It is Monday morning and the stock market is higher and that’s fine with me. I like higher stock prices. In fact, given the recent oversold readings from some indicators there is a chance that we have seen the “bottom” and that the next leg of the bull market is now underway.
However, as I've written, I am “concerned” that another down leg – and a potential test of recent lows – may be in the offing for the stock market. While I claim no ability whatsoever to “predict” the future, I do like to try to be prepared.
Keep a close eye on this current advance. If it fails – for reasons I will detail a moment – there is (at least in the opinion of one straining as always to remain objective writer) a chance that things could get ugly fairly quickly. So my best advice (such as it is) at the moment is:
Pay close attention and be prepared to act
So here is what I see and one way to hedge against just such an event.
The Current Market Setup
Old Concern #1 – The major market averages are below their respective 200-day moving averages.
Figure 1 – Major market averages all below respective 200-day moving averages (i.e., the trend is “down”)
Updated Concern #2 – S&P 500 appeared to break out to the upside from a small triangle and that breakout out may have failed.
Figure 2 – A failed upside breakout often (though not always) portends trouble.
Old Concern #3 – From the end of September Trading Day #13 (9/18/15) through the end of the month, the Dow has lost ground 40 times in the last 60 years with a net loss of -45%.
Figure 3 – Growth of $1,000 invested in Dow ONLY after September Trading Day #13 through the end of September (1955-Present).
New Concern #4 – Weekly Elliott Wave counts for (NYSE:SPY) and (NASDAQ:QQQ) have completed 5 waves up.
Figure 4 (click to enlarge) – SPY and QQQ Weekly Elliott Wave (completed 5 waves up).
New Concern #5 – Daily Elliott Wave counts for SPY and QQQ are signaling the potential for a very sharp decline in the near term.
Figure 5 (click to enlarge) – SPY and QQQ Daily Elliott Wave (projecting sharply lower).
My ability to “predict” the future is essentially non-existent. However (and fortunately) I can recognize “potential danger” when I see it. Given the litany above and especially with the major averages all trading below their 200-day moving averages, it is critical to respect the trend and to prepare for a possible retest of recent low.
That being said, it is also not necessary to “bet the ranch” on the downside. Investors and traders can use options to “risk a little” to “hedge a lot”.
In my next piece I will highlight an example of one way to “risk a little” to “hedge alot”.