Is This A Regular Correction, Or The Start Of Something Bigger?

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by Gavin in Blog
October 31, 2018 0 comments

During bull markets, stocks sell off. They have corrections. It’s natural. This time we have to ask ourselves, “Is this just a correction, or the start of something bigger”?

Let see if we can gain some insight with some charts and expert opinion.

First, let’s look at the VIX Futures Term Structure which is still in Backwardation. To me, this says there is still a lot of fear out there and we are not completely out of the woods yet despite yesterday’s bounce.

We also have this nasty, nasty longer-term negative divergence. Don’t like the look of this at all.

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On the plus side, there is a clear positive divergence on RSI as I mentioned last week.

Plus it looks like the S&P 500 is trying to get above the short term downtrend as shown on the below 30min chart.

So, we’re due for a little bounce, but I get the feeling it may be short lived. A logical area for the market to hit resistance would be around 2750. I’m certainly playing things pretty cautiously over the next few weeks.

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Here’s some other analytical goodness from around the web:

From Adam Sarhan of Chart Your Trade and 50 Park Capital.

Historically, recessions occur every 5-10 years and tend to last around 10-18 months. Needless to say, we are way overdue for another recession and the same is true for another bear market. The average bear market typically lasts 18-36 months and bear markets tend to occur at least once every decade. The last bear market was in 2008-2009 so we are way overdue for another bear market. Only time will tell when that happens but for now we know the market is very oversold and way overdue to bounce. The key is to analyze the health of the bounce to see if it is another dead-cat bounce or if it has legs. The bulls will argue that the major indices are forming a bullish, albeit sloppy double bottom pattern, while the bears argue the market is topping out and could be forming a large head and shoulders top (Feb’s low was the left shoulder, Sep 2018 will be the head and then we will form right shoulder then crash). Again, no one knows what will happen tomorrow, but I do know that February’s low is the next important level of support to watch and if that level is breached, odds favor we are headed much lower. I also know that volatility has picked up severely in 2018 and that typically happens near the end of bull markets, not in the early stages.

And from Mark Abeter:

Stocks got “oversold:” The big washout suffered in Wednesday’s 608-point Dow drop caused stocks to get too beat up and investor sentiment to get too gloomy. But that day’s pain came on lower trading volume than the two-day plunge ending on Oct. 11. “That shows a decline in selling pressure,” says Mark Arbeter, president of Arbeter Investments.

Arbeter also posted an excellent article on See It Market which is well worth your time

As with many pullbacks/corrections, the bulk of the damage has been to individual stocks, individual sectors, and overseas markets. I have not seen enough damage here to declare that the bull market has ended, although there are some key warnings from some of my favorite charts and indicators.

Read the full article here:

From Brad McMillan, chief investment officer at Commonwealth Financial Network.

Panic selling dries up: The market’s recent slide looked more like panic selling than investors making rational investment decisions. But the strong earnings reports allowed investors to recognize “that things are not as bad” as the recent swoon suggest.

And of course, my man Carter Worth always keeping things in perspective:

Trade safe guys!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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