Stocks, as of the end of last week, are back in "buy mode" at least according to my own trading methodology.
Here are the reasons:
1. Signs of accumulation in the market - there has been a proliferation of "follow through days" meaning, trading days on successively higher volume than the days before where the market closes higher.
2. A proliferation of stocks "setting up" - individual stocks will form bases and identifiable patterns such as the "flat base" , " Double bottom" or the "Cup and Handle" as referenced in a previous post:
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By the way, none of this is meant as investment advice or recommendations. It's simply my take on the markets and reflects my strategy for the time being.
It takes a constructive market and the beginning of an uptrend to create the patterns which are shown in that link, i.e., stocks that are "setting up". Stock patterns and bases such as these are not created in a correcting market and certainly not in a bear market.
At this point, it appears the low is in. This is not to say that the market may not take another dip before eventually establishing a new uptrend, but that at this point, it appears the low which occurred a few months ago on that horrendous Monday, will not be pierced. Obviously, this could change if conditions change, but given current conditions, this is how things appear.
This correction reminds me a bit more of the 2010 correction. It is also similar to the 1998 correction in the stock market, yet that correction recovered rather quickly before transforming into the parabolic "bubble" phase of the stock market commonly referred to as the "dot com boom"
First, a look at the 1998 correction:
Where it says "new highs" in blue is where the '98 correction started. It was a sharp and rather vicious fall in real time, similar to the one that occurred a few months ago. Notice how the correction formed a "W" shape. Stocks fall from the new highs, then try to recover, forming the middle of the W. Then, the market falls again forming the second "V" of the "W". From there, the markets ascended up the "right side" as we say and , with minimal resistance formed a new uptrend which culminated in the parabolic rise which lead to spectacular gains from the end of 98 until March 2000. This was the blow off phase, the bubble, in internet stocks.
I think that our current correction will play out a bit more like correction that the stock market experienced in 2010 based on what we're currently seeing:
Instead of forming one nice, identifiable "W", the 2010 correction formed a more messy series of W's or V shaped ups and downs. It had a harder time resuming the uptrend. It would go back up to try to break out of it's correction range, then decline back again, forming another "V".
Notice in the above chart, when the markets tried to come up and break through that trending, snaky looking blue line ( the 200 day moving average) they failed that last time. They 'bumped' the 200 DMA and corrected again forming another "V", then they recouped themselves and eventually got above the 200 day and moved higher.
In similar fashion, currently stocks are moving back up to the 200 day moving average, which I think will offer a level of resistance and potential temporary pullback ( like in 2010) before stocks can gather enough momentum and break to new high ground.
One of three things is going to happen from here.
1.Markets will, straightaway break through the 200 and 50 day moving averages and trend higher.
2. Markets will struggle getting through this "overhead" resistance of the moving averages, and fall a bit or "base" a bit under the moving averages before, eventually rising above them and forming a new uptrend.
3. Markets will fail to get through the moving averages and eventually decline lower, meaning we are currently in a bear market but don't know it yet.
I think # 2 is the most likely and #3 the least likely at this point.
So, what to do with this knowledge? Well, everyone has their own investing methods and for those who shot from the hip and bought at the extreme lows, Kudos to you! Your aggressiveness paid off. It won't always pay off as eventually, buying at new lows like that, you're going to be buying at what will be the beginning of the next devastating bear market only to see new and more brutal lows. But this time, as I said, the gamble paid off.
If you're a stock buyer based on charts, as I am, you can begin to buy stocks as they "break out" of their patterns on good volume. Again, refer to the first link of here to see what a breakout of a cup and handle looks like.
If you've been in cash a while, perhaps you could consider moving into stocks now, as I mentioned, the market is in "buy mode" for the time being.
With all things tied to the markets, it is of course, subject to change. The most effective way I've found to trade stocks and "time the market" if it can be called that, is to look at what is currently happening and base your decisions on that. Predictions or what your "gut feeling" of where things are going is a reliable way to go broke.
A trader should, with cold blood, observe what markets and individual stocks are telling him currently, each day, then base his buys, stops and length of holding on that, day by day, week by week until conditions tell him otherwise.
Along with that, the trader must stay flexible knowing that a series of "distribution days" ( days where the markets are down on increasingly higher volume) means that the current uptrend is in jeopardy and we are likely entering "sell mode" for lack of a better term.
Markets can change on a dime.
Things are looking better and risk appears diminished, but until we're in a confirmed uptrend, I'd say buy good stocks coming out of bases, but put in stops and keep them, rather tight ( no more than 8%)