The start of the trading week did pause, but it failed to hold and prices followed the bear to head down deeper into the south. The global economic outlook is rather sluggish, and US is facing the fear from ‘Fiscal Cliff’ right after the presidential election. The worries in Europe are far from over. Is the market going to crash?
I prefer to listen to the market via the chart than the news. I rather be uninformed than misinformed. And I do not predict what the market is going to do in the future. But rather listen and obey what the market is going now. It gives me more certainty this way.
Looking at the weekly chart of the Dow and S&P, the market is still in a midterm down trend. Using the price behaviour in the past two years (even if you go back as far as five years), we can see that whenever the price lower channel line, it doesn’t stay outside its channel, or stay oversold for long. It does not mean it is the end of a down trend. A trend will not go down in a straight line in most cases.
Let’s see how violent this bear is behaving. In the last two years, if it is not violent, the trend will touch the lower channel, touch the oversold zone, and rally (As shown as May & June). If it gets violent, it can hover in that zone for a while (as shown in Aug Sept 2011).
On the daily chart of the Dow and S&P, I am using the 1 year duration instead of 6 months to illustrate certain pattern that we can use as a reference. When the trend is up (as indicated by the UP red arrow), if price dip into the oversold zone (as sown on the areas marked by red circles), it means buying opportunities. When the trend is down (as indicated by the DOWN red arrow), prices tend to stay oversold longer (as shown on the areas marked by the red rectangles).
VIX (fear index) is on an uptrend. The weekly chart is on the verge of an EMA cross. If it does crossed, it might signal a change of behaviour. But usually, on an uptrend, a dip is a buying opportunity. Let’s see if the current support level ($16 – $16.50) holds (as illustrated on the daily chart). We will know the true picture next week.
Summary:
Mid term view:
Market is down and has stayed down for the 5th week. Now it is at its lower channel line, and near oversold zone.
Short term view:
The market is due for a bounce. But it can stay oversold for a long time.
If you have shorted, stay short but protect your profit. Profit take some of your position might be a good idea. Buying now would be looking to catch a falling knife. If you insist, do it with a tight stop or be hedged.
NOTE: All information provided “as is” for informational purposes only, not intended for trading purposes or advice
