Recent SPX rally - DON'T BE FOOLED
Updated
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!
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!
Note
Note
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.
Note
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).Note
Considering adding to my short position between 2895 and 2800 rangeNote
I didn't end up adding to my posted position at a higher price. Trade unfolding as planned currently.Trade active
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.Note
370 point slide in 3 weeks...Note
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