Fish Market

This market is fishy. I have been very suspicious of this last move up. Since last year, people have been asking me if I think the market will ever go back to where it was. The real question people are asking is: Will the price of my stock ever make it back to where I bought it? There are still many folks who are feeling the pain of being under in their investment accounts despite the last big upward move in the market. My answer is, of course the market will make its way back up. I just don’t know when.

I thought the bounce that had begun after Christmas would be a short bounce before a big flush in January before we’d go up again. Nope. Thanks to a combination of positive factors, we just went straight up and in a big way.

This market has done my head in. There are many conflicting factors happening in the world impacting the economy that have a lot of financial experts arguing over the next direction of the market. As much as I’d like to take a position here or there, I’d been waiting for the market to take a breather and reset itself. It just continued to head up and up. All I can do is look at the charts for some guidance.

This is the S&P 500 Index on four different time frames. Each time frame tells me something different.

A: Daily Chart

We are trading above the 200-day moving average (MA) as seen by the little green squiggly line in Chart A. This means that the market is trading above the average closing price levels of the last 200 days. (Please note that this line could appear differently in other charts for explanations beyond the scope of this blog.)

This is normally a sign of a positive trend over the last 200 days (you can also use 100-day MA or 50-day MA, etc.). More conservative investors typically feel confident to be holding positions above this level. To trade below this would make investors more cautious. Given how quickly we got to this place (40 trading days at this point), I would say that most people wouldn’t feel too confident that we’re gearing to go up again without some challenges.

B: Weekly Chart

We have gone directly up for nine straight weeks with very little selling. We are now approaching areas where we had previously tried to go up further in October, November, and December last year — but failed to. I drew arrows where there will likely be minor sell-offs and attempts to move up again.

C: Monthly Chart

Big severe price swings in either direction as depicted in this sloppy monthly time frame usually means volatility. If I were to go by this chart alone, I’d say that the market is not stable.

Personally, I have been whipsawed out of positions when I tried to buy stocks with charts that looked like this. The trades with the best moves usually come from charts that have stabilized over a narrow price range for some time. This chart tells me to stay away from trading for a while and wait for some stability. However, if I do see an opportunity that seems too good to pass up, I would need to be really careful and use fewer shares with a shorter time horizon for my position.

D: Yearly Chart

You can look at this chart in two ways.

While you could say that we’ve gone straight up since 2009, we did have a small reset in 2015-2016. You could argue that this reset was enough to give us another burst of equal measure. If this is the case, we could just keep going straight just a tad beyond 3000.00.

If you’re cautious or even doubtful of the above scenario, then you would have noticed the big red candle that I’ve circled. It has a large topping tail which means a lot of selling happened here. From a technical standpoint, this pattern usually signifies the start of a reversal move down or a pause in the upward trend.

My Humble Opinion

As much as I feel better that we’ve been positive in the market, my gut tells me it’s not done flushing out all the over-buying that’s happened the last few years. It was fun cashing out on stocks late last year; however, there are still many investors who bought at the top who have not benefited from the last nine weeks. These folks are still itching to get out of their positions. The pain from the last moves down is still all too fresh. It would take a lot more for them to remain in their positions or even feel confident enough to invest again.

I’m actually really hoping that we’ll come back down below the lows of 2018. A substantial correction on a longer time frame usually means we’ll find way more buying opportunities after prices have come down more. Then we could count on another good move up in the market and hold our positions for longer stretches. If this correction on the yearly chart does not happen, I would at least like to see some more stable sideways action in the market before we were to move up again.

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