On the weekly chart of the S&P 500 index below, focus on the orange line. That orange line represents the 20 period weekly moving average. Since the major bear market bottom in March 2009, the best time to swing trade momentum has been when price has been smartly aligned with a rising 20 period weekly moving average. Beyond that, each of the past two summers represented a major bull market correction, sliding roughly 16% in 2010 and 20% in 2011. At each of those junctures, the 20 period weekly moving average smoothed out and subsequently torqued lower as the correction ran its course. Aggressively swing trading momentum was, by and large, a big-time money losing strategy. At the same time, the Flash Crash in 2010 and summer swoon last year made mean-reverting traders look foolish in calling out the “lemmings.” Thus, the risks in corrective markets are higher all the way around.
At issue now is whether we see a third consecutive major correction. We already pulled in 11% before the snapback rally over the past few weeks. You will notice that the 20 period weekly m.a. is now starting to slightly turn lower, as price broke below it and then found resistance after “checking back” to it with the rally.
Even if we have put in a good low down at 1266, the odds favor more of the type of price action we saw last week in the coming month or so, meaning three steps forward, four steps back, two steps forward, three back, etc. If your style is to be a buy and hold investor, then of course you can point to the major corrections each of the past two summers as ideal times to layer into longs. However, most of you are trying to actively trade the markets. The structure of the current tape still indicates a corrective phase, where all positions–longs and shorts–should be kept smaller than usual, on a tight leash, with a heavy portfolio cash position to buttress the wild, random swings that are to be expected at this juncture.
The market is capable of changing character for the better (or worse) and turning on a dime, which means putting in the daily work to stay on top of things is crucial. However, I am at my best as a trader when I focus on interpreting the actual price action that is before me.
Everything else is lip service.
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Speaking of lip service…
I’ve been reading these great posts for a while now. Finally signed up for 12631 earlier this week. In retrospect, I wish I would have done it earlier.
Thank you, Chess!
I appreciate that, Slim. Great to see you in there
Nice analysis here and especially highlighting the timeframe of the trader/investor.
Reassuring I’m not the only one hiding out in 100% cash – Thanks for your analysis, Chess.
>when price has been smartly aligned with a rising 20 period weekly moving average
It feels like the above point won’t be reached until prez election is resolved by result or perception.
In 2010 and 2011, the sub 20 week MA period lasted approx. 4 months, which puts us at late Sept/October for resolution.
I love the Feline Missile Defense System.