TSP Talk Blog

The long awaited test of the S&P 500 November lows is upon us as yesterday's low was 742, just missing the 741 low in November. The lows will be tested, but so will we.

I have the uncanny ability to jump into trades too early, usually just before the serious damage is done. I was blinded by the nice setup in the indicators, while the chart of the S&P 500 continued to look dismal. We have been waiting for three months for a test, which we thought was inevitable, yet I let the lure of trying to pick a bottom get me. Not to worry. I still believe that snap-back rally is on the horizon. The question is, does it start from here, or do we have to experience more damage first?

What a perfect test so far, yet we don't know if it will hold. With the Dow and the Dow Transports breaking below the lows, we can probably assume the S&P won't be far behind, but you know how these snap back rallies work. I'll show you how the October scenario played out in a chart below.

For now, let's look at the current S&P 500 chart. Down 6-days in a row now, a broken wedge pattern, an obvious downtrend, lows being tested, trading below the moving averages, etc. Not much good to talk about. The MACD is still showing a positive divergence and the lows have not been officially broken, but I don't know how much longer either of those will last.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

So, it's looking pretty bleak out there, but if you recall in October of last year, just when you thought the market would never go up again, we got a monster rally. We saw a steak of eight consecutive down days before a late Friday rally, just before a holiday weekend, kicked in. From bottom to top, in less than two full trading days, the S&P 500 rallied 24%.


Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

I remember it well because I was lucky enough to be in the market. The problem was that I had been in for much of the downside leading up to it as I got in too early, and did not take profits quickly enough as things turned south again very quickly.

The market rarely does anything exactly the way it did the previous time so I assume this time things will be different, even if just slightly. But I always suggest that we approach a volatile market with a plan so that we can act on our plan rather than react to the market. The volatility will undoubtedly bring out emotions, whether it is because you are in the market and taking big losses, or out of the market while the stocks are rebounding strongly.

I realize how vulnerable the market is now, but I don't want to let fear make the decision. Whether you are following a system, a series of indicators, or are following a strategy like dollar cost averaging, your plan should not change in the middle of the madness. Follow your plan and you are more likely to make a rational decision.

The indicators are becoming a little less useful as most of them are at extreme levels. We know the deal. The S&P 500 (C-fund) was down 8.4% in January, 9.7% so far in February and, including this week, it is down 7 of the last 8 weeks with the last 3 being -4.8%, -6.9% and with yesterday's losses, another -3.6% to start this week. The rally will come. Good luck!