I am listening to CNBC and the pundits are mostly spewing
- How the stock market is overbought.
- How the stock growth rate over the next 10-years will average 3% per year.
- How Trump winning will be bullish (PS everyone was bearish in 2016 when he was elected and it lasted about 1/2 a day).
- How Harris win will be negative (if one is bullish the other must be bearish).
- How the Mag 7 now have to spend on capital and that is bearish.
- How Buffett is sitting on loads of cash with no-where to put it
Then you get, "The market is dependent on how the earnings come out"
How someone can see 10 years out is beyond me. By the way, if the fiscal situation is a major problem, 3% might seem good.
The fact is no one knows.
So what do we know.?
- The Dow and S&P are close to all-time highs
- The Nasdaq closed at the highest level yesterday sans the July 10 high (the 2nd highest closing level on record)
Stocks are at the highs.
We also know that every bearish story written over the last few years (and for the majority of history), have not worked out too well. The price of the major indices - the Dow, S&P and the Nasdaq are all near all-time highs. The stories are not working.
Those stories may one day work (for a while), but every bearish sentiment so far has not worked.
So when can we sell?
What we DO know is the price of every stock and therefore every index is an auctioned price between buyera and sellers. If there are more buyers, the price goes higher. If there more sellers, the price goes down. Obviously buyers have been overwhelming sellers. The indices are near all-time highs.
We also know if the price includes all the news and all the expectations for earnings now and going forward, the price is IT. It is everyone's consolidated view on the stock - on the index. That price includes all the buyers and the sellers.
If the price is "IT", the price action tells a story too.
That story can be bullish or bearish, but if the price is at an all-time high, the story is bullish.
What would hurt that bullish story?
That is where the charts come into play and the tools applied to them.
For the S&P, the index is up 6 straight weeks.
Is it overbought?
If you applied a RSI to the daily chart, the RSI is actually diverging. That is, the price is trading at new highs, but the RSI is lower than the previous hgih reached in July. The problem is it has been diverging since the price moved to a new high on September 19. That is the problem with oscilators. It is they tell you overbought or divergeent but markets can get more overbought and RSIs can diverge for a while too while the price continues to go higher. Since September 19, the price has moved from 5662 to 5878.46 reached last week. Ouch.
So what can you do?
One way is to apply a simple moving average to the price action. What that helps you do is find a REASON to sell. How? If the price moves below the MA, the bias tilts to the downside. Sell when it breaks and tilts the bias lower.
It also defines risk. By definition, if the price moves back above the MA, it would tilt the bias back to the upside.
So that defines risk. You just need to believe it.
Looking at the daily chart, the 50 day MA (orange line on the chart below), is at 5662.89. Traders might look at that as a potential sell point. If the price goes below it, the sellers are starting to "win".
The problem is the 50-day is at 5662.89. The current price is at 5844. That is 182 points away. What if you are bearish now?
You need to find a reason NOW to sell.
One way is to simply go to a shorter-term chart. The MAs on an hourly chart are much closer in a trending market vs equivalent moving averages on a daily chart.
Looking at the hourly chart below, the 50-hour MA is at 5843.77. The price is at 5844. IN other words, the price is trying to move below that MA level right now. If bearish sell here and hope you are right. Put a stop somewhere above the 50-hour MA.
If the price starts to move below the 50-hour MA and then moves to and through the 100 hour MA at 5792.66, that would be bearish too. By the way, both of those are still way above the 50-day MA at 5662.89.
The 200 hour MA (green line on the chart below) at 5740.13 is also above the 50-day MA. Remember it is down at 5662. That can be the next target on the break of the 200 hour MA level.
IN summary, when bearish in a trending market even if the markets are overbought or there are bearish signals like divergent RSIs, you can get steamrolled.
So what you have to do is use the price action and technical tools to give a reason to trade and also define and limit risk.
Moving averages define and limit the risk. They give traders a reason to do the trade. They also tell the trader when wrong.
So talk all you want about being bearish, but all bearish stories going back in time have failed. The stocks are near all-time highs.
However, if you are bearish and don't want a "story" with all the fundamental reasons, have your story be a technical one. After all, the price tells ALL the fundamental stories anyway. It just does it with the price action, and tools applied to the price action.
