Bottom Yet?
Mood:  incredulous
We continue to be amazed by the ease which most market commentators flip their opinions. The Nasdaq has been in an objectively measurable downtrend since the first of the year and the S&P 500 has been trending down since early March. The market has been in a consolidation/distribution range for over a week now with a heavy bias for more downside before a true rally can ensue. Meanwhile nearly every commentator we read is willing to call a bottom off a minor one day reversal such as we witnessed yesterday. They were calling a bottom last Thursday to by the way. So, since calling the ultimate bottom seems to be this week’s market obsession we thought we would take some time to analyze the bigger picture to see if it makes sense to start buying at these levels or whether we should continue to sit tight in cash and in short positions. Remember, no one knows what is going to happen tomorrow. Those who are successful rely on experience and probabilities. Experience lets you know where probabilities are favorable and where they are not. Success is also achieved by the acceptance that you will be wrong almost as often as you are right. It is for this reason that we know where we will exit when things turn against us. Over time this keeps the probabilities working for us and not against us. As complicated as the market seems from day to day, ultimately managing your money in the market is as simple as what we outlined in this paragraph. Let’s take a look at what the probabilities favor right here and right now; forget about next week and next month, no one has gotten rich trying to read the future. Take a look at the SPY (ETF for the S&P 500). There are several important things to note about the chart’s technicals that will help us determine if we should start looking for a bottom yet or whether it is best to wait in cash and in short positions before we start to think about buying. Several characteristics objectively determine a downtrend is still in tact: • Both the 20- and 10-day averages are trending down; • The price is trading below its 200-day average; • It has a downtrend line that is still in tact, and; • The accumulation/distribution (AD) indicator continues to show distribution (note, this is not an overbought/oversold oscillator – when a trend is getting old we would expect to see this line diverging upward against the downtrending price). It can easily be established by these criteria that the downtrend is in fact still in tact. But, trends all reverse eventually, right? Should we start looking for a reversal and should we start thinking about getting long at current levels? Again, there are several characteristics that exist that raise a red flag of caution to those who are itchy to be the first one to pick the bottom: • When the two-year uptrend broke on April 13 the price quickly sliced through the 116.75 support level, which in the past had been heavily defended. The price now trades below this level, which now represents formidable resistance; • There is no measurable support before 110, and; • Even if the price were to somehow manage a recovery over 116.75, it will still have the broken downtrend to contend with (in our book, a return to a broken downtrend is a situation that just begs to be shorted). The market may or may not be at its ultimate low for the year and this may be the buying opportunity of a lifetime. Or, it may just be a temporary stop on its way lower. Experience shows us that we are most likely confronted with the later and that assuming the former would require a thought process comprised of wishful thinking and intellectual dishonesty. We will get a nice tradable bottom soon and just because the market is projecting lower prices does not mean that the world is ending and that the economy is collapsing. It is all just part of the normal cycles that the market takes us on as it responds to a sea of data, greed, and fear. When this current data is priced in we will get a bounce (Why? Because the market is an unconscionable over reactor). If the downtrend defies odds and does ultimately reverse from these levels there will be plenty of time to profit from such a reversal. But, trying to load up here in anticipation that a reversal is immanent simply amounts to nothing more than gambling and is a great way to lose a lot of money. There are times in the course of trading that the trend is difficult to discern and trading decisions are more complex. This is not one of them. Keep it simple and stay with the trend until it’s not a trend any more. As we can see, there are objective ways to measure this that trump the subjective observations of the guru analysts who are paid to make bold predictions every day.