The Long-Term Trader

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies. 

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords: http://goo.gl/eBpYBT 

 

AAII survey (8/26/2015)

32.5% Bullish. 29.2% Neutral. 38.3% Bearish. 

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/25/2015)

31.6% Bullish.  22.5% Bearish.

Bearish: If sentiment is over 60% bullish. 

Bullish: If sentiment is over 60% bearish.

 

VIX: 26.05 (on 8/28/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 42.51 (on 8/28/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P 500 is below its 50-, 100-, and 200-day moving averages, and pointing up

Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is below its zero line and below its red 9-day signal line. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.19% (on 8/28/2015).

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: A lot of records were broken last Monday. The VIX went from extreme complacency to over 40, one of the highest one-day jumps in VIX’s history. Then the Dow went from the biggest two-day point loss in its history to its biggest two-day point gain. Now that is volatility! As expected, the indexes fell hard on Monday morning as margin calls were initiated. By Monday afternoon, the indexes fell well below their moving averages and caused severe technical damage. On Tuesday, however, the indexes bounced back strongly (the RSI correctly signaled the indexes were short-term oversold), but the indexes were unable to rise above their 200-day moving averages. Believe it or not, that parabolicly strong bounce-back was not a good sign. It’s better if the market has time to recover, rest, and repair the damage before trying to regain those lost points too quickly. A manic-depressive market is not a healthy sign. On the sentiment side, retail investors are feeling less bullish while financial writers and most on Wall Street are hopeful the worst is behind them. Bottom line: The odds are high the worst is not behind them. Meanwhile, expect more volatility this week as various Fed members make conflicting statements and jobs numbers are released on Friday.

Opinion: I could write a chapter about the current market but I’ll try and be brief. As money managers and others who work on Wall Street enjoy their final days in the Hamptons during Labor Day weekend, their underlings are telling investors not to panic, buy on the dip, this is a “buying opportunity,” and invest for the long term.

Did you see the confused looks on the faces of the hosts and financial commentators on TV? They had trouble keeping up with the many zigs and zags of the market. One clueless commentator even blamed the Monday selloff on panicked individual investors. Ridiculous. Sadly, individual investors don’t know whom to believe or what to do, and unfortunately, many are going to get hurt, and badly.

First, the current market is no place for the inexperienced. I know that this is the opposite of the message everyone is saying, but my message is simple: When the market is not acting normally, stay away. To use an analogy, over the last few months we heard thunder in the distance, but now the thunder is getting louder and there is lightning. This is the time to take cover from the rainstorm. The market is a dangerous place right now and most investors would be wise to reduce risk. It doesn’t mean sell everything in a panic (and many can’t sell because of tax reasons), but taking money off the table is a prudent strategy.

Here’s what I think: I never mind selling a stock or index and missing out if it zooms higher. That doesn’t bother me at all. But what bothers me is when I have a winning stock position and it turns into a loser. I hate that. Many investors have built up gains over the last few years and it will be destructive if those gains are erased. By the way, those are paper gains until they are actually sold. As for me, I like to convert paper gains into real gains on occasion, but that’s me. I’m not a long-term investor. 

I follow my own advice. I am primarily in cash right now but I’m using a portion to speculate using call and put options (mostly put options). Buying puts is less risky than shorting because I know in advance how much I can lose if I’m wrong. Nevertheless, when you trade options, there is a chance you can lose 100% of your investment, although you’ll usually lose less money than if you short stock. As you know, I wrote a bestselling book on options, Understanding Options 2E. Nevertheless, options are not for everyone. It takes skill, discipline, and good timing to make money with options. Even trading stocks in this volatile environment is not easy, which is why most investors are wise to simply move to the sidelines for a while (at least three months in my opinion). Obviously, that is a choice only you can make. And don’t forget that financial professionals a lot smarter than me vehemently disagree with what I just wrote.

Now that I got that out of the way, let’s look at the facts. The next three months will be critical for the markets. No one can predict what the market will do during the next few days or weeks. I do know there are many warning signs telling us the market is in the danger zone (and has been for a while). 

The wild card is Janet Yellin. I highly doubt she will raise interest rates because she doesn’t want to be blamed for a crash or correction. As I wrote last week, if the markets keep plunging, the Fed will surprise the markets with a QE type stimulus, similar to what they did in 2012 (QE3). It worked in 2012 so I assume the Fed thinks it will work again. (It will definitely cause a short-term rally.)

Bottom line: This is a chaotic market. I am looking for failed rallies, a retest of the lows from last week, and more volatility because of the Fed. Until the indexes rise above their 200-day moving averages on strong volume, this market is in trouble. More important, I believe the market is at a pivot point and going through a trend change. If that is true, this is a unique opportunity to make (or lose) money. The bulls really need the market to recover this week, and if they are successful, they will breathe a huge sigh of relief. As always, I will wait for the market to have the final say. Meanwhile, be careful out there. 

 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies. 

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords: http://goo.gl/eBpYBT 

My latest MarketWatch column (Aug 14): http://goo.gl/Axc5Pi

 

AAII survey (8/19/2015)

26.8% Bullish. 39.8% Neutral. 33.3% Bearish. 

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/18/2015)

37.7% Bullish.  18.4% Bearish.

Bearish: If sentiment is over 60% bullish. (Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)

Bullish: If sentiment is over 60% bearish.

 

VIX: 28.22 (on 8/21/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 24.84 (on 8/21/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P 500 is below its 50-, 100-, and 200-day moving averages, and pointing down

Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is below its zero line and below its red 9-day signal line and pointing down. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.05% (on 8/21/2015).

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: You already know from the headlines that the Dow had its worst week in four years, that it has fallen more than 10% from its high, which is a correction, and that all the indexes fell well below their 200-day moving averages. All of the leading stocks sold off. In addition, the S&P 500 fell below key technical levels including 2080, 2030, and now 2000, which caused major technical damage. Did you see the VIX? It had the highest one-day spike in its history, from the low 12s to 28. At least for a few days, fear crept into the market. Another change was that RSI fell to under 30, which means the market is technically oversold. Therefore, the odds are good there will be a bounce this week, perhaps Monday or Tuesday. On the sentiment side, surveys were conducted earlier in the week so it did not reflect the selloff. I assume that retail investors are feeling more vulnerable now, although there isn’t panic (yet). One of the most important developments was all the market leaders rolled over last week. The leaders had been holding the indexes up, but last week investors sold them off viciously. Bottom line: The long anticipated correction arrived with a bang. This will be a very difficult market environment to manage and many investors, including many pros, are going to get hurt.

Opinion: I can sum up the market in two words: “It’s complicated.” Fortunately, I won’t spend one second discussing “why” the market plunged; I’ll leave that to the pundits. But I do have a lot to say about this dangerous market. Today’s blog will be longer than usual.

A few weeks ago, I said that a major trend change, or pivot point, seemed to be developing. Last week gave us more clues that the bull market may be stalling. There is one more major clue we are waiting for, and here it is: Based on the oversold RSI and market history, the odds are good there will a bounce this week. It could come as early as Monday afternoon (after the margin calls are completed), or Tuesday.

This is exactly what Wall Street wants, and they should get their way. Nervous investors will sigh with relief that the 10% correction is out of the way. And after the bounce, it will get very, very interesting.

If and if

If the S&P bounces strongly but does not go back to its previous highs eventually (2000, 2030, and 2080), that would be a negative sign. Yes, the chances are good there will be a rally, but what happens next is the key.

If the indexes rally and can retake its previous highs, then the bull market will continue for a while longer. If, however, the rally fails (or if there is a weak rally), and the market keeps falling, Wall Street will scream at the Fed to do something to save the market.

What will the Fed do?

Allow me to speculate what the Fed might do based on probabilities: At first, the Fed may do nothing. If the market bounces without outside help, the Fed may stay quiet, as long as the market is relatively calm. If the Fed acted responsibly, it would proceed with a quarter point interest rate hike in September or December, and leave the markets alone. However, based on past Fed actions and pressure from Wall Street and financial pundits such as Jim Cramer and Suze Orman, the odds are high the Fed will delay raising interest rates this year. In addition, if the market keeps plunging, the pressure will be intense to initiate a QE4 style program with a new name. In other words, the Fed will feel obligated to do something to stop the carnage rather than leave the markets alone. Because of the Fed’s expected interference with words and actions, the indexes will be volatile, so be ready for anything.

Although the market may settle down for a few days or weeks, danger is percolating below the surface. Most important, be very careful about listening to advice. You are going to hear a lot of conflicting opinions. Think about this: Only a week ago most pundits were telling investors to buy AOT (any old thing), and that any pullback was a “buying opportunity.” By the way, many are repeating that advice:

“We are advising clients to stay invested and use the drop in stock prices as an opportunity to add quality stocks at lower prices if they need equities in their portfolio.” Edward Jones strategist

“We are advocating clients to stay invested, if not add to positions.” TCW strategist

Most of the major Wall Street firms are giving the same advice: Buy on pullbacks and buy on rallies. In other words, buy but don’t sell. Why? Because this strategy has worked in the past.

Here’s a minority view: “I’ve been bearish for months and expect a sharper pullback. We are in the early stages of a broader selloff and we expect a double-digit correction before we bounce back.” Ed Shill, chief investment officer at QCI Asset Management.

Wall Street and most of its followers will be spreading this message: “Stay the course. This was a natural 10% correction so stay calm. Do not panic or make any impulsive decisions.”

Think and Plan

The next few weeks will be fascinating. As mentioned earlier, I suspect that we have reached a pivot point. If I’m right, then the market will let you know. No one, not even the Fed, is bigger than the market, so if this market is destined to go down, it will eventually no matter what the Fed throws at it.

Bottom line: This is the time to pay full attention to the market. Fortunes can be made or lost if this is truly a trend change, but it won’t be easy. Very few want this market to fall, and with the Fed’s help, the damage may be contained temporarily. We will soon find out soon enough who will win the week. Based on past history, the bulls are desperate for a strong rally, and they will likely get it.

Additional note to speculators: Be careful about stepping into this market too soon. Let the market confirm your opinion before making any big plays. For those willing to buy puts (or short), there will be opportunities over the next few weeks and months.

 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies. 

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords: http://goo.gl/eBpYBT 

My latest MarketWatch column (Aug 14): http://goo.gl/Axc5Pi

 

AAII survey (8/12/2015)

30% Bullish. 33.4% Neutral. 36.1% Bearish. 

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/11/2015)

40.2% Bullish.  18.6% Bearish.

Bearish: If sentiment is over 60% bullish. (Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)

Bullish: If sentiment is over 60% bearish.

 

VIX: 12.83 (on 8/14/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 49.16 (on 8/14/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P 500 is below its 50- and 100-day moving average, and slightly above its 200-day moving average, and pointing up

Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is below its zero line and below its red 9-day signal line and pointing sideways. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.20% (on 8/14/2015).

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Retail investors are becoming increasingly bearish but not at extreme levels. It’s primarily at extremes that the sentiment indicators are most useful. However, financial writers and most pros are still overwhelmingly bullish with very few bears in sight. Therefore, it’s a draw. On the technical side, although the indexes are below their 50- and 100-day moving averages, they are above the all-mighty 200-day and pointing up, thanks to a remarkable intraday reversal on Tuesday. Bottom line: Because of the intraday reversal (and low interest rates), the bulls have the advantage this week.

Opinion: Not surprisingly, the first couple days of last week were volatile. As expected, on Monday the indexes bounced strongly, and it looked like it was going to be a great week for the bulls (after a miserable month). On Tuesday, China shocked the financial world by devaluing their currency, sending the futures straight south. In the morning, the indexes plunged, and the bears were in control. Around mid-morning, after hours of panic selling, an influx of buy orders from computer algorithms and stock buybacks halted the plunge, and the panic subsided. The market drifted upward the rest of the week. 

As I’ve mentioned before, computer algos (and Wall Street) needs a low-volatile, slightly bullish market, and they got their wish. A complacent market (with the VIX near 12) keeps clients calm. As we enter this week, all seems well with the world once again.

At the moment, conventional wisdom is that interest rates will remain low (and that the Fed will not raise interest rates in September), that there will be no more surprises from China, and bonds will keep rallying. Sounds perfect (as long as you are not long commodities or emerging markets). Based on previous index reversals and conventional wisdom, the market “should” shrug off bad news and climb higher this week. Wall Street needs the Dow to return to 18,000; the sooner the better.

Putting it all together, I would be surprised if the indexes did not climb higher this week. Although moving averages are negative, the intraday reversal was powerful. In fact, if the indexes do not move higher this week, then the previous pattern will have changed, and that will be significant (it will be very negative). 

Bottom line: This is the time to be patient and watch. The bulls should win the week, and if they do not, then the financial problems are more severe than anyone realizes. The market is still dangerous, so do not let down your guard. Problems can appear from places no one can anticipate. 

 

 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies. 

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords: http://goo.gl/eBpYBT 

 

AAII survey (8/5/2015)

24.3% Bullish. 44.0% Neutral. 31.7% Bearish. 

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (8/4/2015)

42.2% Bullish.  17.5% Bearish.

Bearish: If sentiment is over 60% bullish. (Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)

Bullish: If sentiment is over 60% bearish.

 

VIX: 13.40 (on 8/7/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 43.24 (on 8/7/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P 500 is below its 50- and 100-day moving average, and slightly above its 200-day moving average, and pointing down

Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is below its zero line and below its red 9-day signal line and pointing down. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.17% (on 8/7/2015).

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Sentiment among financial professionals is still quite bullish although some admit a “short-term” 10 percent correction is “possible.” The VIX is still at historic lows, which reflects never-ending complacency and a lack of volatility. It also means that even with the recent 1000 point pullback on the Dow, most investors are not expecting a major correction. However, the indexes fell well below their 50-day and 100-day moving averages. From a technical perspective, damage was done to the indexes. As we enter this week, we’ll see if the indexes will rally. In the past, when the markets were about to fall into the abyss, the Fed showed up with encouraging comments or new programs. Bottom line: Once again, the market is at an important crossroads. Although the indexes are pointing south at the moment, and the market internals are deteriorating, a short-lived bounce is possible (and even likely). Monday may set the tone for the week. Most important for the bulls: The indexes need to stay above their 200-day moving averages. 

Opinion: While most people are distracted by the lazy days of summer and the upcoming start of the school year, astute investors and traders are focused on the market. The next three months will make or break the market and your full attention is recommended. The market is at a crossroads, a pivot point, and a possible trend change. Now is the time to study and observe, and get ready to take action. 

The conventional wisdom on Wall Street is that a mild 8 to 10 percent correction is possible. According to many pros, if this correction does occur, it will be a “buying opportunity.” Note: On Wall Street, it’s always a buying opportunity.

I have a different view. Although an 8 to 10 percent correction is possible, followed by a rally, I am also preparing for a much larger downturn, perhaps more severe than any of the professionals believe is possible. This is not a prediction but a warning that it is time to prepare now. If there is a trend change, and it can take several weeks or months to develop, then you can throw conventional wisdom out the window. Identifying trend changes is how fortunes are made (and lost). Keep in mind that if the market does fall into the abyss, the Fed will appear out of nowhere to delay raising interest rates, and initiate another QE-type program. That will cause a short-term rally. If that rally ultimately fails, then the market will continue plunging.

Now is the time to learn how to buy options (I recommend my book, Understanding Options 2E), learn how to short (I prefer buying put options because it’s less risky, i.e. you know how much you can lose in advance with options), or how to hedge. As I’ve said for almost a year, it’s also the time to take money off the table (i.e. selling). After probing and testing both sides of the market for a year, my put option positions are coming to life. On the other hand, it’s too early to put on the gas until the market falls below certain technical levels. For example, the S&P must fall below 2050, and ultimately, 2030. If the market falls that low, there will be even more selling as margin calls are made. 

This market is about as dangerous as I’ve ever seen. That being said, Wall Street needs and wants the S&P to return to 2100 and the Dow to 18,000. If successful, the bulls will sigh with relief. However, if the market keeps plunging this week, short sellers will be taking out their knives, and volatility will return with a vengeance. 

Bottom line: What to do? Let the market tell its story. Look for a severe break in the indexes. If that occurs, the market will be in trouble. On the other hand, with help from their friends, Wall Street might be able to get their wish once again (i.e. a strong rally). The bears have the edge on Monday but this week is still too close to call. I can, however, guarantee the next three months are going to be very, very interesting. 

Each weekend, I study market behavior using sentiment and technical indicators. My goal is to use clues, observation, and indicators to analyze underlying market conditions. If you can determine the current market environment and trend, it may help you to create profitable trading strategies. 

RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk

My latest book (eBook) has been released: Prepare Now and Survive the Coming Bear Market. Amazon: http://goo.gl/2wWC8X Nook: http://goo.gl/VQstmr  Smashwords: http://goo.gl/eBpYBT 

 

AAII survey (7/29/2015)

21.1% Bullish. 38.2% Neutral. 40.7% Bearish. 

Bearish: If sentiment is over 50% bullish.

Bullish: If sentiment is over 50% bearish.

 

Investors Intelligence (7/28/2015)

43.3% Bullish.  17.5% Bearish.

Bearish: If sentiment is over 60% bullish. (Note: Percent of bears is still at historic lows. 13.3 % is the 1987 low.)

Bullish: If sentiment is over 60% bearish.

 

VIX: 12.12 (on 7/31/2015)

Bearish: Less than or near 12.

Bullish: Greater than or near 40.

 

RSI (S&P 500): RSI is at 51.78 (on 7/31/2015)

Overbought (i.e. Bearish): When RSI rises to 70 or above.

Oversold (i.e. Bullish): When RSI falls to 30 or below.

Note: RSI can remain overbought or oversold for extended time periods.

 

Moving Averages (daily): The S&P 500 is above its 50-, 100-, and 200-day moving averages, and pointing down

Bearish (Short-term Downtrend): Index crosses under 50-day, 100-day, or 200-day MA.

Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.

 

MACD (S&P 500): MACD is even with its zero line and even with its red 9-day signal line and flat. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Bullish: MACD line crosses above zero line. MACD line crosses above 9-day signal line. 

 

Bonds: U.S. 10-year yield is at 2.21% (on 7/31/2015).

Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).

 

Analysis: Last week, the Fed stuck to the script, saying nothing, but the market rallied (as we expected). The indexes managed to climb above their moving averages but not by much. Unfortunately, the technical indicators are not telling us much, which means the market could go in either direction this week. Sentiment isn’t extreme, but the VIX is at 12 again, reflecting extreme complacency. It appears as if many market participants believe we’ll have a low volatile but rising market (of course). If you look deeper, however, the warning signs are increasing. For example, only a handful of stocks are keeping the indexes afloat. Also, the New High-New Low indicator is flashing red (18 new highs vs 480 new lows on July 29). Finally, China must be watched for signs of a slowdown, and commodity prices are plunging. Bottom line: The market appears suspiciously quiet and guarded going into this week. Observe whether the Dow can retake 18,000 or if the S&P 500 can hold 2,100.

Opinion: As I mentioned last week, the market needed to rally during the Fed two-day meeting, and it did. Unfortunately, the rally was rather tepid, and worse, the Dow remained below 18,000, a key psychological level.

One thing I’ve learned about the market: It can go higher than anyone ever imagined, but it can also go lower than anyone believes. That is why it’s so essential to be prepared for either scenario. Based on the clues and indicators so far, the evidence is leaning towards a pullback, but that is not guaranteed. That is why you must protect your positions using hedge strategies or raising more cash.

If this were a strong bull market, the indexes would have risen a lot farther and faster by now. Instead, the market appears to be weakening. It’s still too early to aggressively short, but it might be time to draw a list of potential candidates.

And yet, never forget that a sideways market such as this is the most treacherous of all. Amateurs are going to get whipsawed as the market goes in both directions, sometimes within a day. Yes, it’s possible the market will climb higher this week (because anything is possible). However, it’s also possible there will be more deterioration. I am watching the market leaders. When the leaders start to crack (and some already are), the market will be even more vulnerable.