An old trader's saying quoted here at the title refers to the tendency for markets to go up slowly/gradually (glide
) but to give back a LOT of ground quickly on a pullback (slide
). Bottoms can be identified technically
but quick trade action may be needed as 'slides' often are over FAST!
I wrote in my last Trader's Corner (12/31/14), my month end December technical review, that:
"What the elevated 21-month RSI readings seen with SPX, INDU and COMP charts do caution us about is increased risk of more and more frequent, bouts of volatility, as measured by the VIX and VXN."
We have been in a period of increased volatility and that may continue going forward into 2015. I encourage our Subscriber's to treat sell offs such as seen in the sharp mid-December decline or the equally sharp decline into Tuesday (1/6/15) of this week as trading OPPORTUNITIES when the major indexes bottom. Easy to say, you say! It's not easy to both analyze where a likely low will come in AND to pull the trade trigger.
A big contributor to this twin difficulty is psychological. When sizable sell offs occur in what 'should be' a bull market, the media immediately begins hyping the possibility that the sky is falling and we're headed into a bad economic patch and/or BEAR market. Whereas, roller coaster price action on the downside can be simply a characteristic of 1.) an extended bull market getting long in the tooth and 'overbought' on a long-term basis; 2.) panic selling due to some unusual unexpected development; e.g., sharply lower oil prices.
POSSIBLE TREND CONSIDERATIONS CURRENTLY RELEVANT:
1.) We have had a very strong and prolonged run which has produced or led to a long-term overbought situation with stocks. A LOT of investment money is ALREADY in stocks, so it can take a SIZABLE downward push to get substantial buying coming back in.
2.) Sell offs often are scary and sharp because buying tends be piecemeal on the way up so rallies take a more prolonged time to unfold. Institutional money from mutual to hedge funds tend to buy SCALE UP. However, breaks in prices that accelerate tend to bring in stock 'dumps' as the same managers buying scale up over a prolonged period don't sell in drips and drabs; they tend to sell all they want or need to right away in the face of falling prices.
3.) Computer driven trading contribute to number 2, in that the programs keep selling on the way down, often buying back short positions on small pauses in the decline. Then, as the sell off continues, the programs are in selling, selling, and selling again!
4.) Bottoms tend to be 'real' buying so to speak as prices get to an attractive level for fund managers who finally come in to scoop up cheaper stock.
Technical analysis principles are useful at lows when they come in:
1. At prior bottoms.
2. At other technical support such as at up trendlines or at key moving averages.
3. When the Market 'throws off' its prior overbought condition.
More difficult sometimes is NOT the identification of where you think the Market 'ought' to bottom (technically) but the psychological difficulty of being a buyer AT or close to the turnaround point. By the time of the bottom, many traders, especially if not professional seasoned pros, can get quite rattled. Hey, the 10-year note is trading at UNDER a 2% yield, which 'MUST' imply some far reaching problem; e.g., U.S. growth won't be enough as the world goes into the tank! OR, the sell off isn't just a flight to quality and the result of panic but must relate to something more dire, like deflation.
It can be necessary to deal with the psychological difficulty of being sidelined by fear and loathing. One big help for me, as I've dealt with many panic sell offs over the years, is to see over and over how bottoms have very similar technical characteristics; various key chart/technical aspects line up at bottoms time and time again. If you follow market cycles long enough you will gain confidence in being a trend predictor in directional trades. Pretty much all I do that is speculate on the direction of the next trading swing of size.
The other thing about the various indices is that very often if not usually, ONE or TWO of the indexes will BEST show bottoming prospects in terms of the technical/chart picture. Consequently, I present two charts that were 'convincing' for where a next bottom might come in.
I'm using below the S&P 500 (SPX) as one chart example and the Nasdaq 100 (NDX) as the other. I could have used the Nasdaq Composite, rather than NDX as my example but I choose the Index (NDX) that has heavy options trading.
THE NASDAQ 100 (NDX):
1. NDX had the 'strongest' technical sign of an area to cover puts and buy calls given its powerful double bottom pattern. The Composite mirrors this also. Somewhat secondarily, NDX's second bottom also got down to the same lowermost percentage envelope trading 'band' (-3.5% under the 21-day moving average) as occurred at mid-December bottom.
2. The 13-day Relative Strength Index (RSI) again got down to an oversold extreme and that's been acting as a surefire 'tipping point' for a bottom; this may not be true in the next market cycle or in bear market but it is the case currently.
3. A volatility aspect to a possible bottom: the VXN (the Nas 100 volatility index) has tended to see bottoms in recent months when VXN rose to 21-22 or higher. Check it out on the chart!
NDX was back above its up trendline by today (1/8/15) per the NDX daily chart seen above but it took 3-days to do that. A much stronger bullish 'signal' was seen with the S&P 500 (below) as it conformed to a '1-day rule' of thumb; i.e., there was 1-day and one day only with a CLOSE below prior support; at a prior key low or an up trendline. Ability for an index or stock to pop back TO or ABOVE an up trendline by the day following a Close below the trendline, suggests an up trendline is still exerting a bullish influence.
THE S&P 500 (SPX):
1.) SPX's bullish up trendline kicked in so to speak by 'acting as' support the following day after this trendline was pierced. The first break of the up trendline was part of the panic type selloff. But, count to 10, give it one more day and then see what happens!
2.) The 13-day Relative Strength Index (RSI) again got down to an oversold extreme and that's been acting as a potential sign that our major indices could be at or near a bottom; this may not be true in the next market cycle or in bear market but it is the case currently.
3. SPX, after rallying well above a key prior top, pulled back to that same 2000 area and rallied in recent days, suggesting that what was prior resistance had 'become' subsequent support on a pullback. This wasn't true of course at the mid-December low but this tendency kicked in on this most recent bottom. Moreover, I'd note something about 'key' chart levels: the August-September SPX top was at a major price point, a second 1000 point gain, to 2000. This dynamic was present for years at 1000 resistance in the Dow and then was seen to a lesser degree at each 1000 point Dow gain, especially near 12000, at 14000 and last at 18000.
One other of my technical indicators seen on the NDX chart above is worth mentioning: that of my bullish/bearish 'sentiment' model (CPRATIO). It is often the case in bull market cycles that high levels of bearishness or, conversely, a significant drop in bullishness, often is seen just once or twice prior to a sell off. This is a tip off for a pullback to come.
GOOD TRADING SUCCESS IN 2015!!