S&P 500 Sets Up Possible Buy Trigger on Daily Time Frame

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The S&P 500 continued to slide down this past week…it slid down by 5.16% to be exact. I say slid, if you were watching, it probably felt more like falling than sliding. It is understood that some people have been “unnerved” about this recent decline. Yes, of course, the market can do whatever it wants to do, but we want to see more proof before we say the great bull-run is over.

Market structure can be categorized four ways. In categorical order, breakout, tight channel, broad channel, and finally trading range. We just broke out of the tight channel and the broad channel has held. Now, we will see if the channel can hold or if we will transfer into a trading range. We will be looking for a trading range to break to the downside before being very apprehensive about the bear market.

Bull / Bear Market

Even with the sharp selloff, the S&P 500 and All World (ex-USA) Index are still greatly outpacing short-term Treasuries. The All World is still leading the S&P 500 and both have a ways to go before that will turn. We will be bullish on the All World (ex-USA) Index until one of three things happen…it underperforms the S&P 500 Index, it underperforms Treasuries, or it retraces more than 50%. With all that said, the bull market is still intact.

Index Swings

The swing indexes we like are the following: Canada / United Kingdom / Japan / Oil / Extended Treasury / Australia / Brazil / International Government Inflation-Protection Bonds

Ouch…the majority of swing indexes are in a relatively close correlation of decline with the S&P 500. The last couple of weeks are good examples of the failure of diversification when it comes to capital preservation. Someone would be hard pressed to find markets that did not decline although the amount of decline varies between them. Some of the swings are getting closer to either getting stopped out or their respective second purchase ranges. No new ones are giving buy signals for a possible trigger this week. That is OK, we have some cash available if the second purchase ranges and like stated before, since we would be purchasing with relatively low risk (close to the stop price), we will eat the cash fast if in fact the second purchase triggers signal.

This Week

If we break the S&P 500 down to a smaller daily frame from the weekly we have a buy signal and a low that was held for a double bottom. Furthermore, for the Fibonacci math traders, the 61.8% level was struck and closed slightly above from a major leg. Even furthermore, a breakout level was held on the close. One more…we see two legs down or what many would refer to as an ABC correction. All of this builds a case for the bulls this week.

Remember, any good, reasonable, open minded investor worth their salt, can build a bull OR bear case. So, even though there are reasons for bullish action this week, the bears also have a case even though I see the bullish reasons outweighing the bearish ones. This is what makes the markets so interesting and the absolute main reason why we focus on risk management above all else.

If we do in fact get positive price action this week on the weekly time frame, it will be what we call a high one buy signal. Don’t know if we will get it, but we shall see!

The Education/Gratitude Book Club

This month’s book is “Intentional Thinking: Control Your Thoughts and Produce the Results you Desire,” by Dale East. I’m through some of it and am enjoying it. Would you believe the first step is to take responsibility!!?? Of course, that makes sense. Really, who else is in charge of your own thoughts and emotions? We all put certain thoughts and emotions with the circumstances and we can certainly see how people can look at the same circumstance and associate different meanings to it. Kinda like putting meaning to the recent declining market action…some see it as the start of the end while others see it as an opportunity to buy in as they missed it the first time. What do you associate the decline to? Opportunity…the beginning of a GREAT bear market, maybe somewhere in between? I’d love to know.

Gratefully yours,

Adam Straseske, CMT

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