Whenever the market plunges, there is always a plethora of opinions telling you what to do. The bulls and vested interests tell you to keep calm, while the bears say ‘I told you so! Get out while you still can.’
Try to ignore all that. Forget opinions and try and focus on the facts. The best way to do that is to make a cold, rational interpretation of the charts. Charts don’t reflect opinion. They reflect facts. They tell you what investors and speculators are doing with their money.
The skill lies in correctly reading the charts…in trying to decipher their message. In my view, the simpler your interpretation, the more effective your analysis will be. There is no need to get too complex.
So today, I’m going to show you a few of the most important charts in the world right now. Before I do so though, I need to get you in the right frame of mind.
Often when people look at something abstract, they see what they want to see. Or, more accurately, they see what their inherent biases tell them to see.
Humans are hardwired to resolve uncertainty as soon as possible. Seeing the world through the lens of our preconceived biases helps us to avoid uncertainty. That might work in the primitive world we evolved to survive in, but it’s not so useful in the stock market.
The point I’m trying to make here is that you should view charts (a visual representation of what the market is trying to say) with no preconceived bias. Don’t go in looking for bearish or bullish clues. Call it how it is.
Having said that, I know I have a slightly bearish bias. Since late 2017, I’ve been telling readers of my advisory, Crisis & Opportunity, that the US market was stretched and that it could experience a decent bear market in 2018.
That was looking like a good call earlier in the year. But from early April until just last week, it was looking pretty silly. In September, the Dow Jones Industrials index joined the S&P 500 in breaking out to a new all-time high. That’s normally a bullish indicator.
I had one problem with that though. Nearly every other major equity index in the world was well off its highs. US stocks were alone in their strong performance. Asia was in a bear market, as were the ‘emerging markets’ in general. European stocks were in trouble too.
This made me at least a little cautious about the strength in the US. Last week’s developments proved that to be the right call.
But where does that leave us? Let’s look at a few of the major charts to get a sense of how to think about the recent correction.
Firstly, let’s look at the NASDAQ. Tech stocks have been the leader of this bull market. Before becoming too bearish, you really need to see the NASDAQ change trend. Despite the recent sell-off, that hasn’t happened yet.
As you can see in the chart below, the latest correction from the 30 August peak is on par from the two corrections earlier in the year. On both of those occasions, it wasn’t enough to bring about a change in trend.
The moving averages are a good proxy for a trend. They smooth out the day-to-day volatility of a stock or an index. In the chart below, you can see the 50-day moving average (blue line) and the 100-day moving average (red line). If the blue MA crosses the red MA to the downside, it will be an indication that the medium-term trend has shifted.
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That didn’t happen earlier in the year and it may not happen this time around either. In the next few weeks or months, the important thing to look for will be the size of the rebound and whether last week’s low holds. Importantly, the sharp low in February 2018 held during the March/April sell-off. If that happens again, the upward trend will be intact.
But if you see any rally run out of puff and the NASDAQ turn down and hit new lows, it will tell you there is an increasing probability the market is in the process of turning into a bear market.
But as this stage, it’s too early to tell.
S&P 500 Chart
The next chart is the S&P 500. It’s a similar story here. Last week’s sell-off wasn’t as large as the one from early in the year. But in saying that, it may not be over yet.
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Once again, the moving averages and levels are important. It’s too early to tell whether this is just a shake out, or the start of a bear market.
Finally, let’s look at the gold chart. It had a big move last week, and traded above resistance at around US$1,215 an ounce. It’s still in a downtrend, but the recent move higher suggests August may have been THE low.
Gold is also an important piece to the puzzle
A rising gold price suggests more investors/traders willing to take out insurance against a possible equity bear market. So gold is an important piece of the puzzle.
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The takeaway from all this is that it’s too early to tell either way. No one likes uncertainty, but that doesn’t mean you have to rationalise it away by succumbing to your biases.
Tomorrow, I’ll look at the fundamental factors influencing markets right now and see whether that sheds some more light on things.
For now though, be alert, not alarmed!
Editor, Crisis & Opportunity
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