The Weight of the World on it's Shoulders
I know all of us have felt this way at times, so how do you think the US Stock Market must feel. It has been artificially lifted to the levels it currently occupies by the PPT, now all of the sudden the concept of gravity is lurking. Above I have the SP 500 daily chart with a half assed guess at what might transpire next. It basically just shows a bounce, then another leg down taking out the recent low. It also forecasts a roll over in the first momentum oscillator, and a rally against a down trend in the other two. Will this happen ? Well of course we never know the future. Since the whole basis for this "recovery" is the stock market gains, this index has the weight of the world on it's back. If this rolls over everything else is going to follow, and the fraud of the "recovery" is going to be exposed. It is hard for me to see how borrowing more to artificially continue to prop up things solves the problem of over leveraging. To me we have added to the leverage, not de-leveraged like we need to.
Each weekend I look at every single individual stock in the both the SP 500 and the Nasdaq 100. I do this mostly looking for trades, but also to get an overall feel for how things are under the hood. I trade both sides of the market, so I have no bias short or long. I can tell you from doing this over the past couple of weekends, that the number of individual stocks setup for sells so far outweighs the buy setups it is a very startling contrast to the overal indices and how they look.
We are now seeing some weakness in the indexes, due to heavy volume that let this get away from the PPT in a 2 day span. I warned people this would happen, that if heavy volume showed up they would not be able to stop it. So, now he we are in what could well be a pullback buy zone for those who have missed the rally. The 64,000 question is, is this a buy here?
First of all, if you have missed this entire rally and are a less sophisticated non junky than I am, the answer is flatly no. If you are a short term trader who likes to go in and out, I would say possibly. We have gotten very oversold here, so it is likely at the very least we get a tradeable bounce. Larry Connors has written a book revealing research about buying into declines and legging into the trades in ETF's when the prices are above their 200 day moving averages. Those strategies are flashing buy signals all over the place right now. I have considered doing some of these trades, but I do not like trading with no stops, which his methods suggest.
It is a fact that stops when testing things mechanically always diminish performance. However, if this is a big roll over starting, those strategies are going to wipe you out here. One thing that can be done is to just select an uncle point, and honor it. You buy weakness looking for the reversion to the mean move upward, then just have a spot where if we keep going down you just get out. The problem with all of this is that the numbers make buying more and more weakness, statistically very favorable. So in reality, the more it drops, the more you should buy. If you arbitrarily pick a spot it is possible that you puke out of the trades right before the reversion move happens.
Below is a chart of an ETF that would have you long now and you can see how much heat you would be taking. EWZ is an emerging markets Brazil ETF that as you can see has had 3 very good buys on weakness during 3 prior pullbacks. I have arrows indicating the entries. There are various techniques for generating these trades, so that is why there are different arrow colors. Clusters in one spot are generally what you want to see here.
Look what has happened recently, you would be getting buried in this trade. With no stops it is very difficult in the heat of the moment to make a good exit decision when you find yourself in a mess like this. You could argue that now that we are right at the 200 day Moving Average in this ETF that it still is a good buy spot. The problem you have is that you got 3 good wins that can be wiped out by one loss, a cardinal sin in money management. I used to trade this way when I first started, buying pullbacks on weakness, not any more. If you are inclined to do this, Connors book is an excellent buy. Maybe you can find a good way to manage the risk in these trades. I do know Larry and he is an excellent trader himself so it is always good to learn from someone who makes money doing this.