S&P500: Time To Buy Stocks?

For those who trade stocks, the S&P 500 Index is an important gauge when it comes to timing. Novice traders and investors especially need to understand the relationship of relative strength between their portfolio or stock and a major index like the S&P.

The concept is simple: S&P pushes new highs, your stock should be at least making an effort to follow along if not outperform, otherwise it can be "relatively" weak and become an ideal choice for getting short or getting out completely. Stocks or instruments in this situation? DE30EUR, IWM are just a couple on our short radar.

So what can this S&P chart tell you now? A couple of IMPORTANT pieces of information:

1. The blue rectangle between 3400 and 3700 is the fake out zone. This is a proportional location where the S&P is highly likely to retrace. This zone has been in place since the March low. Buying stocks "because they look strong" or because "some expert on television said it was a buy" or even worse, "my dentist told me about it", particularly in this zone puts you in a HIGHLY vulnerable, LOW PROBABILITY position. With such a high risk of retrace, you are likely going to get caught at a potential short term market peak. We have been extremely cautious over the previous month with our stock picks, and always making sure to lock in profits when we can.

2. Buying back in TOO EARLY. So we have been WAITING patiently for this perfectly healthy and NORMAL bearish retrace. As soon as it starts, the first question I get, "Is now time to buy stocks?". IF this is the broader bearish retrace that we have been anticipating, then it is TOO early for swing trades and positions trades (the type of signals we share, NOT to be confused with day trades).

Why too early? Aren't we at the 3400 support? Yes, buying activity appeared around that historical inflection point, and even attempted to produce a bullish pin bar. The problem is, with this magnitude of bearish momentum, this price action does not meet our criteria for price stability.

IF the current candle low is taken out during the week, it will signal bearish momentum is still in control. The next inflection point from here is the 3050 area which is where we will be evaluating price stability next.

With the U.S. election on the horizon, we are anticipating a broader market range from this point, NOT new highs. A range often takes the form of a large triangle and the lows of that formation are likely to establish themselves somewhere near the 3050 area. I could be wrong, but that is why we let the MARKET provide the information and we simply adjust to it.

When we see: 1. high probability inflection point, and 2. price stability, followed by a clear setup where we can clearly define risk, we will then be looking for new swing trades and position trades in relatively strong stocks. WAITING for the right location, setup and risk criteria is what leads to a positive outcome over time, NOT reacting to news or other RANDOM information. Patience PAYS.