Click chart to enlarge Here at the Snotwheel Group, we're getting geared up to buy the indexes, but aren't pulling the trigger just yet. We're under water on the first layer of index ETF's we bought months ago, so we've been waiting for a washout move upon which to double or triple our current number of shares. Remember, as it goes lower, it becomes less and less expensive to double your shares. In a sense, a falling market gives you leverage, provided you're not fully invested.
We haven't pulled the trigger yet because we're still eyeing the channel, waiting for the market to reach a position where it will be as oversold as it's been at its worst times since the start of this global depression. The market's level of "oversold-ness" can be determined by how far below the moving average it is, on a percentage basis. For example, on 10-16-08, the Dow hit a low of 8,200 while the 100 day moving average was at 11,300. In other words, the Dow was 27.4% below the moving average. On 11-21-08, the Dow hit a low of 7,450 while the 100 day moving average was at 10,423. At that low, the Dow was 28.5% below the moving average. The chart above shows a 90 day moving average, just fyi. It does not matter what moving average you use for this calculation, as long as it's the same one for each comparison.
It's safe to say that when the Dow is 27% below its 100 day moving average, it's as oversold as it's been over the past couple years. Today, the 100 day moving average is at 8,360. For the Dow to be 27% below this, it would have to be 6,100. For it to be 28.5% below it, it would have to reach 5,977. Anyway, this gives us a rough idea of where we would be looking to buy. Of course, there's no guarantees it will reach that target, no guarantee that it will stop falling if it does reach it, and no guarantee it won't just go slowly sideways or lower from there. Nonetheless, as a long biased retirement fund, this is where we will focus our next layer of buying.
It should be noted that if anyone wants to engage in such "risky" activity, it would be a good idea to check such numbers against the S&P500 index, as the Dow is the worst performing index of late. We intend to buy SPY and/or SSO, not the Dow this time around, so we'll be checking the math on a chart of SPY accordingly.
If the market does not reach those lows, then we just stay put. There is no rush to buy at any point that does not represent a severely oversold condition. If the market rebounds early, the next oversold condition will not be at 6,000. It may be at 5,000 or 4,000. We are not interested in buying at 6,000 per se, but at 28% below the 100 day moving average, whatever the market's level may be at that time.
Tomorrow morning we will get the all-important jobs report. This will determine the direction of the market, and if it is negatively received, we could easily hit 6,000 by early next week. If the market continues to crash over the next few sessions, and you intend to buy, it's best to turn CNBC off and just focus on nothing but the market's level. The media will be overwhelmingly negative, and it will appear that the bottom is falling out of the market. There could be talks of runs on banks and such, along with many excuses as to why the market is falling. Truth is, it is only falling because people are selling. And people only sell for one reason... they think it's going lower and they don't want to lose money. It's a self-fulfilling prophecy. If you intend to buy, don't get caught up in the emotion. Just pull the trigger when it feels most scary to do so, and then just walk away.
We haven't pulled the trigger yet because we're still eyeing the channel, waiting for the market to reach a position where it will be as oversold as it's been at its worst times since the start of this global depression. The market's level of "oversold-ness" can be determined by how far below the moving average it is, on a percentage basis. For example, on 10-16-08, the Dow hit a low of 8,200 while the 100 day moving average was at 11,300. In other words, the Dow was 27.4% below the moving average. On 11-21-08, the Dow hit a low of 7,450 while the 100 day moving average was at 10,423. At that low, the Dow was 28.5% below the moving average. The chart above shows a 90 day moving average, just fyi. It does not matter what moving average you use for this calculation, as long as it's the same one for each comparison.
It's safe to say that when the Dow is 27% below its 100 day moving average, it's as oversold as it's been over the past couple years. Today, the 100 day moving average is at 8,360. For the Dow to be 27% below this, it would have to be 6,100. For it to be 28.5% below it, it would have to reach 5,977. Anyway, this gives us a rough idea of where we would be looking to buy. Of course, there's no guarantees it will reach that target, no guarantee that it will stop falling if it does reach it, and no guarantee it won't just go slowly sideways or lower from there. Nonetheless, as a long biased retirement fund, this is where we will focus our next layer of buying.
It should be noted that if anyone wants to engage in such "risky" activity, it would be a good idea to check such numbers against the S&P500 index, as the Dow is the worst performing index of late. We intend to buy SPY and/or SSO, not the Dow this time around, so we'll be checking the math on a chart of SPY accordingly.
If the market does not reach those lows, then we just stay put. There is no rush to buy at any point that does not represent a severely oversold condition. If the market rebounds early, the next oversold condition will not be at 6,000. It may be at 5,000 or 4,000. We are not interested in buying at 6,000 per se, but at 28% below the 100 day moving average, whatever the market's level may be at that time.
Tomorrow morning we will get the all-important jobs report. This will determine the direction of the market, and if it is negatively received, we could easily hit 6,000 by early next week. If the market continues to crash over the next few sessions, and you intend to buy, it's best to turn CNBC off and just focus on nothing but the market's level. The media will be overwhelmingly negative, and it will appear that the bottom is falling out of the market. There could be talks of runs on banks and such, along with many excuses as to why the market is falling. Truth is, it is only falling because people are selling. And people only sell for one reason... they think it's going lower and they don't want to lose money. It's a self-fulfilling prophecy. If you intend to buy, don't get caught up in the emotion. Just pull the trigger when it feels most scary to do so, and then just walk away.
9 comments:
Hi - I'm working on a Michael Moore project and have been reading your terrific blog. If you have a moment, it would be wonderful to touch base with you; I really like your ideas. Thanks!
hum, not so sure about the "just pull the trigger....and then just walk away" advice.
yesterday, after watching pot bounce off it's lower trendline the previous 2 days I decided to pull the trigger and go long a few shares (at 81.25). literally not less than 5 minutes later the news came out about some russian company cutting potash prices 25% and down pot went! i watched in disbelief and scrambled to check the news to find out what just happened. i ended up selling maybe 30 minutes later for a 4 point loss. but, in hind sight i'm glad i cut my losses when i did since pot closed today below $70.
on a brighter note, after following the retrace of gold and seeing it hit 900/ounce yesterday(which is approximately where i have the bottom of its trending channel), i pulled the trigger and went long dgp. so far so good on that trade, but with the markets as volatile as they are, i am keeping a close eye on how gold trades. if it breaks its channel I am out (thank you snot for teaching me this important lesson).
Karey, that's flattering! you can email us at snotwheel@yahoo.com
Anon,
The ferts have been breaking down, that's for sure. If MON breaks its 65 low, then it's 'look out below' for the sector. POT's action today is very ominous.
You're right that GLD has a very well defined trend channel going back to October. If its breaks, like you said, it's better to sell and wait on the sidelines.
What we're doing is risky (buying against the overall trend), but it's a little safer to do it with the indexes than with individual stocks. The way we play the market (buying in layers, sticking only to the indexes, buying only during panic selloffs at the bottom of the channel, etc), there are only three possible outcomes...
1.) we ultimately profit
2.) we break even
3.) the financial world as we know it ceases to exist (Dow 500)
thanks snot. i was wondering what your take on pot is compared to the sector in general. it seems pot is the first to break its channel, but mos and cf seem to be still in their channels. i'll have to check mon too. do you consider mon the 'leader' of the ferts now, and pot just the canary in the coal mine?
rl
Rl, MON is very influencial because of its sheer size. If it breaks, it could take the rest down with it. AGU has already broken down.
POT looks weaker than MOS, CF and TNH. Was a little suprised to see how poorly POT did today. It is the canary in the coalmine in that MOS will probably follow. But this isn't really a major break for POT, either. If the sector really breaks down, it will happen like this... MON will break first. Then POT. Once they break, AGU, MOS and CF won't be far behind. MON is the real canary here. If the sector is going to begin a new leg down, it'll die first to spare POT traders.
thanks snot. i checked the chart of mon. over the last several months its chart does not appear like its been trading in a clear channel as much as pot, cf, mos. actually has more of a converging wedge look to it (if that's the right term). if i'm reading it right, it looks like it's converging at around 70. if that's the case, i guess we will find out within the next week or so which way it breaks out.
rl
Snot, I think your channel is too shallow. Here is the rsi chart I am using to measure long term trends. Obviously the channel has to break sometime soon, otherwise we're heading to 340. But this is a weekly chart, and the channel is over a year long. Note that SPX will be at 604 when we reach the center of the channel!
this is so sick....
http://www.marketwatch.com/news/story/story.aspx?guid={04C7AB69-4A94-40FD-97F0-BE62F786DF50}&siteid=rss
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