A Stealth Double Dip or Bear Market Has Started
The stock has gone through many cycles since the tech bubble in 2000. The tech bubble was the last significant time that the popularity of the stock market among individuals has sparked their interest in the way we see it now in the markets.
Market legend Jeremy Grantham recently spoke on CNBC that price movement in the markets is the “real McCoy” of bubbles. We'll come back to his findings later in this article, but let's do a technical analysis that can help us identify when and where the market bubble could burst. If this is the case, it will seriously harm all newly unemployed retailers and sports betting retailers who do not yet know how the markets are moving.
The stock market and its movements are constantly evolving. Since 2008, when the FED entered the US bailout that manipulated the financial system, presidential and Fed markets have been enforcing new policies.
Instead of the markets naturally correcting and reevaluating stock prices with each business cycle (which has more or less been the case in the past), executives and central bankers now don't want the music to stop. Now they are pushing money into the economy and improving the rules / guidelines / taxes for every company.
Unfortunately, we know how all of these fiscal incentives and manipulations will ultimately end. Changing rules / policies, pumping money into the economy, and spending free money can help in the short term, but this only worsens everyone on the street.
Traders and investors currently believe that they have the Fed that behaves like their parents, that they can fall back on when the going gets tough and that there are no financial threats to a falling stock market. Traders pay a premium for stocks and always buy a break. While all of these traders feel great with position and profits, they can and probably will all be wiped out early enough if position size and risk management are not available for every position held.
Don't get me wrong, I'm not a doomsday person, but that's "crazy stuff," as Jeremy said in his recent interview.
Ok, now that this joke is behind us, let's move on to three simple charts that paint a clear picture, since last week's closing price action may be the start of something ugly.
I know my team and have long spoken about top of the market and lower prices because we try to warn as many traders and investors as possible. Unfortunately, at this rally, FOMO (fear of missing something) took over people's emotions and forced them to buy, buy, and think that things would go smoothly from here, which we don't think is. It is difficult to act against the herd in extreme emotional times like this.
Take a look at these charts to get a simple overview of the slowdown in market internals and their past impact.
S&P 500 VS stock trading over 200 days MA
2004-2009 Bull & Bear Market
This graph shows quite clearly that we are in a bull market when 50% or more of the stocks trade above the 200-day moving average. It's not a short-term indicator, it lags behind, but the red arrow setup shows the strong stock market rally at the top and the split below 50% and the stock trading recovery above the 200 moving average. This is what happened during the last bull - and bear market happened and just like what we are experiencing now.
S&P 500 VS stock trading over 200 days MA
2014 - 2020 Bull & Bear Market
This graphic shows some interesting things. First, the number of stocks trading above the 200-day moving average is below 50%. Last week this value had a massive reversal, indicating that the majority of stocks have seen an upward movement and are now starting to sell.
Momentum stocks are when stocks move up so fast that everyone has FOMO and only chases higher prices. As soon as they start to roll, everyone panics and throws the stocks, and the stock value falls quickly and hard. This is a bearish sign, because as soon as the momentum wears off, we know what is going up and usually fall straight down for at least half of the last rally.
The other pattern that gives cause for concern is the megaphone pattern. This indicates price instability and increases the risk to long stocks of investors. They don't plan to dump them when things turn south.
Since 2015, all types of land mines and forms of manipulation, new tax policies, etc. have been fed on the market. In my opinion and many others I spoke to in 2015/2016, the market was ready for a normal correction cycle (bear market). But the new policy has spurred the economy for another mega-wave that still brings us today. As I mentioned earlier, in the long run, things become unsafe and unstable when you start playing the system and changing the rules, which eventually leads to failure. Megaphone patterns show exactly the unstable price and the health of the market.
Bonds indicate short-term market weakness
The bonds held up exceptionally well during this Fed-induced rally. Bonds tend to lead the stock market and collect or at least outperform stocks before the stock market corrects significantly.
For example, we traded GDXJ and TLT in January this year as they were pioneering and pointed to much higher prices compared to the stock market. GDXJ We hit 10% and left the position on the day of the high tick when gold mining companies hit and fell 57% over the next few weeks. This price level that we left was a significant resistance zone and our target price for the exit.
TLT had broken out of a huge bull flag and was beginning to outperform stocks. We bought TLT and ended up closing it for over 20% when the stock market collapsed.
Both assets not only warned us that the stock market would become fragile, but also offered great trading opportunities.
This shows you the possibilities of using cross-market analyzes, technical analyzes and predefined trading rules. If you use these techniques, you will not be drawn into the emotional side of trading, which will cause you to fall in love with winners and not sell them until they become losers that you can no longer handle the size of the loss.
If you haven't seen this video yet where I put together our last major calls to the crash in February months ago, the 30% rally prediction, and more about what I'm talking about in this article, check out this video.
In short, I hope you've learned something useful from this article and I'm not going to come across as a doomsday guy. If this is the start of a double dip it will be huge and if it is the start of a bear market it will be life changing.
If you are new to trading, technical analysis, or a long-term passive investor and are concerned about what to do, you can follow my example. I share both my investment signals and more active swing trade signals using simple ETFs at www.TheTechncialTraders.com
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Chief market strategist
This article was originally published on FX Empire
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