Posted on Sunday February 28, 2016
Note: Below is part of my weekly trading journal entry, decided to share.
As we all know the market has gotten off to a very interesting start to 2016 and I expect that to continue. This is a bear market and likely the end of the FED BUBBLE, so the idea that we have to be down 20% to be in a bear market is foolish. By the time we are down 20% you will have missed most of the move or lost too much money being caught long. The market is making lower highs and lower lows, that should be the true definition of a bear market to anyone protecting their hard earned capital, not down 20% like the media likes to use as it’s gauge.
There is unconfirmed, technical measured move into 1600 (by unconfirmed I mean, we have not broken major support YET). Can we get there before the election? Possibly, but our job here is not to predict, but manage risk accordingly. Right now, we are in the middle of a Bear Market rally, so let’s look at whether it is likely to continue and how far we may go.
Chart of the of S&P 500 Making Lower Highs and Lower Lows. This bounce will with very high probability turn into a lower high. The question is where. Do we fail here at major resistance or can we push a bit higher?
At the end of last week the S&P attempted to break above major resistance like it did last October which triggered a very strong year end FOMO rally, so many trading for alpha are very concerned and focused on whether this rally has legs to continue.
The weight of the evidence says bounce should continue:
Looking at the chart below:
- Momentum is confirming price, in that it is moving higher with price, suggesting strength despite pockets of daily weakness like Friday.
- Notice on the below chart how the Feb 12 low had major momentum divergence which sparked this rally,
- Notice in November we started to see the momentum move lower as price moved higher. That is the first sign of weakness we will look for and then let price action confirm it.
- Right now, we have the opposite, momentum confirming price, suggesting higher prices ahead.
Using the above momentum price observation as our guide:
- I am targeting 2020 – 2030 area as an upside target which is 161.8 Retrace using the 2/16/16 high and 2/11/16 Low.
- Notice how in October that is the Fib we failed at basically penny for penny. (It is also BTW the magic fib level the SPX failed at back in may using the 2007 high and 2009 bottom, this is shown on 2nd chart below)
- 2025-2030 also coincides with the 10/20 Month moving average cross shown on 2nd chart below. Historically, in the last 2 bubble tops, we retest the cross area which we are in the process of doing now.
- 200DMA is currently at 2026
The above 4 bullet points tell me there is a magnet into those levels and I don’t see enough yet think otherwise and turn bearish and press shorts yet. (I am speaking immediate term, longer term definitely bearish which is why 401k in cash).
BIG PICTURE MONTHLY (see 3rd chart below)
- 10/20 Month Moving average cross at 2025-2030 Area.
- Historically we retest that area to confirm bear market.
- That area along with the 161.8 fib and OCT-Jan overhead supply should act as pretty stiff resistance.
As full disclosure in my 401k (non trading accounts) I have been in cash since November 2015 and I have no plan on changing that right now. This is a bear market rally not a place I am looking to be invested. The analysis above is the same analysis I have used to make this decision. I’m just sharing it.
It appears that a move above Friday’s highs will trigger a FOMO (fear of missing out ) rally with a bit more upside, but ultimately the weight of the evidence suggests lower prices ahead. The market has a funny way of toying with people and what better than to suck the bulls back in than a 1 day close above the declining 200DMA currently at 2026. Imagine the headlines on CNBC before they pull the rug.
If you have any questions or something in the analysis is unclear, please feel free to ask. Good Luck out there and as always use this analysis at your own risk, it is not a recommendation to buy or sell.
Monthly chart of S&P 500 with the 10/20 Month MA Cross Also show 161.8 resistance from 2007 top to 2009 bottom