“Turn that off, it’s time to go to sleep”, my wife said. But I couldn’t pull my eyes away from my phone. The market that had closed the regular trading session just shy of all time highs a few hours earlier, was now plummeting faster than I had ever witnessed before. The “expert” consensus was wrong. The majority of British voters wanted to leave the European Union.
The “Brexit” whipsaw underscores the importance of staying flexible. A bearish macro pattern of lower highs and lower lows that had controlled the weekly chart of the S&P 500 for most of the last year was broken a couple of weeks before the Brexit vote. Bullish! The post Brexit crash sliced through TWO potential higher lows AND the 200 day moving average. Bearish! The snapback rally that followed reclaimed ALL of the moving averages in just 3 days. Bullish! I don’t think I ever flipped my stance back and forth from bullish to bearish faster.
A few weeks on, with the S&P 500 now at all time highs, it’s easy to say that the Brexit whipsaw was just a bunch of noise that was best ignored. Keep in mind though that one of these days we may see the beginnings of a REAL crash. Never forget that complacency can quickly wipe out all of your hard earned gains and then some.
So where does the market have the potential to go now? The S&P 500 has just carved out an ENORMOUS bullish “W” formation visible on the weekly chart. As I mentioned before when discussing the two smaller W’s that make up the bottoms of this larger W formation, the potential measured move is calculated by adding the height of the W to it’s top. I calculated a conservative height that ignores the “tails” of the weekly candlesticks as well as a more aggressive target which includes the full height to draw in the rectangular “measured move zone” in the chart below.
As you can see, a move to the potential measured move zone is good for better than 220 points or 10% over the next year! As long as the S&P 500 continues making higher highs and higher lows above it’s moving averages we will maintain a bullish stance… but as always, stay flexible.
(watch video below for market recap and trade details)
OMN – sell at market
Other 821x buy ideas:
ARIS – buy with a limit price of $4.17
SLX – buy with a limit price of $26.61
I only track one 821x model portfolio trade at a time for educational purposes. Remember, IT NEVER MAKES SENSE TO PUT YOUR WHOLE ACCOUNT INTO A SINGLE TRADE. Please refer to the section on position sizing in the 821x Trading Manual.
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The 821x system is a trend following system. However, it’s not enough to know the direction of the trend for a trade idea. We also have to stay in touch with the direction of the market as a whole. We always want to have the wind at our back. This is even more important in a down trending market where even “good” stocks gets dragged down with the “bad”. Very few stocks make it through a bear market unscathed.
So what is the evidence that the market is currently in a primary downtrend? First off, the S&P 500 is below a DECLINING 200 day moving average. Furthermore, the definition of a downtrend is lower highs and lower lows. The market just made a pronounced lower high and lower low that is visible even on a monthly chart.
By the end of the first week of trading in 2016, my retirement account was almost completely in cash as my remaining positions flashed 821x sell signals one by one. By the middle of the following week, my IRA was completely in cash as our model 821x trade at the time triggered a sell. There is no absolutely no sign of an end to the current down trend. It may take MONTHS for the market to heal and the primary trend to reverse. I am thankful that the 821x system has moved my money out of harms way.
Many beginner DIY Investors feel like they have to stay fully invested all the time because “their cash isn’t growing if it’s on the sidelines”. It’s important to remember however, that when stocks go down, the value of your cash is actually increasing in that you can buy more and more shares. In fact, market declines are what set up some of the biggest and fastest gains as the downtrend comes to an end and the market reverses back up, refreshed.
When looked at this way, one starts to understand that maybe we should embrace a bear market. This is obviously much easier to do when most of your money is safely in cash.
Before I finish, it’s important that I ask and that you answer the following questions honestly:
Unless you can confidently answer yes to both questions, you absolutely should NOT put your retirement accounts in cash.
If you are on this site, I generally assume that you are a do-it-yourself investor or at least an aspiring DIY investor. You are someone who wants to take an active role in growing your investment accounts by executing smart, higher probability trades.
However, when the market starts tanking, average investors start freaking out and do stupid things that hurt them in the long run. Just in case any of these people have stumbled in, I want to make clear that average investors SHOULD NOT be flipping their long term retirement accounts into and out of cash. They will likely miss the resumption of a bull market which would put their long term financial goals at risk. Know thyself.