The stock market got wildly overbought to start this month after its big first quarter rally from the December low and so it has been pulling back for the past few weeks. As that pullback has happened the Trump/China trade negotiations broke down and we have seen a few big up and down days in the market that get all of the attention while people miss the fact that things started to roll over at the start of this month.
Most people don’t think this is much to worry about with people in the financial media asserting that a trade deal MUST happen or see an up day after a down day and then yell that you must buy because it could go up again tomorrow.
overbought market signals like we got on the first of May are warnings to wait before making news buys so that you can let the market work the increased risks of buying into a top by letting it consolidate or pullback first.
I don’t chase news stories and daily market swings and believe that now is the time for people to return to the basics of trading and technical analysis and even examine the work of the originators of this like Charles Dow and not think just doing nothing and hoping for robots to carry things up forever for them will work anymore from here – or expecting a trade miracle.
There are ways to profits this market. Last week I talked about a bet I made against TSLA stock and that stock dumped over 7% on Friday.
Other stocks are starting to fade already. A month ago these weaker laggard stocks were starting to hold up, but now they are fading again. For instance look at NVDA.
NVDA is resuming its role as a dead money stock market laggard. Notice how the NVDA/SPX ratio is still trending down and how the stock broke last week.
MU is another popular stock that has now rolled over.
Both NVDA and MU are among many stocks that fell much worse than the S&P 500 did when it declined 20% last year and then bounced hard in the first three months of 2019, but have now rolled over. Such stocks likely to now lead again to the downside and could even fall if the S&P 500 simply were to go sideways this summer.
Personally, I believe we are now in a minor stock market correction that will end with a spike in the VIX. Few believe that and want confirmation.
For some people to even consider a pullback in the markets makes their brains lock up as they think it’s too scary to contemplate. It is if you are on margin or in the insane triple ETF’s, but if you are a normal market participant than a 10% drop in the markets becomes an opportunity if you prepare for it ahead of time.
So if you want confirmation that you should get ready to mentally prepare then look to see if the S&P 500 can now hold its most recent support level of 2800 for the next few weeks.
So far this month we have seen the S&P 500 dip below its 50-day moving average and then bounce back.
The low of that dip is 2800 so that is now the new support level to bring in robot buyers and technical traders.
If it breaks then we will know we are now in a confirmed correction and will have to look to see if the next support level will hold and for signs of panic in the market to signal a washout buying opportunity, which typically comes when the VIX goes above 30.
I really see no reason anyone should buy or increase their risks in the market this week until the market consolidates here more for a few weeks above 2800 or if it goes into a panic drop after closing below 2800.
That 2800 level is now key and we will have to watch it together.
I am traveling tomorrow morning with no access to the internet so I won’t be able to do an update for you Tuesday. However, I plan on doing a special private update for Power Investor members tomorrow evening in a video session. If you want that key update then join the group.
Again – this is the time to try not to get caught up in news stories – don’t buy because the DOW is up 100 points and someone is on TV talking about a Trump tweet, but when you see trading or investing setups that come to you. Successful trading means knowing the tactics that came before you to navigate the markets and forming your own principles to guide your decisions by.
My book Strategic Stock Trading can help you do this. This book lays out the simple methods and key indicators I continue to use to keep on top of the trends of the market and to identify the best stocks to buy.
If you take advantage of my special book giveaway also get into my private trading group and receive tomorrow’s video update my coming trade alerts to take advantage of it.
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