Monday, 21 August 2017

Mind the Bear Traps, and Bargains Hunting Season

If you ask a 10 year old if this chart of SPY since Feb 2016 is in the uptrend, sideways or downtrend, i think you know they will say uptrend. I'll take their words for it.

SPY price chart from Feb 2016 to Aug 2017
SPY price chart from Feb 2016 to Aug 2017.
(Click image to enlarge)

The market has been in the uptrend since Feb 2016, and its prices are confined within this light purple uptrend channel. Especially since Dec 2016, prices have been moving in an even narrower channel between the channel's center-line (marked by dashes "-----") and an upper line parallel to the center line. Notice how well the 200 DMA (in red) hugs the channel's bottom starting from November 2016? And the more volatile 50 DMA also waltzes around the channel's center-line.

There only 2 times where prices move outside this narrow well defined channel.

The 1st time is around March 2017 in the circled area that i call "False Trump Rally Breakout" (as supposed to Trump Rally's False Breakout. The difference is subtle but significant. The word "False" refers to the so-called Trump Rally, not breakout. The realisation that Trump's pro-growth won't be implemented anytime soon during March 2017 pulls the Trump's euphoria back down to the channel's center-line).

The other time occurred on Thursday 17 Aug 2017. During 2017, the center-line has been a strong support. Every time SPY prices being pulled towards the center-line, it bounce off and move to new highs. That is, until last Thursday when the prices dipped below it.

Will this be the beginning of a reversal? Anything is possible, but not equally probable. I would give the probability of this being the start of a reversal (from bull to bear market) a 1% chance, and the probability that prices get to the bottom of the channel = 200 DMA would be a 20% chance. I think SPY has bottomed last Friday (18 Aug), in the short term. (well, late September, early October is another matter). SPY may go down for one more day or two to say, SPY about 240, maybe, but that's it.

During the bull market, you need to be aware of bear traps. Don't get too excited about shorting the market because it dips below 50 DMA. In my article Trump Victory and the Stock Market Roller Coaster Ride, i warned about bear traps in this market with a chart, which i've reproduced below.

S&P 500 price chart 2016 showing bear traps
S&P 500 price chart 2016 showing bear traps

The stock market shows its resilience last year when it faced multiple headwinds ranging from Brexit to the uncertainty of election, but it manages to march upwards. The stock market's resilience is once again demonstrated this year with the constant D.C. dramas being played out in Washington. In fact, the market is more resilience this year given the more political background noises from French Election, North Korea and constant slip-ups by the dysfunctional Trump Team.

All this market resilience is just another words that global growth is sound, and so market is more willing to ignore political noises. When economy is weak (or market volume is thin), market becomes jumpy, and jumps (actually drops) at every political shadow (side)show.

Just today, the polls show that Japanese manufacturers most optimistic in a decade. European economies are also improving, emergent economies are powering ahead, China has been stabilizing for a few years (just look at Dr. Copper, which is probably China's best economic indicator).

Percentage of global copper demand by Top 5 countries

SPY may drop another day or two from here (although i'll bet it's over since last Friday until the next pullback in late November or October). In any case, i've put my money where my mouth is. My cash position was 50% at the start of the month. On 10 Aug, i deplored 20% of this cash to pick up some bargains, and last Friday (18 Aug), i've picked up some more bargains. And by the end of today, i'll be 100% in equity (this is not my recommendation to anyone. You should make up their own mind).

I think the downside, in the short term (i'm a swing trader), is limited. Trying to pick the EXACT bottom consistently is a fool's errand. It's wiser just to pick bargains during this pullbacks. If you can't stomach the ups and downs during the volatile August to October months, just stay out the market until November. But to me, these 3 months are the Stock Market Sale Season.

No comments:

Post a Comment