The S&P – Market Reset Time to Jump in?

Overview:

After a wild week for the stock market it appears in the pre-market we are seeing signs of a potential bottom.  We have been talking about a pullback prior to the Christmas rally and though it is a little late, patience has paid off.  So is this the time to jump in or just get our feet wet?

First regardless of “headline” news the economy is still very strong.  When ever there is a significant market move, people look for a reason, and news sites provide opinions.  Of course one week the market is ignoring trade talks, rate raises, fed meetings, and the next they are all the reason the market sold off.

Quite simply the market gets ahead of itself, and resets are common.  Markets go from overbought to oversold.  This has been going on since the dawn of markets.   If you can suppress the impulsive natures and patiently wait, buying opportunities eventually present themselves.

This is where we can take advantage of over leveraged fund managers, scared retail investors and a market full of news hype. 

S&P Daily:

After it appeared that the market was finding support around the 2860 level someone pulled the rug.  This is why we do not buy until we see evidence that we are turning.  There is a point where the market is so beat up that good stocks are drawn into the same hole as bad ones.  This is one of those moments.

I have been asked how I get the levels on my chart.  Well it is a combination of Fibonacci and experience.  Often you will notice Marc and my levels are slightly different.  This is because different analysts have different perspectives

Every chart I do starts with trend lines and relative support resistance levels.  Fibonacci is just an additional perspective in my opinion.  It provides depth of a pullback or length of an extension.  What I personally place more weight on is support and resistance levels which are found at 2800 and 2700. Note these align with the Fibb retracements.  A break of 2700 would imply the selloff is not over and we are over estimating the market’s resilience. 

Note I have two trend lines drawn.  The broader trend line is a mid term trend.  It started in April but it wasn’t until July that the market kicked into gear.  The start of the shorter term trend was much more defined. Once this trend line was broke, we fall back on the mid term trend.

Once the mid term trend is broken I now zoom out to a broader trend.

S&P Monthly:

The monthly shows clearly the market is in the FOMO phase.  Forget about fundamentals here this is strictly technical. Since 2009 the market has formed a valid trend channel.  Within the trend channel we have distinct fractal trends. 

These fractal trends are the basis for determining market cycles.  Markets generally cycle in 3 impulse waves followed by a correction. Note the trend lines are indicative of market sentiment.  The current trend line has a steepening slope, which is part of the FOMO and relates to a final impulse move. 

Using Fibonacci we can get a perspective into market conditions.  The 0.236 level is a critical level to hold.  Why?  A 25% pullback of a cycle is indicative that the cycle has likely ended.  IF we push through the 2665 level it would indicate this is a broader based correction and 2500 as well as 2230 are now in play.  Is this a magical number? NOPE it just provides a perspective of the strength or weakness in a market. 

As long as 2665 can hold we assume the market is strong and this is just a simple market reset. (Note this is inline with the 2700 level above, I give more weight to the 2700 as it is a psychological level as well)  This is why trading trending markets is so easy.  Anytime since 2009 you invested or bought the dip, you are a trading genius.   These types of markets, similar to the 2015-2017 Bitcoin market, create experts in charting.

Where it becomes more difficult is identifying a top or a bottom.  Inevitably we will get a reset and reversion to the mean. For this we look at market Super Cycles.

S&P Yearly:

Again the same rules apply.  We draw simple trend lines and from these we can visualize market trends.  From this we can apply EW and Fibonacci to further gain perspective.

Note Supercycles are multi year cycles.  From 1944 to 1973 we had a broader market run.  From 1975 to 1998 we had another broader market run.  We likely in the next few years revert to the broader term trend.  Where would I expect a pullback?

A 50% pullback from 3300 would put us at the 1567 level which is a significant resistance level.  Resistance becomes support and this is between the 50 and 62% retrace of the broader swing.

So what are we looking at here?

Quite simply at this phase of the market cycle we want to own equities that we do not mind holding through a correction.  No different then in February where I mentioned in cryptos it was the time to close out trades and batten down the hatches.

I want to own equities I do not mind holding through a market down turn.  Every investor should have a list of equities they want to own.  Not 20 or even 10, start with 2 or 3.  I love dividend payers that have a track record of continual increases.  Companies like JNJ MMM and KO have 60+ years of dividend increases.

This is an opportunity to start buying and to enter some small trade positions.  However, buying to early often results in buying into larger investors that are looking to trim out.  For those looking to start a long term investing account value and dividend payers should be the central core of a portfolio in my opinion.

Ultimately my goal is to own 100 shares of a company.  After this I only buy dips.  This provides a basis for investing.  I want to own a company now that I want to own 20 years from now.  QCOM is one of those companies I want to buy.

Trading with Options:

I am not trading the open here.  I rarely position before 10:30 especially in volatile markets.  As volatile as this market is I will likely wait till mid day or 2:00 will allow the market to weed out impulsive traders.

I do not want to trade into a dead cat bounce and will wait till later this afternoon for any trades.  Update will follow before I buy.

If you are looking to build a portfolio and your means are limited, putting a buy order under the market and see if it gets filled is one strategy. For those with larger accounts we can look to sell some shorter term puts and see if they get filled. 

AMD Example:

AMD is trading around 26.35 pre market.  The NOV 26 PUT strike is trading around 3.00.  If you are looking to add 100 shares here, selling cash covered puts here is a good way to buy stock.  If you are assigned the stock your cost is 23.35 per share.

That is right in the area I want to be a buyer.  If the market continues higher, I keep the 300 in premium which can be used to buy the stock outright and build a small position. 

Another strategy is stock covered calls.  Buy the stock outright at 26.36 and sell the 29 call strikes for 1.40.  If the market fails to break 29 by the strike date (November) you keep the premium.  If it does break 29 and the shares are called away you made 4.40 a share which is 15%.  Not bad for one month.

Of course this assumes you do NOT mind owning the shares and it is possible for the stock to move lower.  I WANT TO BE CLEAR DO NOT RECOMMEND USING LEVERAGE UNLESS YOU HAVE THE CASH OR STOCK TO COVER BEING ASSIGNED OR CALLED AWAY.  ANYTHING CAN HAPPEN. Leverage = Losers!

We are currently working on some basic options strategies that keep it simple.  Simple is good and though there are more complex strategies we stick with stocks we do not mind owning if assigned or stocks we do not mind being called away.  This is not a strategy I use for Apple as an example.  I simply do not want to risk my shares being called away.

Summary:

Unlike the crypto market the stock market is very liquid.  This provides opportunities and we are looking to enter some trades here.  These types of selloffs do not happen often and we can take advantage of them when they do.  This is a time to get our feet wet not dive into the market full force.  Trades should be selective though long term buys can be more flexible.

Update to follow later as there are many stocks on our radar including TGODF and ACBFF.

 

5 Responses
  1. Satertrading

    Hi Andrew. Clearly, calling the top is quite difficult. All of your charts are identifying 3000-ish as the range for the completion of wave 5. We have kind of already been there, at just over 2900. What are your thoughts on the possibility that wave 5 may have just been completed, and we are now in leg (a) of a corrective move?

    Thanks!

    1. Andrew Gonci

      If we 2500 fails to hold. This would be a 20% correction of the overall move from 2012 and at this point I would look to consider it a top. Starts showing weak structure, fails to make higher highs, testing 2500 which is a critical support level not only technically but psychologically I would lean towards a top. Keep in mind markets seldom selloff in a straight line however, how it forms here will provide signs like the DAX did.

Leave a Reply