Sunday, October 4, 2015

A nice break

Pretty exciting week, especially Friday, when market reversed intra-day. These intra-day reversals are significant on short/intermediate time frames especially when market tries to make a fresh lower low or a fresh higher high but fails. We had a failed rally after the Feds announcement that they were not going to rise the rates, SPX flied to 2016 just to turn red by the end of the day. After that, we saw a fast drop of more than 100 points. On Friday, SPX did not actually attempt to make a fresh lower low (that would be bellow 1865) so is not that significant but, nevertheless, a 60 points rally after a decent drop in the morning can't get unnoticed.

The most important fact about this reversal day was that it did cancel a fresh lower low on weekly chart and a drop bellow SMA120. It doesn't mean bulls are now in control of the long term, it just means bears are taking a break here.

I want to be clear about what I mean by long term, I mean a significant move on the upside or downside noticeable on the weekly chart. The reason I am making a big deal about the long term is because SPX moved bellow EMA60 for the first time since 2011. Not only that but SMA120 was also crossed a few times (granted by the end of the week price moved above SMA120). Also both EMAs are pointing down, again a pretty rare event. Obviously, the longer time frame out there is the one that defines the bull market. From this point of view SPX is still in the bull market. Why is this important? Because as long as the market stays in the bull territory is can still make a come back. However, once the bear market starts there is no way back until market suffers a substantial loss, beyond 20%.

I hear people (even authors on Market Watch) saying SPX may go to 1,700 then back to 2100. This is very naive! At 1,700 SPX is going to be in a bear market for sure. From there it is extremely likely that it will go further down, God knows by how much. It will eventually go back to 2100 and above  only in a few good years from that point. It took SPX five years to get back to 2007 highs. 

I've seen people arguing that indexes have been in red for 3 quarters in a row. Actualy, this is not acurate. The only index that had 3 quarters in red is Dow, SPX had only two (first was rather flat than red) and for Nasdaq this is teh first quarter on red. 

Officially,  recession starts when the economy (not the stock market) finishes two quarters in a row in red. However, don't forget that the stock market anticipates what the economy will do in the near future. Stock market enters the bear territory a few months before the recession is officially declared and starts a new bull market a few good months (around 6 months) before the end of the recession becomes official. Stock market started going down in November 2007. Recession was officially declared in July 2008. Stock market entered the bull territory in March 2009, long before the recession was officially over.

The fact that the economy seems to do good at the moment is not a reason to argue that no bear market is in sight. Remember that Wall Street insiders have connections with the people in charge of the economy. They know that the economy is starting to falter long before the rest of us do. There is a reason why market moved strongly down after August 24th. 

Now let's summarize this article to be sure you've got my point;

1. Very long term is still bullish --- we are still in the bull market
2. Long term is bearish ----- strong drop after August 24th, market making lower lows and lower highs
3. Intermediate time frame is neutral----- market traded mostly in the 1,915-1,990 range in the last 30 days.
4.Short term bullish----however, this may change in one single day.

 Generally accepted rules for a bear market to happen:
1. Fundamentally, economy needs to have negative quarterly GDPs in a row.
2. Technically, market needs to drop at least 20% from the top and stay there for at least six months.

My strategy in determining that a market has technicaly entered a bear market:
1. EMA30 crosses EMA60 from above (weekly chart)*
2. Market goes bellow SMA 120 on weekly chart
3. Market goes bellow a well established bull market uptrend line.
4. All three main indices (Dow, S&P500 and Nasdaq) fulfill all of the above conditions.  

*I usualy use EMA25/EMA50 pair but I've got a whip-saw in 2011 so I pumped the EMAs a little bit.

According to generally accepted rules no index is in a bear market neither fundamentally nor technically.

According to my strategy Dow is the only index that is almost in a bear market, it is bellow the bull market uptrend line and bellow SMA120. EMA30 is touching EMA60 but no crossing yet. 

All the beast!