Tuesday, September 15, 2015
The bears are out in force this week.
Lots of financial-television talking heads are pointing to the seasonal tendency for stocks to decline in mid-September as a reason to be bearish right now. There's even an old Wall Street saying that supports this view...
"Sell on Rosh Hashanah. Buy on Yom Kippur."
The origin of the saying has more to do with freeing one's mind from the distraction of finance so that one can reflect on more important things – like family – during this important Jewish holiday. Then, once the holiday is over, we can get back to focusing on money.
Rosh Hashanah began on Sunday. So folks looking to free their minds should have been out of the market by the end of last week.
On the other hand, there has been a fairly consistent trend over the past two years of stocks rallying in the days before a Federal Open Market Committee (FOMC) announcement. The next announcement is scheduled for Thursday.
So we have conflicting strategies here. Do we sell on Rosh Hashanah, or do we buy going into the FOMC announcement?
Unfortunately, the charts aren't really giving us any clues. Most indicators are neutral across nearly all time frames. The trading range over the past few days has been relatively tight. So energy is building for a larger move. But the direction of that move is a coin toss.
Fortunately, we can look at the chart of the 2011 correction for clues...
You'll recall I showed you this chart earlier this month. Back then, I warned that if the current correction follows the same course, then we're in for several weeks of choppy, back-and-forth action in a wide trading range and eventually a retest of the early September lows.
The blue arrows point to where I think we are right now in the correction cycle.
Now, take a look at the current chart of the S&P 500...
We're still a little too early in the correction period for a drop back down to retest the lows. In fact, if the current script plays out similar to 2011, we should be looking for another push higher – perhaps to the 2,030 level – before we suffer a retest.
Add to this the prevailing bearish sentiment – which is a contrary indicator – plus the tendency for the market to rally going into an FOMC announcement, and there's a good case for higher stock prices over the next few days.
But – and this is a really important but – back in 2011, the S&P 500 rallied to within spitting distance of its 50-day moving average (DMA) line before turning lower and retesting the lows of the correction. That test of the 50-DMA was an ideal setup for a short trade. Aggressive traders could have shorted stocks at that level, put a stop on the trade just above the 50-DMA to minimize any potential losses, and profited as the market fell back to retest the lows.
If the S&P 500 can rally up toward the 2,030 level over the next few days, then traders will have a similar ideal setup for a short sale. Aggressive traders can look to short the market as the S&P 500 approaches its 50-DMA... put a stop just above the 50-DMA in order to minimize any potential losses... and look to profit as the market comes back down to retest the lows from earlier this month.
Best regards and good trading,
"Stocks move up and down. If you're only investing on the up moves, you're only taking advantage of half the opportunities," Jeff says. "Short-selling is an important strategy for any portfolio." Get all the tools you need to make money on short trades here and here.
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