A few days ago the S&P 500 closed below its 200-day moving average and yesterday the DOW fell over 600 points. Many Nasdaq stocks got crushed while the NYSE composite index closed for a new low for the year.
But today the market futures are up before the open and people are calling a bottom.
I don’t believe it is and let me explain why.
First, you need to realize that no one wants to doubt the market right now – because if they do and are wrong their careers will be ruined. They’ll be attacked and smeared and few will listen anyway so most professionals feel there is no point in telling the truth at a moment like this to the general public. So if you turn on CNBC you’ll hear bull calls all day and if you turn on Fox Business commentators there act like it’s treason against Trump to doubt the market at all. They put on David Stockman every once in a while and then laugh at him when he warns against the deficit.
The reality is that fad stocks are getting killed and the semiconductor sector got hit particularly hard yesterday. Past “momo” favorites like NVDA are now in a free fall.
This market weakness began a few weeks ago and whenever there is a down day I see people try to predict a bottom.
And when the market has a gap up open I see others predict big gains to come.
The reality is NO ONE can predict where the stock market bottom will come in terms of price or time ahead of time, because NOT A SINGLE PERSON alive can predict the future.
Those that are claiming to predict the future did not predict this decline ahead of time. Elliot Wave Theory isn’t real.
But we can tell the bottom is there when it comes.
It isn’t about knowing when the bottom will come ahead of time, but how.
Secondly, this has been a serious stock market drop and nothing shows that better than the percentage of stocks trading above their 200-day moving averages. This is a chart of all of the stocks on the NYSE and as you can see this indicator is in collapse.
This indicator turned down before the stock market did and flashed a huge warning signal weeks ago.
Stock market drops like this and market corrections end in panic selling and we have yet to see any.
The best indicator of panic in the market is the VIX as it isn’t just a sentiment survey, but a measure of what people are REALLY doing in the markets.
What the VIX does is measure the premiums that traders are paying in the options market for volatility. At times of panic, there is a segment of investors that decide to buy puts to hedge their positions instead of sell and when they act in mass they cause the VIX to jump up.
Historically market corrections have soon come to an end when the VIX has gone above 30. In February it even touched 50.
On Wednesday it simply closed barely above $25.00.
If the market were to fall hard today or tomorrow – really hard say the DOW going down 1,000 points – then the VIX would easily go over 30 and we could look for a potential bottom.
But if the market gaps up or goes up in the morning on Microsoft earnings news and simply bottom guessing buyers than the VIX won’t do that and we will see no evidence that the correction is over.
Instead, we’ll just see another sucker rally whether it can last minutes, hours, or even a day or two like the one last week (remember the DOW 500 up day), that will only trap more people.
This correction will end not when someone’s price prediction is hit, but when there is real panic selling in the market to take the VIX over 30.
Until then all bottom predictions and gap up wonder rally days must be ignored.
Last night after the close I did a 30-minute live video going through many popular individual stocks to show people how these stocks aren’t just dipping, but collapsing in a way that I have not seen in eighteen years. Go here to watch it:
Stock Market Live Breakdowns in Key Stocks 8 PM EST – Mike Swanson (10/24/2018)
The truth is the stock market is trading different now. It is not falling like it did this past February or in years past in which corrections would just play out over a few days or two or three weeks. This has a look to it of something that is going to go on for a few months.
That said there are ways to make money in this market. Despite this October drop, my seven position portfolio is green this month.
And there are things actually lining up to even buy when the dust settles – when instead of chasing market action you use setups and let them materialize before buy you put yourself in the driver’s seat of the stock market.
It is time to arm yourself with the single best trading pattern that I have used.
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