Friday, September 4, 2015

Lower low on weekly chart

Bulls and bears are exchanging insults on every financial board at a rate I haven't seen for a while. This is due to the huge volatility we have these days that makes market swinging strongly in both directions so everyone is right for one day and wrong the next day. What makes me laugh is they are bragging about huge gains one day then, if next day they are losing everything plus change they are arguing they are in the market for the long term.

I hope you are not joining the chorus no matter if you are a bull or a bear at the moment since arguing with other people is making your blood boiling and you are very likely to make wrong moves.

Market is doing about the same as last week, it made a lower low on weekly chart on all indexes (or indices if you prefer this version, both are correct by the way) except Nasdaq where the lower low is present but is not as convincing as one on Dow or SPX. So technically this week is more bearish than the last week despite the fact that today market is above the low seen on Monday, September 24th.

The bull market uptrend line is around 1,800 at the moment, so if you see a big move bellow this level next week that will be a very bad sign. Keep in mind that the uptrend line is moving up at a rate of 15 points per month more or less, so if SPX is going to move up on short term or trade sideways for say another 3-4 months from now and only then move bellow the uptrend line, that line is going to be in the 1,845-1,860 area.

On a shorter time, like on an hourly chart, things are neutral at best if not bearish. SPX managed to make a higher low but failed making a higher high. For this market to turn bullish on this time frame SPX needs to climb to 2,020, which is 100 points above today's close. Not an easy task and even it is going to happen next week it won't affect the long term bearish momentum.

Another point I would like to make is that you should use a logarithmic chart if you want to understand the magnitude of move up or down compared with similar situations in the past. A 200 points move down from 2100 to 1,900 is not the same percentage wise with a 200 points move from 1,200 to 1,000 on SPX. On an arithmetic chart they will look exactly the same.

The recent drop is worse than the one seen on October last year, about the same with one in 2,010 but less that the drop in 2,011. However, don't forget the recent wave down may not be over.

To give a clearer picture of a difference between logarithmic and arithmetic charts look at this 1975-2015 chart. In 1975 SPX was around 50, in 1995 was around 450, a (9 times increase). In 2000, at the top SPX was around 1,500, about 3 times higher than it was in 1995. However, from the arithmetic chart you may believe that the 1995-2,000 period has the most gains.

 Look now at the logarithmic chart.

In conclusion, market remains vulnerable on long term and neutral to bearish on shorter time frames. A good idea at this point is to trim the stocks and move into bonds. If market is going to move a little bit up from here you are still going to make money with bonds but if the market turns ugly the loss will be substantially less with bonds. Personally, I have some money in a very good bond mutual fund, FGMNX, one of the few bond funds that actually increased in value even during 2007-2009 bear market.

All the best and safe trading!


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