Friday, August 28, 2015

Huge volatility, bearish momentum, still bulish long term

The title is a summary of the stock market as of today, August 28, 2015.

So we had a crazy week with SPX swinging about 150 points just to end up 20 points above last Friday close. On short term probably bulls managed to get a temporary bottom. On long term market remains bullish, or more exactly we are still in a bull market. However, the bearish momentum created in the last 10 days it's a big warning sign for bulls. They should not take this drop lightly despite the last three days on the upside. 

Among many indicators, monthly MACD, that has a pretty good record at signaling the beginning or the end of a bull market, it's showing a bearish signal. 

Monthly MACD had also two whip-saws in the last 20 years so you need to keep in mind that is not perfect. My EMAS adjusted for monthly chart (considered a month as equal to 4 weeks, therefore I divided al MAs to 4) had no whip-saw during the same period (give me some bricks to beat my chest -))

Well, actually in 2011 EMAs gave me a faint bearish crossing for a few days but it was not confirmed by SMA120 which fell bellow the SPX value in a very short time. 

 You must understand these EMAs I have found for SPX are not 100% accurate. Someone asked me a few days ago why EMA50 and not EMA 48 or 51? Of course it doesn't matter which one of these I am using, I used 50 just because it was the closest round number. It cracks me up when I hear people predicting that Dow will collapse to say 11,254. Really? When you do a prediction you need to use round numbers, 10,000 or 11,000 or you can go somewhere in between, 11,500.

Anyway, let's adjust a little bit my EMAs to get rid of this whip-saw. I'll go to the nearest round numbers EMA30-EMA60. It's ok if you do this kind of fine tuning once every 5-10 years. Otherwise, if you change them all the time just to look good in front of other people, you are just kidding yourself and lose money at the same time. So, from now on (actually from 2012 on) I am going to use this pair instead of EMA25-EMA50. This will give me a "sell" signal (like in "the beginning of a new bear market") at a lower value on SPX that the other pair but it will be more likely to generate a real "sell' signal not another whip-saw. I don't see any reason to change SMA120 to a higher value.

So here is how the new pair of EMAs look like. No big difference I must say. 

Another thing I want to mention for the people who are not part of the old followers is that I prefer SPX to any other index, either Dow or Nasdaq. However, no matter what signal I am getting from SPX I want to be be confirmed by the other two indexes. 

For example, at the moment Dow is the most bearish index since is the only one that went bellow the 6 years bull market uptrend line. At the same time Nasdaq is the most byullish. SPX, as usual, stays somewhere in between.

In conclusion, if you are long don't panic yet but be alert since I haven't see this kind of bearishness in awhile. Protect your gains with "stop-losses". Personally I hate stop-losses (I am going to tell you way some other time) and I prefer to protect my shares by buying "puts". 

All the best!


Wednesday, August 26, 2015

Bear market?

Not yet! This is the most bearish momentum since 2011 but technically we are not yet in the bear market. At least according to my timing method.

For those of you new to my blog I am going to write a few words about my timing method. Basically is an improved version (I'm bragging, of course) of MACD. I am using exponential moving averages crossovers in order to get "buy" or "sell" signals. I mostly use two exponential moving averages (EMA) EMA25 and EMA50. Why these two? Because I noticed that they are giving me the best "buy" or "sell" signals with the least whip-saws (fake buy or sell signals). As a confirmation I am also using a single moving average (SMA120).

Using this pair of EMAS on weekly charts it gives me a clue when a new bear or bull market starts. I am always missing the exact top and the exact bottom but I can safely take advantage of a good chunk of a bear or bull market without fretting every single day that I may lose my money.

For example the "sell" signal came at the beginning of 2008 somewhere around 1,300 on S&P500, a few good months before the October crash. The buy signal was not that good or it seems this way because market went down from 900 to 650 then back to 900 in a very short time and EMAs didn't not had enough time to react to this sudden move. The buy signal was somewhere around 1,150. Actually not bad keeping in mind where are we today.

Coming back to August 2015 I see S&P500 (SPX) sharply bellow EMA50 for the first time since 2011 and also slightly bellow SMA120. EMAs are pointing down but not crossing yet. These are serious warning signs. We are not technically in bear market yet but I'm afraid this is not a "buy the dip" moment either. The bull market uptrend line is around 1,800, very close to today's level.

If you are in for the long term you should not panic yet. It's hard to believe market will go straight down from here. Most likely bulls will push SPX up a bit even if is going to be short lived. When this happens maybe a good idea is to buy one "put" for every 100 shares you own just in case SPX is going to plunge into a bear market. Options are expensive now but they are going to be much cheaper if SPX moves up even a little. Let me know if you are not familiar with options so I can give you some advice.

All the best!


P.S. I am adding two charts for AAPL. Judge for yourself if the signals generated by my method are better than "death cross", "golden cross". You may say it's easy to look back and find the best pairs of EMAs. It's exactly what I am doing but only ONCE, based on a long run in Dow or AAPL or whatever stock I am interested in, then STICK with that pair. In time (years) I may adjust them a little bit if I am getting an whip-saw but they will be close to the initial values.

A close up to see the current prices.