Thanks for viewing. There is a bit of text here. Stick with it - it will be worth your while.
Can I have a brief rant first? Anyone that tries to sell you indexes is absolutely not your friend. In the coming weeks and months you will be advised by professionals to keep your money in the index (even though it has gone down (and will continue to go down) significantly) on the justification that you are "dollar cost averaging" and it will all work out when things go bullish again. Now, unless you have a very specific buy or sell zone in mind and a valid target (or you may just be willing to let the trade ride for as long as its trending in the right direction) then dollar cost averaging is considered in the finance industry to be a rather amateur move. Very hard for finance professionals to justify to their managers / board when performance review time arrives, but good enough for the average Joe and Jane retail investor. The thing that amazes me about indexes is that they aren't reassessed and reshuffled when difficult times approach to focus more on more stable (i.e. better PE ratio and less speculative equities). Like it or lump it basically. A lot of people can't withdraw funds locked into long term contracts and WILL take the hit (plus management fees). Sorry, but the level of negligence just astounds and annoys me.
Anyway, I am a relatively inexperienced trader and certainly no financial professional so I wonder what the odds of me picking the actual turning point of the S&P 500 correctly are? Let's see :) Despite my lack of credentials here is where I will be entering a short position on the SPX via order laddering (a bit like dollar cost averaging but set within a very tight 0.7% range). I will put larger orders near the top of the box and smaller orders near the bottom.
Why am I entering this trade?
1. A lot of people knock Elliot Wave and I don't understand why - it turns the chaos of the "random walk" of market price action into order (its not predictive as there are many wave variations, plus some degree of randomness, but it is indispensable). The last 9 years in the SPX has been a very clear impulse wave with 5 main divisions. In my view it is wave 5 of the primary cycle - with a significant retracement to come (which has already started). The correction happens in 3 waves (or combinations of 3 waves). Wave A (-11.2% drop) has formed. Wave B (+8% from the swing low of 2635 has already been set in mid November) is finishing soon (my view is it will finish within my red box range). Wave B has 3 sub-waves, 2 of which are complete and the third is soon to complete. The third wave is always subdivided into 5 sub-waves. In my chart we are more than half way complete in the 5th and final wave.
2. There are clear bearish indications from lagging indicators. First the hourly scale: a. The MACD is on the upside but the moving averages are looking like they will cross over shortly and head downwards (which will be a clear indication to enter a short - once it crosses the "zero line" of the MACD scale). b. RSI is showing a series of lower lows (which allows me to draw a clear trend line above it (expect one more touch before the drop) while the price is making higher highs and higher lows. When RSI and price action head in different directions it is termed bearish divergence - an early indication of an impeding change in direction - and a very useful tool to have in your kit). c. The MACD histogram is trending downwards and, if it continues, will shortly cross into negative territory. Now I do expect a small cross over negative, then positive, before the drop occurs.
3. Much of the same on the daily time frame. The RSI is currently at 56 and I am expecting the 60 level to offer insurmountable resistance. An RSI of 60 is considered a resistance level in a bear market (yep we are now in a bear market) by Constance Brown's guidelines stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_index_rsi. The bullish RSI ranges is 40+ and if you look at the weekly time frame the RSI only briefly dropped below 40 five times in the last 9 years and was just touched 5 more times before heading upwards.
4. The wave (B) top reversed right between the 0.65 and 0.618 fib retracement levels - this is a VERY popular retracement level for people to place shorts / sell orders if they are of the view that price will fail to make higher highs. I am not imputing any more significance into this except that the big money in the background is betting against the market. Spoiler alert; the big money drives the market. Betting against it is just that - betting, and unlikely to be rewarding.
5. I guess I am just a bear at heart ;)
My only concerns in this trade is that 1. it will go slightly higher than my laddered shorts - in which case I will add to it up to a point (I haven't decided on a stop loss yet) and 2. if the current wave up ends up somehow being wave 1 of 5 I will move my stop loss to break during the wave 2 retracement and look to re enter later (if stopped out). Even if scenario 2 happens I likely won't lose funds and the full 5 waves are (in my view) extremely unlikely to exceed the high of 2940 set in September. A lower high than 2940 will be strong support for my bearish view. I apologise if I patronised anyone - as some may see some of what I am saying as obvious or semi-basic but I am just trying to make my case very clearly. I am not trying to influence the market (as if I could) but just follow it. I will use about 25% of the funds for this trade on the laddered zone, the other 25% (after wave 1 and 2 down wave formed) on a break below the wave 1 price extreme.
My first tentative target will be 2485 for a 10% profit but I will be staying in the trade while the MACD moving averages stay below the zero line and will close on a cross above, short on an MA crossover to the downside - rinse and repeat.
Did you know that Amazon's market valuation a few weeks ago was 139 times its annual net profit? Based on today's earnings it would be able to distribute dividends equalling your initial investment in 139 years. So maybe invest now and your great great great grandchildren will see your initial investment recouped (if the revenue stays steady). You don't need to point at cryptocurrency to fund a bubble.
I will link to a longer-term analysis of the S&P 500 Shiller PE ratio below. It may explain some of my hyper bearishness. Wow, if you got through to the end congratulations. Apologies if there are any typos. Protect those funds and good luck everyone!
The youtube link above is a rather persuasive case for upcoming deep recession published by Mike Maloney (if you don't like to click on links search his channel or for: "I Found A New Recession Indicator That Says LOOK OUT BELOW" on youtube. It contains a lot of what I love: charts. Yep, it's a bit scary. I read a few weeks back that experienced investors see the market continuing to trend despite the justification of that trend evaporating as far out as a few years beforehand - you can see the point where the market should have corrected in the video as well as some alarming reasons for the rather parabolic rise of the last 5 years.
A couple of clarifications: 1. I will be using 25% of the margin for this trade on shorting at the red box laddering zone, the other 25% on a break below wave 1 extreme and the other 50% will be kept in reserve as trading margin and only a small portion will be used to add to the position (up to a maximum of 10% - if things don't go totally to plan). If not all of the laddered sell orders are triggered I will add those portions to my second entry point. 2. I am not excited by my view that there is a recession coming. It will hurt a LOT of people - myself included. However, I am trying to take steps to recession proof myself - via trading in equities, FOREX, Commodities, Cryptocurrency, and fixed interest savings accounts (only liquid cash investments - not locked away in fixed term instruments). 3. I have put a lot of time into learning to chart, trading, reading about EW, RSI, MACD etc. I have decided to share my trade in good faith and risk being wrong in a trackable, transparent way. I have become a bit tired of seeing "may its going down or maybe up" technical analysis on here. At some point to enter a trade you need to grow a pair, form a considered viewpoint, and risk your hard earned cash. 4. In the Shiller PE chart above the High Jan 2017" should say 2018 instead.
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My comment about by MACD crossover strategy is based on the daily timeframe. While the moving averages remain below the zero line I will probably remain in the trade. If the moving averages are below the zero line but the shorter timeframe MA crosses above the longer term MA at a decent angle I will reduce my position and add those funds back in when the moving averages cross each other side again (as long as they are both remain below the zero line).
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Considering adding to my short position between 2895 and 2800 range
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I didn't end up adding to my posted position at a higher price. Trade unfolding as planned currently.
Trade active
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Update: Average trade price: 2788. Stop lowered to 2813 just above the high. Expecting this small downtrend to go to about 2665 - at the 0.786 fib level / 2.618 fib extension of wave i down - which occur at the same price point) before retesting the swing high of 2812.8. If my stop is hit I will take a 0.9% loss and look to re-enter but may reassess this as it take time and energy to re-enter. I will probably move my stop a bit higher if price gets to close and add to the trade if and when the price gets above above 2813. This may happen if we get an expanded flat correction. I hope people appreciate my transparency - because people that have the capability to move price significantly (and try to trigger stops) can see the details of my trade too. I doubt I will post such specific details again - details which can risk my trade.
@gvoommen, Cheers, it is my most viewed post ever. It is a pretty key moment.If I am right then there is another +/- 11% drop coming - and that may just be the start...
Some thoughts based on experience:
1. The market is a crap shot. It can go down, up or sideways. So many postings on this web page turn out to be musings.
2. The market is long in the long term. Being a bear at heart will get you shot.
3. Stops tend to nickle and time you to death.
4. There is nothing wrong with dollar cost averaging, especially if you have dividend stocks and are investing monthly, because:
5. It is near impossible to time the market (maybe the pros can manipulate it better), but as invdiual investors, good luck. This most recent short squeeze proves this.
6. Thinking you know the direction will backfire.
flyinkiwi10
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@stuartsfleming, Ok I'll bite. You have absolutely destroyed all my preconceptions and assumptions with your expert criticism sir.
I don't win all my trades but I am getting better all the time - I entered a trade on crude today $0.14 above its swing low based on my reading of the price action. That's a nice 150% gain (admittedly with crazy levels of leverage) - that isn't random. After my commission was covered I was immediately in profit. But you must be doing it right. Sure dollar cost averaging is a valid strategy - it's just not a good one. I believe the potential market declines will be significant in the coming years. Yes I am willing to take a position and put my case forward - in the hope just that other appreciate it and hopefully is of some small benefit. I just do it for my own education. This week was great and my account is up 218%... IN A WEEK.
Why would you come to a technical analysis website? That is ALL everyone here does: tries to map out scenarios or likely price directions.
I would never enter a trade if my expectation of price action was pure randomness. Prices are driven by people and people aren't random.
You would have a hard time arguing point 2 to a Japanese investor - their equities market is just emerging from a 28 year bear market. Now that is a long term bull trend if the bear markets are 28 years long. Market cycles ARE long, have you even considered how long a bear market can possibly last? It might be longer than you think when interest rates are almost near zero and the fed simply cannot print excessive amount of USD without sharply devaluing the currency and causing a deflationtionary recession. Which is good - because that would make things even worse.
I don't think this is a normal dip. PE ratios have increased so much as to make equities markets largely speculative. If you are getting less than a treasury bond yield in dividends every year, your returns have to come from growth in stock prices. I think a lot of people will be shopping around for other sources of investments - with a trend towards fixed interest instruments - simply because ALL profits from the year can be erased due to market corrections (like in 2018). That isn't an acceptable risk to reward proposition for most people. I will trade what I think and you do your thing okay. I went to see your market analysis but you haven't posted anything as yet.
Stops are there to preserve funds, and yes they can be counterproductive at times. I have had my stops triggered sometimes only for the price action to change direction almost immediately (it's almost like people are driving price around in order to trigger shorts at time) I certainly wouldn't advise (not that I am an Advisor) anyone not to protect themselves with a stop in the market.
Dollar cost averaging is an amateur move. Maybe it is just my opinion.
I would go on but I have accidentally discovered that there is a character limit in these comment fields. Cheers
stuartsfleming
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@flyinkiwi10, Hey, I only said I learned those things from experience. Last week everyone on this forum was posting shorts, this week its longs. Tech analysis is amazing, but mostly in retrospect.
flyinkiwi10
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@stuartsfleming, Yes, I'm not attacking you but if what you posted is correct, so that was my response defending my analysis - that's all. If you are right then there is no way for me to be right (or anyone else for that matter) with odds better than random chance.
This TA was posted well in advance of the drop, with tightly defined entry and a specific (less tightly defined) target to exit. I am willing to be wrong and everyone can judge based on the outcome. This TA is only to be appreciated in retrospect. If correct it will partially validate my theory that TA can stand on its own - without fundamental analysis (ok, maybe I did a little FA to confirm).
My stop loss is 2820 for a small loss just in case my analysis is incorrect and we are instead in a wave (iv) correction - with wave (v) still to come.
I think a lot of the recent gains in the S&P500 were from wildly over valued FAANG equities with my one PE ratio example from Amazon being 139, which is very clearly a bubble. After the correction, this may be called the second dot com bubble. But it isn't just FAANG stocks that is overvalued. Free money from the FED levelled off a few years ago but the market kept inflating... until... now.
The reason I defended my TA is mostly to defend TA as a discipline (clearly not all TA is equal). Advocates of pure randomness and people to discount Elliot Wave out of hand both astound me. I'm not sure I will be posting any more TA after this one. I have worked really hard and long over the past few months to increase my accuracy and 1. I need to help myself first of all as my trading balance is still rather small, and 2. I am starting to wonder what the point is of me sharing my hard work for free so that much bigger players can benefit from it.
What happens if it goes above 2800 as the futures today is showing a very strong gain. Any advice would be great.
flyinkiwi10
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@gvoommen, Thanks for the interest gvoommen. Short answer is: I just entered a but early and closed manually or hit my stop loss. As far as the general prediction goes, it would have little effect and my idea could still eventuate. However, if we break above 2940 (all time high) or break down a little way and form the basis of a descent move upwards it would mean I am totally wrong. I will try to update if anything goes wrong and will be checking the chart once a day.