1SimpleTrader's Blog

If you’ve been on FinTwit the past few weeks you can tell that everybody is as bearish as it gets and they are all calling for the end of the stock market, the next great depression, and the end of the world. I didn’t know everybody became an economist overnight.

This line chart of the SPX, which measures prices on a closing basis, is my favourite chart currently. On a closing basis, price is sitting right above support from Feb-April lows. If the big banks and funds defended price there and drove it higher the entire year, why wouldn’t they do it again. Support is where buyers are willing to buy. Also the channel I drew containing October-November prices shows the current correction we are in. Correction, not a bear market, a correction. Just like the correction in February-April that people were calling for the same end of the world scenario.

I think it’s important to follow this chart with a couple charts of the call/put ratio. The call/put ratio basically measures the sentiment of option buyers in the marketplace. The higher the reading, the more puts are being bought. But here’s the key, I don’t look at the traditional $CPC which is the total call/put ratio. I look at $CPCE which is the call/put ratio of equities, which is said to be mostly amateur traders. And I look at $CPCI which is the call/put ratio of the indexes, which is said to be mostly professional traders.

This is the $CPCE. As you can see this is a very high reading, indicating the amateurs are scared and bearish, and thus buying record amounts of puts.

As you can see by the $CPCI, the professionals are pretty damn neutral. The stock market is at the lows of the range, and the professionals are neither buying puts nor buying calls.

This is a chart of the fear and greed index. As you can see nobody has been this fearful since the bottom in February, and the bottom in 2016. Look back on your charts and see what happens when everybody gets this fearful, the market shoots back up. Source: https://money.cnn.com/data/fear-and-greed/

Now, for everyone saying this is the longest bull market ever and it has to end, no, you’re wrong.

Although it’s highly debatable when this bull market actually started. You can either use the bottom in 1932, or the break of the downtrend line in 1943. This bull market ran until 1968 when it made a double top with the 1966 high.

After the 1943-1968 bull market, the market then spent 14 years consolidating those gains.

In 1983 the Dow Jones broke out from the consolidation and started the next bull market. This bull market ran until the tech bubble in 2000. Yes there were corrections along the way, but nothing like what FinTwat is calling for right now.

This brings us to what everyone refers to as “The Lost Decade” where prices went mostly sideways for 13 years. The Dow Jones actually had a higher peak in 2007.

The S&P 500 was actually contained between two almost perfect channels.

Most assume the bull market started in 2009, but a bull market is defined as a market making higher highs, and highers lows. Thus, the bull market did not officially started until 2013, putting us a mere 5 years into the current bull market. But as you can also see, there was a good 2 year consolidation in 2015-2016 to give the bull market a rest. Some argue that 2015-2016 was also a cyclical bear market inside a secular bull market. Either way it gave the market the rest it needed to launch its next run from November 2016 until February 2018.

The current consolidation in the Dow Jones is just that, a consolidation. It is absorbing the gains from the 2017 run.

We’ve seen it all throughout history, so why should this time be any different? I was there in 2015/2016. I was trading that market. Sentiment was the exact same as it is now. Everyone was calling for the next great depression, the next bear market, the next big short. It was a disaster. And then the market shot up and nobody believed it, but it kept running and running. If my old twitter account was still up and running I would pull up old tweets showing the double bottom pattern and my $2500 target in $SPX when it was only at $2100. I wasn’t trading in 2007-2009 but from what I’ve been told, nobody saw the bear market coming. Nobody is following price action or the history of the stock market. They are finding bearish narratives to fit their bias because they are brainwashing themselves by reading fear mongering headlines and chatting with other permabears.

So if in the history of the Dow Jones, you had a 25 year bull market from 1943 to 1968. Followed by a 17 year bull market from 1983 to 2000. Why is everyone trying to call the next great depression during a 5 year bull market that has spent 3 of those years consolidating its gains? 2015-2016 and 2018 were all spent consolidating its gains.

Here’s a real crazy chart. If we assume 2018 is a consolidation year, it may be 2 years, we don’t know. But when the market finally does break out, the measured move, matching the rally in 2017, will bring the Dow Jones to 35k. How long it takes, I don’t know. But the measured move possibility is there.

I really want to address the end of the world comments, because I’ve been trading since 2012 and I keep seeing it over and over at the bottom of normal corrections.

Let’s start with 2010, although I wasn’t trading at the time, I’ve studied this correction over and over. It looked horrible at the lows, and I’m sure the bear market comments were all over the headlines.

As you can see, when the market looks its worst, and everyone expects a collapse, it fools everyone and rallies into the most epic bull runs you’ve ever seen.

Next is the 2011 correction. Looks awful right? The market must have collapsed the very next day.

Hey look at that, a 20% rally starting the next day.

One can only assume that 20% rally got bears to chase to cover their shorts, and longs to chase the highs due to FOMO. After everyone was convinced it was the bottom, the market had another quick selloff, then went into sideways chop again, before finally breaking out and rallying in epic fashion.

These examples of correction from 2010 and 2011 show how choppy markets can get after a period of trending. But it’s never been the end of the world.

Just for good measure let’s take a look at the 2015/2016 correction, which some will argue was a bear market. Its all fugazzi now. The point is everyone was calling for the next depression and the end of the world, but it never happened.

Markets trend, markets correct, markets consolidate. You don’t know if you’re in a correction or a consolidation until the market breaks out above the highs and its over. All you can do is find good risk/reward plays. Looks for stocks showing strength during a selloff, and play them long during the snapback rally in the market. Then look for stocks that didn’t rally with the market and are very weak, they will fall first once the rally is over and the market tests the lows again.

Just remember when you think the market is going to break the lows and collapse, it usually always bounces and rallies pretty damn hard, catching bears with their pants down. It also gets longs to panic out and sell all their stocks. Once bears see red on their shorts, they chase the market higher to cover and get out with losses. Once longs that sold at the bottom see the market rallying, they get FOMO and chase to get back in. This is how markets work. It’s more than just charts and patterns. It’s an auction of buyers and sellers.

A correction is fast and sharp and usually ends with a V bottom. Just like October 2014. Contrast this with the long, annoying sideways chop of 2010, 2011 and 2015-2016.

Now on to some individual charts I find interesting.

Everyone is concerned about how weak the Russell 2000 $IWM has been. But if you zoom out and look at the trendline, on a LOG chart, it’s sitting right on the long term trendline.

If we look at the daily chart of the Russell, we can see it traded right into the bottom of its ‘corrective channel’ and ready for a pop back up. It also has positive momentum divergence in the stochastics, or RSI, or whatever momentum indicator you use.

Next up is $GS monthly with its long term trendline. Don’t @ me for not using a log chart. I tried and only the arithmetic chart hits all the pivot lows. Remember, technical analysis is more an art than a science. Every investor(s) that control a stock use different rules to time their investments. Follow their coattails. Experiment with settings. Get to know the stocks you follow.

Everyone is bearish $AAPL, the biggest company in the world. A quick look at the weekly chart shows a 50% correction of its weekly trend. Also trading into major price support from early 2018 before it took off for the $1 trillion market cap. Also you can see the gravestone doji at the bottom of the downtrend, which usually indicates a rally is coming.

$CAT is very interesting, as I was expecting this bear flag to lead to some downside. But it was actually very strong on Friday as the $SPX sold off all day. A great relative strength candidate.

If we look at the monthly chart, it has tested and held the major breakout, which is now acting as support.

$PG is breaking out from a major, major consolidation. It has been **VERY** strong during the entire correction. It even consolidated for a few weeks before breaking out.

$JPM weekly is very interesting to me, as it has a tendency to correct in a descending channel, even breaking the lows, and then ripping back to highs when everybody least expects it. Everyone sees a double top, but remember, if it’s obvious to the majority, it usually doesn’t work.

I still love this $HD chart as it’s holding the lows. Ended the week in a doji candle, possibly showing that sellers aren’t willing to sell more down here, and buyers are waiting for more confirmation of a bottom. I’m looking for a rally starting soon and into summer.

$DJT transports had a fast and **dirty** correction, but it’s sitting at the bottom of channel support now. Names like $XPO $FDX $UPS have gotten hammered. But down moves like this are usually followed by equal or greater snapback rallies in the opposite direction.

Remember, the market is a living, breathing organism. Refer to Newton’s 3rd law.

“For every action, there is an equal and opposite reaction.”

Markets and stocks don’t go down forever. You can’t expect 5 red bars in a row to continue going down. It will snap back in the opposite direction and trap traders on the wrong side of the move.

$MA and $V are 2 stocks I’m very interested in. They have acted very well during the market correction, and have been putting in higher lows on the right side of the base while $SPX has been making lower lows.

$BA is another stock I’m very interested in. It’s spent the entire year consolidating the gains from its epic bull run.

This consolidation looks very similar, but shorter, than it’s consolidation before the epic bull run.

There are also other very strong stocks I’m watching, like cloud stocks $WDAY $SPLK $DATA, but I don’t want this post to get too long. If you’re still reading, thanks for staying and hearing what I have to stay. I remain firmly bullish and see this market as a consolidation of the 2017 bull run. Until the $SPX $DJI lows get taken out by a wide margin, I remain bullish and looking for long opportunities.

Disclaimer: Everything in this blog is an opinion and not considered financial advice.