S&P 500: Low lag indicators are starting to show bearish signals
Updated
Are we headed for a stock market crash in 2018? At least in the near-term (next days to weeks) there are growing risks to the downside as the potential for a sharp pullback is gaining power as I'm showing here. On this chart I'm using two different indicators, which both have as one of their main features that they exhibit a very low lag.
Moving averages make it easier to analyze price movements, but the price smoothing creates lag. One approach which is trying to solve this issue is the HMA - Hull Moving Average . The idea was developed by Alan Hull and he reduces lag by using the square root of a given period instead of the actual period itself. And he also uses weighted moving averages, which are more similar to but a little faster than exponential moving averages.
On the chart the recent daily close price is below the 18 period Hull Moving Average, which is bearish and if the market would decline very soon, the HMA would start to slope downwards, which would be the second bearish signal given by this indicator.
The second indicator on the chart is a oscillator. I'm using the Fisher Transform which was developed by John Ehlers . The Fisher Transform converts data to have nearly a Normal Probability Distribution. The Fisher Transform changes the probability density function (PDF) of any waveform so that the transformed output has an approximately Gaussian PDF. If the prices are normalized using Fisher Transform , extreme price movements are relatively rare events. This means turning points can be much easier identified.
On the chart the 9 period Fisher Transform has started to slope downwards, which is bearish . The second bearish signal given by this indicator would be if the Fisher Transform would cross below its zero line. Which is not the case as of today.
Conclusion: Both of these low lag indicators have started to show early bearish signals (Hull MA above price, Fisher sloping downwards) with both indicators having signal-wise more downside potential left, because both aren't fully bearish yet (Hull MA slope not yet declining, Fisher Transform not yet below its zero line).
Short entry: 2730
Target: 2675
Stop loss: 2745
Risk: 15 points, Reward: 55 points
Risk/Reward Ratio: 3.6666666667
P.S. Here you can learn more how these two indicators work:
- Hull Moving Average
alanhull.com/hull-moving-average
- Fisher Transform
mesasoftware.com/papers/UsingTheFisherTransform.pdf
Moving averages make it easier to analyze price movements, but the price smoothing creates lag. One approach which is trying to solve this issue is the HMA - Hull Moving Average . The idea was developed by Alan Hull and he reduces lag by using the square root of a given period instead of the actual period itself. And he also uses weighted moving averages, which are more similar to but a little faster than exponential moving averages.
On the chart the recent daily close price is below the 18 period Hull Moving Average, which is bearish and if the market would decline very soon, the HMA would start to slope downwards, which would be the second bearish signal given by this indicator.
The second indicator on the chart is a oscillator. I'm using the Fisher Transform which was developed by John Ehlers . The Fisher Transform converts data to have nearly a Normal Probability Distribution. The Fisher Transform changes the probability density function (PDF) of any waveform so that the transformed output has an approximately Gaussian PDF. If the prices are normalized using Fisher Transform , extreme price movements are relatively rare events. This means turning points can be much easier identified.
On the chart the 9 period Fisher Transform has started to slope downwards, which is bearish . The second bearish signal given by this indicator would be if the Fisher Transform would cross below its zero line. Which is not the case as of today.
Conclusion: Both of these low lag indicators have started to show early bearish signals (Hull MA above price, Fisher sloping downwards) with both indicators having signal-wise more downside potential left, because both aren't fully bearish yet (Hull MA slope not yet declining, Fisher Transform not yet below its zero line).
Short entry: 2730
Target: 2675
Stop loss: 2745
Risk: 15 points, Reward: 55 points
Risk/Reward Ratio: 3.6666666667
P.S. Here you can learn more how these two indicators work:
- Hull Moving Average
alanhull.com/hull-moving-average
- Fisher Transform
mesasoftware.com/papers/UsingTheFisherTransform.pdf
Trade active
Short order was filled today right after the open at 2730.Several minutes later came the breaking news that Trump cancels the summit with Kim Jong Un amid North Korea 'hostility'. This news headline lead to a immediate decline of the stock market as of now.
Note
On May 29 hours before the close I said that I recommend to "partially cover the short position as we approach 2674-2676".
The low on May 29 happened to be 2676.81 therefore I closed some of my short position before the close of on May 29, but I didn't update this here, because at that time I had expected with higher chance - compared to today - more weakness to follow in June and I had expected on May 29 only a minor bounce until the end of May.
I had mentioned this bounce in my comment: "there could always be a strong bounce higher again towards the new open gap right below 2715"
(again same comment link)
The market did exactly that. But to my suprise the bounce was not only strong, but VERY strong. Instead of only closing the open gap at 2715 plus maybe 3-6 additional more points due to increased euphoria (which therefore would have been 2718-2721), the S&P 500 instead moved far higher and closed the week barely bullish enough that the odds increased strongly that the S&P 500 could move into my stop loss recommendation at 2745 in the next week(s).
Therefore if you didn't close some of your short positions into the lows of May 29 as I did, I recommend to use any remaining market weakness in the days ahead next week to close your shorts. Because it's possible that May 29 was a key low - which could be part of a new leg taking the S&P 500 higher.
Trade closed manually
As I have said before there was a chance to close some or all shorts in profit last week below 2700. If anyone kept shorts open: My stop loss recommendation was 2745. Friday's close was 2734.62. Now before Monday's open S&P 500 futures have already been above 2746, therefore they are going to take out all stop losses at 2745 anyway. Therefore my recommendation is to close all shorts at today's Monday open.At some point later this week I continue to expect a sharp pullback lower, but until then the bulls remain in charge.
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