This was a week that saw a big drop in the stock market. I am always amazed at the look of surprise on the faces of so many market people who actually know better. I am going to review the symbols we have been keeping an eye on and then have something to say about the market in general.
Just to recap: we are trading five symbols: the S&P 500, Gold, Oil, Bitcoin and USD/EUR currency pair. We are using a simple moving average crossover system which I explain as we go. That includes our risk management.
We will start with charts of the futures and if we have a trade look at the stock symbol that mimics the futures.
The chart above shows the 8 EMA (red) crossing the 21 EMA (blue) and then the 55 EMA (brown). At this moment there is nothing here for us. Our system calls for us to trade with the trend which in this moving average system the blue needs to be below the brown in order for us to go short: trend would then match trigger. As I mentioned, A bit more on the S&P anon.
As you can see, 5 days ago we had a trigger where the price crossed above the blue line and back below, matching our downtrend: blue below brown. Normally we would like the EMA (red) to cross above the blue and back down, but I am ok with the price performing the trigger.
Since many of you don’t have futures accounts or are using accounts that don’t allow short selling anyway, we move to a chart of a stock equivalent: UCO
The beauty of this symbol and others of its kind described in Book 1 of my Basic Trading Series is that as Oil goes down, this symbol goes up. We bought as the price cleared resistance. This is detailed a few days ago, just scroll down. A trailing stop was added. We are currently risk free on this trade. The trailing stop is anchored so that even if the price turns against us, we would be stopped out at breakeven. As discussed previously we are probing for the BIG MOVE. Click here to get Book 1 for FREE:
Nothing to see here. The red line has crossed below the blue calling us to short this symbol. But the brown line is still the lowest moving average, so still an uptrend. For now this is a correction against the main trend.
Nothing here either. Uptrend still indicated, no trigger.
The chart above is for our lone currency pair. Once we have a trigger on this, I will explain a little more fully how the currency pair works. As of close Friday, however, we still see uptrend, no trigger.
Back to the S&P 500. I began this journey into trading and investing on my own decision making after the debacle in 2000. I had gained enough knowledge by the time 2008 came around I transferred all my clients to cash – none of them lost a penny.
I want to show you the simple pattern that appeared in the past and again in the last two weeks.
The chart above is a monthly chart. It is a longer term chart than the others because of the point I wish to make. The red arrows on the price show the upward movement of the price. On the momentum, the downward slope of the arrows indicate a downward movement of the “energy” that drives markets. This difference: price going up while energy goes down is called a divergence. They don’t always appear, but when they do, we pay attention. It is a set up only. The momentum can go back to matching the movement of the price, that’s why we don’t act on this set up alone.
There are a couple of triggers that can be used. I like to put a trend line on the price when a divergence appears. The signs in 2000 were visible and some portfolio managers talked about it, but did nothing. Most of them allowed their clients to ride it down with “it will be back” ringing in their ears. I became disillusioned with the buy and hold mentality. As mentioned by the time the same pattern appeared in 2007, I put my trend line on the chart and got out when the price crossed. My clients were 100% cash when the crash took place.
And again a week or more ago this blog had a long trade in the S&P 500 and got out.
The chart above is a mid range chart. This chart is telling us that when all is said and done there will several hundred more points coming off the S&P. It may or may not go that way, but we have been warned.
I teach these things in my course and in the Basic Trading Series. Go back and click to get Book 1.
I end this with a thought for you. Why, if this is so obvious, do so many people take it up the exhaust pipe when these extreme corrections occur? Could it be because someone has to hold the market up while others are fleeing the ship like the shameless rats they are?
Learn this stuff for yourself.