In the last post I discussed why the 20% idea wasn't helpful for investors. Regardless of where you bought in, sitting through a 20% drop off highs without minimizing losses or protecting previous gains seems not the smartest thing to do.
So if we toss this concept, what can we use to define a market as bull or bear? And let's not forget the third type of market - sideways.
In my work the higher time-frame is always more important. Usually people look at daily charts, but we can get a clearer view of the larger move by examining the weekly charts.
As mentioned in the first post, I use several common moving averages in my work. There isn't any magic to these numbers but they are levels where the big money plays, so I want to see what they are doing and go along for the ride. These are the 20 period moving average (orange line in all example charts), 50MA (moving average for short) in purple, and 200MA in thick black.
So we can simply define a bull market as above its 50MA and a bear market below. But this isn't really enough - we also need to factor in slope. If the 50MA is rising price can drop below the 50MA and then come back easily enough. This happened several times in the S&P500 in 2004-2006 and each time it came back, ultimately making much higher highs in 2007. See chart 1 below.
But a move below a downward sloping 50MA means trouble. If the 50MA clearly acts as resistance, then the market is going lower. Period. See chart 2. This happened in late 2007 and early 2008. You didn't have to wait until August 2008 to panic; if you were a long term investor you would have been out (cash or short only) from the close of 1/6/2008 bar on.
Check chart 2; a big red bar below the flat purple line (ie no longer upward sloping) warned possible bear market from early in 2008; and then another big red bar with the 50MA acting as clear resistance in May of 2008 sealed the deal.
Which leads to our current situation. Despite the recent drop S&P500 is still above its slightly rising 50MA. Therefore it isn't a bear market yet. If this level breaks, it even be able to recover. But if it breaks, starts to slope down and then act as resistance, watch out below. Market as of 5/31 close is shown on weekly chart 3. I view its current status as "trying to remain a bull, but needs to hold!"
Lastly, whether a market is "bull" or "bear" depends on the vehicle! NDX (the technology index) still has a nice rising weekly 50MA. IWM, the ETF for the Russell 2000, already has a downward sloping weekly 50MA. You can quickly gauge the strength of the larger trend just by eyeing the weekly 50MA and its slope. This is very easy to do (and works across time-frames). From this view:
TLT (bond ETF)
UUP ($US ETF)
IWM (Russell ETF)
XLF (Financial ETF)
GLD (Gold ETF, 50MA starting to slope down)
EEM (Emerging markets ETF)
FXE (Euro ETF)
USO (Oil ETF)
SLV (Silver ETF)
If you are curious you can go to a free site like stockcharts.com and pull up any stock you own or are curious to examine. Select weekly view, check the slope of its 50MA and whether price is above or below. If the latter, I don't think you should own the stock.
There is a deluge of articles on the subject but this will be different than most. Before the IPO I saw both cheerleading and warnings from the usual sources like CNBC. To my knowledge, the astrologers nailed it.
I said directly "Don't do it!" on Twitter on 5/17; and answered a question on my FB page saying "Don't buy" just minutes before the IPO on 5/18. Check both if you'd like.
Sam Geppi, an excellent Vedic astrologer here in San Francisco, came to the same conclusion using an entirely different system. He was also very public about this on his FB page as well.
While other market analysts may have been weighing earnings per share vs demand, all we had to do was check the IPO chart. If you are interested in the Vedic view please check Sam's article here:http://www.mydailyastrology.net/join/news/vedic-astrology-facebook-ipo
Here is my take on it.
With Leo rising the chart ruler is the Sun. The Sun is not bad in Taurus but the problem is the ruler and motion. Venus is Retrograde in Gemini and still very close to an aspect with Saturn. Sure that's a trine but a retrograde aspect to a malefic is just not a good thing. Also, a company like Facebook has a lot of natural Venus/Gemini qualities (like, friends, etc), so an IPO with Venus retrograde is asking for trouble.
Then when we consider the motion of the Sun, in 2 days time it enters Gemini where it will encounter the South node and be eclipsed. This is the worst of all conditions for the Sun. There is only two things that can take the Sun's light out of the sky (besides clouds, but we know the light is there) and these are the nodes. In particular the South node is more devastating than the North node.
For a public event I also looked at the MC ruler; here Venus so we have a similar conclusion to the ruler of the Sun - does not look good.
And most importantly, I considered the Moon. On the one hand Moon is highly exalted at its very exaltation degree in Taurus. I think this represents the people's love of facebook and FB's staggering number of users. And yet the first aspect this Moon makes is to a soon stationing Neptune which suggested a scam.
And so it proved. The entire episode was marred by delays and glitches; Sun's ruler Rx. The IPO has gone down as a total bust, even to the point of setting an unfortunate precedent for future IPOs; chart ruler heading into eclipse. And the primary buyers of FB stock - whether loyal fans who were out of their league, people who fell for the hype, or those hoping for a quick pop - were all basically taken for a ride by Mark Zuckerberg, Goldman Sachs, JPMorgan and the other insiders who sold off their shares to an unwitting public.
I think FB will continue to have problems until Moon passes that Neptune aspect by progression which means early June at best. And the next company seeking to have a successful IPO should hire an astrologer.
In the last post I asked if this was the start of a bear market, and discussed what this phrase actually means. According to standard sources, a bear market begins with more than a 20% drop off highs. With the current S&P500 high for 2012 at 1422, the market becomes a bear at 1138.
The 20% idea is commonly referenced by CNBC, bloggers, market commentators, etc; but I don't think this is a useful concept for most investors.
If you bought the breakout bar on 3/13/2012 at 1395 SPX and are holding above 1138, then you stand to lose -18%. If the market went down to 1138, you would then need a +22.5% rally to get back to even. This is quite a lot.
If you bought the breakout bar on 12/20/2011 at 1241, then a decline to 1138 would only cost you -8.3%, with a +9% rally required to get back to even.
If you bought the breakout bar on 9/2/2010 at 1080, then even if the market becomes a bear you are still in the green. But why would you let a 31.6% gain drop to only 5.3%?
These are examples on the S&P500, but numbers could be similar with any other stock. What really matters is what level you bought and where your stop is placed.
So ignore the commentators and toss out this useless piece of information. The 20% bear market idea is just another fallacy designed to get you, the investor, to buy and hold and hope. Meanwhile Wall Street plays the game by a much different set of rules.
We'll look at much more helpful ideas next week. Enjoy the long weekend!
Last week I said market was probably going lower. Indeed it did! Even more than I (or most people) expected. So is the start of something much larger? Or will the market pick back up again and head back towards highs?
First of all, what is a bear market exactly? Mainstream media will say more than 20% drop off highs is a bear market.
In 2000 S&P made a high in March at 1552. 20% of that is 310 points, so it only became a bear market under 1242. The weekly chart closed under 1242 for the first time on 2/25/2001 about 1 year later. See chart 1 below; blue line is the high, red line is 20%.
Now let's see what happened after that on chart 2 (condensed to show more bars). This was a nasty drop and you would have suffered a lot more losses.
The next key high in 2007 was 1576, so 20% down from that is 1261. You can see this level tried to hold a couple times on chart 3. The first close below the level was in July 2008, so still 10 months after the high. After it became official though, losses were steep (chart 4).
The most recent high in March 2012 was 1422 so a bear market becomes official with a weekly close below 1138. This is not bad definition since it turns out to be near the weekly 200 moving average (black line). See chart 5.
One would assume that market is not going to drop as fast as it did this past week, so it will probably take several months or even a year to see this level (if we do at all).
But my main point in this post - is this idea of 20% useful for investors?
I think not. My view of bear market has to do with moving averages and slope. I generally use 3, and starting to watch a 4th. The 3 main moving averages are:
20MA shown by the orange lines
50MA shown by the purple lines
200MA shown by the thick black lines
The MA I am also starting to include on my charts is the 100 shown by the thin black lines.
And so I propose a different definition of "bear market" which takes into account moving averages and their slope.
I'll continue this idea next week. In the meantime, watch the weekly 50MA on the S&P!
Let's start with the big picture. SPX monthly chart (first chart below) has recently topped after making a nice divergence high on both Bollinger bands and RSI. The current May bar is medium red but hasn't closed yet, and a lot could change between now and the end of the month. That said a big red bar near the top of the monthly BB after a divergence high is bearish and perhaps significantly so.
From a Fib perspective, measuring from 2 lows back (a standard technique) puts the first support at 1265. There is also a rising 20MA line at 1291 that will probably try to bounce.
Turning to the weekly SPX chart (chart #2), a large red bar after a lower high / test has turned momentum negative. This week dropped onto rising 20MA support which tried to fight up several times. The close was barely under, but other indexes (SPY, QQQ) were able to hold on. Again measuring from 2 lows back the first Fib support is 1321 then 1290.
The daily SPX chart (chart #3) is in a clear downtrend with lower highs, lower lows and downward sloping MA lines. Approaching a key 38% Fib from 12/2011L at 1338 which is also the area of the March low.
Now let's put this in context. Bonds are up and closed above 61% resistance this week (TLT on chart #4). The Dow has led structurally both the rally and the decline, and it closed under its weekly 20MA (chart #5). The Euro and commodities (oil, gold, silver) have been dropping sharply along with other international markets (EEM and others).
Bottom line - I highly doubt 5/9 low was 'it' for the pullback. Given the OE week coming up, I think ripe for a move under 5/9L that busts some stops; but then will be alert for recovery rally into strike. Any bound will be into daily chart Fib and MA resistance, so the decline will probably resume into later May and then perhaps early June.
Another trading theme includes 138% projections. Sometimes these are called zig-zags or ABCDs. 138%s were in play on Monday and Tuesday; per the recent volatility we got one up and one down shown on the charts below.
The first chart is ES 15 min (all session). I chose a higher low (and not the spike low) because that was inside a key timing element and the 100 level also fit. The session high was on 138% exact. And since this arrived on perfect Bollinger band and RSI divergence it also gave the opportunity to turn around short.
The next chart is ES 1 min (session only). In this case a floortrader pivot level stopped from exact but still within .5 point of target. After stabilizing at a higher low then was able to think long.
Trading themes are central to my forecasting work for traders. I don't just try to get direction and turn times, but also try to understand the quality of the movement. For example, the trading theme for Thursday was 50% Fibs (support or resistance), 100Ps, swings that end even. Here's how it played out.
Charts started looking negative and a bounce stopped at a 50% high. See chart 1 below. I often don't trade before news but saw falling lines and very high ISE so took a small short position in the 9:55 bar before 10:00 news release.
The result was a spike down to a 100P target. Doji on the level was the perfect exit. See chart 2.
After a bounce I was looking for another 50% level. There were 2 possible anchor points and I took a short in 10:40 bar that turned out scratch. At 11:20 we were up against a larger 50% Fib, see chart 3. Falling lines on 15 min and 5 min charts, key Fib, 15 min showing weakness, then 5 min red engulfing bar was the perfect setup. Shorted big.
Everything went the right way and target was matter of another 100P down, see chart 4.
So a simple idea of '50% Fibs, 100Ps, swings that end even) turned into 2 great trades with good entries and great exits.