Is it time to Panic? Friends and Family are asking. This entire weekend, I am getting phone calls and emails from Friends and Family about the market. I am even getting emails from people watching our videos but have never contacted us.
A fear has amounted and everyone is afraid of losing a huge chunk of their retirement. It was just yesterday when majority of people lost over 20% of their retirement accounts in 2008. This pain point is in everyone’s mind and is making everyone question the recent events in the last 4 weeks on whether the a big movement is about to come back!
First, since September 2015, we have been telling people be careful in 2016. What happened in August 2015 was so severe that it dented the entire forecast for 2016. Before August, there was a high probability of the marketing consolidating with a bullish “tilt”. After August, there was a high probability of marketing consolidating with a bearish “tilt” and a high probability of starting a bearish trend some time in the year.
With these comments, everyone should have been very cautious going into 2016. If people were nervous towards the end of 2015, they should have protected their retirement accounts at least! It is better to be in cash then go through a HUGE drawn down. If the markets go up they just wouldn’t MAKE money which is something everyone could live with. Losing money is something people CAN”T live with… Also, the market’s hit an all time high last year. As a result, how much more upside could there be at the beginning of the 2016? In my mind, not much. Is it better to miss the upside and protect losing or try to get the upside without any protection to the markets going down?
Greed would says stay in the market but common sense would tell you to get out and wait and see what happens!
From the technical side, it was clear from Sept 2015, how about the Fundamental side. Everyone has a fundamental opinion and this is why fundamental analysis varies from person to person. How about this thought process then? Since 2009, the markets have gone up due to the Fed “pumping” money in the market and also lowering interest rates. How much “pumping”? Today, they have a 4.5 trillion balance sheet. It was 900 billion in 2008. The pumping was done by purchasing Treasures and mortgage-back securities. Here is a Bloomberg article talking about it. Article. Based on this information, would you agree the stock market has gone up due to them and they are the “floor” for the market.
If you go with that thought process then basically, you should be thinking that the stock market is no longer going to go up after they raise interest rates. The very first time they raise interest rates, it indicates they no longer want to be the “floor” and they want to start to reduce their balance sheet. Their long term goals have changed. For get about China and the other countries around the world, In December, they raised rates. That sign was alone sufficient to have doubts that the market would continue to make new high’s in 2016. There is no guarantee’s in trading but there are probabilities. The probabilities were extremely low!
Ok.. if you don’t agree with that thought process, how about this one. Majority of the money in the stock market is from the “baby boomers”. They are now retired and enjoying their lives traveling around the world. When they travel, they use the money from their retirement account. During 2008, a lot of these “baby boomers” say their retirement account drop 20%+. The 20%+ drop was nothing NOT planned. They had planned their retirement based on the market going up slowly. They would get $X/month in order to do everything they wanted until they died at a certain age they were estimating.
With this unplanned event, now their monthly expected income was going to be lower. This means they would have to sacrifice on a lot on their retirement plans or die earlier. Travel plans, etc got cut! Fortunately after a couple of year due to the Fed, their retirements came back and they started to travel and fun. In August, the markets got hit and in December which is suppose to be the “Christmas” rally didn’t occur at all. Do you think they are going to stick around and allow a big hit again?
Ok…enough of the fundamentals. Let’s get back to reality and look at the charts to see what is really going on.
Below is the monthly chart for the E-Mini SP500 futures provided by eSignal. Since September 2011, we have not closed below the 26 month support.
Notice in 2011, once we closed below the 26 month green line support, there was a stronger yellow line support below it. The yellow line is a 52 month support. The 52 month support stopped the markets from drastically going down in 2011 and retesting the lows from 2009.
Today, we are blow the 26 month support with the 52 month very far away. As a result, if we close at the END of the month then this market will be in major trouble.
Furthermore, notice in August, we went below the green support but we closed above it at the end of the month. As a result, we have be patient and see what happens until the end of the month.
Right now, our forecast is that we are consolidating in a bearish pattern. If we close below the Green monthly support, our forecast will be that this that the stock market will have a high probability of starting a bearish trend not consolidate. The magic question is WHEN if that occurs?
No one has a “crystal ball”. You can only trade probabilities. Probabilities in the trading world are created from events occurring in the past. Let’s look at the chart pattern in 2008 and see if we can estimate when it can occur now.
Below is the monthly chart of the E-Mini SP500 from 2008. Notice, in January 2008 it closed below the monthly support after registering a all time in 2007 just like the scenario that could happen at the end of this month. Once that happened, it consolidated until the end of August. At the end of August, the bearish started where price went to the 52 month yellow support and broke that too.
So far, everything is repeating from 2008. If it continues to do this then there is a high probability of the high for the stock market will be around May 2016 on a pull back. Remember, there is no 100%! It could happen earlier or later depending on volatility. The key is that the markets pull back to the 26 monthly resistance after breaking it in January and then it “tanked”.
In conclusion, three possibilities can occur. They are as follows:
1. Markets break the support Jan/Feb of 1834 to start a major bearish trend.
2. Markets hold the 1834 support and consolidate between 1936 and 1834 until one of them are broken.
3. Markets hold the 1834 retest the resistance 1936 around May and then the markets tank.
Yes…I didn’t give you a direct answer. The reason is that there isn’t a direct answer. There are only probabilities!!!!!!!!!!!!!!!!!! When you are at major support/resistance then you can give high probabilities but right now, we aren’t at a major support/resistance. So multiple scenario’s can occur.
The best way to trade these markets is to use OPTIONS. Do not buy/sell stocks which have unlimited risk. Use Options to limit your risk. Also, make sure you understand the GREEKS behind the options. If not, you will not make money even if you are correct on the direction.
EDUCATIONAL USE. Commodity Futures Trading Commission, Forex, Futures, Equity and Options Trading has large potential rewards, but also has large potential risk and may not be suitable for everyone. You must be aware of the risks and be willing to accept them in order to invest in these markets. Do not trade with money you can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell. No reresentation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this document. The past performance of any trading system or methodology is not necssarily indicative of future result.