Technical Damage Confirms Bearish Bias

I track technical analysts, including Avi Gilburt over at FATrader, Marc Chaikin, a point-and-figure guy here in Milwaukee, several candlestick makers and a few others. When their macro analysis lines up, it gives me pause. Right now, they are all telling a similar story:

The stock market is very likely to go lower from here. 

There is a catch though, it might get a rally first. The Federal Reserve is likely to break character again and lower rates more than Chief Powell initially indicated. There’s an also an outside chance of a partial or “fake” trade deal. 

A Few Charts

Let’s start with Avi over at FATRader. The script is pretty simple, we should be seeing lows into that first blue box soon. The support levels have given and now become resistance. To avoid the main support box would take some sort of positive surprise that improves sentiment.

Elliott Wave S&P

The lower blue box is similar to a level that I identified early last year when the stock market first began this topping process: 

SPY Risk

I call this a topping process because the stock market has barely moved in 18 months now despite the increased volatility. 

SPY Risk Update

So, it appears, we are waiting to see if we get: 

  • A correction now
    • into the support range, or
    • the lower non-crisis range
  • A rally now, followed by, a correction later. 

If we get a rally now, then my guess is that the next correction blows right through the upper support range. The most likely set-up appears to be consistent with Avi’s Elliott Wave analysis which is that we get a small correction now, a corrective rally (which could be substantial) and then a deeper correction later.

What Investors Can Do

Because a correction similar to last December’s appears likely, I am sitting heavily in cash. My short-term bias (about 18 months in this case), is bearish. Thus, I am cautious to enter many long positions. 

There is clear opportunity to trade the large indexes though. The Invesco QQQ (QQQ), SPDR S&P 500 (SPY) or Vanguard S&P 500 (VOO), as well as, iShares Russell 2000 (IWM) – which we didn’t discuss today – can all be traded at turning points. The problem of course is with that first support level. We will have to watch carefully to know if a rally or further breakdown is coming. 

For most investors, I would be very cautious through the end of next year. Certainly cherry pick some of our favorite stocks on bottom fishing prices, but in general, avoid the “next best” or just good ideas.

As I was reminded of in New York this winter, when the stock market falls, just get out of the way for the most part. Hedging will generally not save you because there is an uncertainty in hedging trades that works against them most of the time.

It is rare when we get two “less hard” iPath S&P 500 VIX Short-term Futures ETN (VXX) set-ups like we got in January 2018 and August 2019. By being heavy in cash, if there is another set-up, then the trade can have a positive impact. We don’t want to simply be offsetting losses. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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