Patience & Fortitude
You rely on seasonals, so this decline surprises you? You forgot that February tends to rank as one of the three worst months. You rely on cyclical factors? You forget that all trends include minor trends that swing contra to your wishes and expectations. What many of us investors regularly forget is that markets always oscillate, even within definitive trends (up, down, or sideways). This volatility enables us the opportunity to purchase or sell at better prices, as these movements tend to continue to outlying extremes.
If resolutely long ("Damn the torpedoes, full speed ahead!"), you require fortitude to withstand the depth charges the market will deploy to rock your (emotional) boat. If long cash and eager, you require patience to forget about the now defunct prior (up) trend, and commit your monies only at appropriate moments of low risk, high reward. Not willy-nilly. ("It's an even better purchase now, thanks to this decline!")
This decline is no different than any other... So far. There are some items of bullish merit, and yet almost all technical and fundamental signals suggest lower prices remain to be probed. There will be a tremendous amount of volatility; for example, the market appears set to decline hard on today's opening. The market, and you, will be plagued by lots of intra-day volatility; remember to place within the greater continuum each day's price bar to discern the true trend. For example, do not be surprised should the down opening (with likely gaps) seemingly in the cards for today reverse up intra-day; the surprise will be the market's closing levels. And even that factoid is not particularly important.
Do not allow the market's intra-day oscillations to gull you. No longer rely on tools more appropriate for trending markets such as moving averages -- the 50 day sma will be breached. (As it already has been in most instances.) The 200 day sma remains crucial. The difference between the two is that support at a rising 50 day denotes continued upside momentum, whereas support at a 200 day sma denotes investor (not trader) buying. There are many more investors than traders.
Place some measure of faith in tools that circumscribe range-trading markets; e.g., stochastics, RSI, and other oscillators. Why? Because the market has yet to shift gears to down from up; nothing indicates a change to bear from bull. This remains merely another correction, so far.
Remember to seek inflection points: during market advances, identify resistance ("What force impedes or even stops the advance?"); during market declines, identify support ("What force stems or even stops the decline?"). These inflection points are crucial. On a pattern basis, seek a slackening of the downside momentum; not present at the moment. This action will appear on the charts, perhaps as a falling wedge. (Recall that in late-January I identified the rising wedge to indicate the increasing risk in the market; the rest is now history.)
And never forget, even for a moment, that this hellacious moment too shall pass. They always do.
-- David M Gordon / The Deipnosophist
Labels: Market analyses