DJI: More Volatile Selling Pressure To The Downside Until 21700?
Ever since the market selloff in DJI, NASX, SPX starting 2/1/18, both the selling and the buying in the market has been ridiculously intense for your average complacent retail buyer (including myself). After months of easy steady profits, climbing slowly upwards, suddenly volatility has skyrocketed and also plummeted with stomach-churning speeds. All the bullish analysts pound the #BTFD mantra after 1-2 selloffs (at least on a long-term scale) followed by other pessimistic bears equally warning #STFR or to get into cash (at least on a short-term scale). For every analyst calling a bottom to the sell-off, another one says THIS time is different and there is much more pressure to the downside. Which is it? Is it time to buy? Or is there way more selling to come and is it time to still wait it out/sell/get into cash until the carnage is over?
It's been difficult for me, even with my basically perfectly timed call of the market top on 1/30/18 (See Below) to know when to get back into the market to buy DIA, QQQ, SPY or other index funds, or to possibly buy some puts on those same indexes and play a swing trade. Every massive buyback seems to be followed by a massive drop, and every massive drop seems to be followed by a massive buyback. 400 and 500 point swings, even upwards of 1000 points a day are happening almost daily! So what's an investor to do?
I agree with the long-term philosophy that the market will eventually go upwards from this correction, but the average correction lasts more than 3 months and around 14% drop, and we are nowhere close to that. And I also agree with the bears that there's no reason to buy at still overvalued and overbought conditions if the market will still potentially experience more massive drops. Looking at trend lines and support levels gives us a better idea what to expect.
First of all, starting from 2/18, the trend is CLEARLY downwards. We see lower highs for every buyback, massive or not, and lower lows for every selloff. After nearly 2 weeks of data, this is quite clear. So from a strictly TREND perspective, there seems to be more selling off to continue. We have just come off of 2 pretty large buy-back days, and based on the DOWNWARD TREND LINES, a break above 25000 or so on DJI would be bullish. However, assuming the selloff continues, let's now look at SUPPORTS. The first level of SUPPORT (S1) would seem to be around 22750 on DJI, which would bring us back to around mid-November 2017 levels (Note that December 2017 levels of support of 24000 were already tested/broken on 2/9/18). If this S1 support level of ~22750 or so is broken, the next level we would test (S2) would be the mid-October 2017 levels of 22350 or so. The last level of support I can see (S3) is 21700 or so, or September 2017 levels, if S2 (22350) is broken. Keep in mind that this S3 level would represent almost a 20% drop (or near the definition of a bear market), if it occurred.
Will all of these happen? Will the market/DJI continue with the sell-off bottoming through supports until that key 21700 level that defines a bear market scenario is breached? That I can't answer. But based on the downward trend lines, I don't think the selling is done and I DO think there is another large selloff after we bounce off the upper downward-trend line, and that we test 22750 (S1) support easily by later this week. 22350 (S2) support is only another 400 point drop after that, which is not that hard to imagine. Keep in mind that ALL 3 of these supports could be taken out by just ONE 1000 point drop day, which as we know we have seen more than 2-3 times already in February 2018.
(DISCLAIMER: I'm mostly cash now but have a short position/puts on QQQ, and may add puts on DIA/SPY soon. This information may be useful in determining when to start opening up a long position, or possibly when to BTFD or STFR for a short-term swing play, but as everyone knows, it is very difficult to time the market. Do your due diligence and examine risks)
It's been difficult for me, even with my basically perfectly timed call of the market top on 1/30/18 (See Below) to know when to get back into the market to buy DIA, QQQ, SPY or other index funds, or to possibly buy some puts on those same indexes and play a swing trade. Every massive buyback seems to be followed by a massive drop, and every massive drop seems to be followed by a massive buyback. 400 and 500 point swings, even upwards of 1000 points a day are happening almost daily! So what's an investor to do?
I agree with the long-term philosophy that the market will eventually go upwards from this correction, but the average correction lasts more than 3 months and around 14% drop, and we are nowhere close to that. And I also agree with the bears that there's no reason to buy at still overvalued and overbought conditions if the market will still potentially experience more massive drops. Looking at trend lines and support levels gives us a better idea what to expect.
First of all, starting from 2/18, the trend is CLEARLY downwards. We see lower highs for every buyback, massive or not, and lower lows for every selloff. After nearly 2 weeks of data, this is quite clear. So from a strictly TREND perspective, there seems to be more selling off to continue. We have just come off of 2 pretty large buy-back days, and based on the DOWNWARD TREND LINES, a break above 25000 or so on DJI would be bullish. However, assuming the selloff continues, let's now look at SUPPORTS. The first level of SUPPORT (S1) would seem to be around 22750 on DJI, which would bring us back to around mid-November 2017 levels (Note that December 2017 levels of support of 24000 were already tested/broken on 2/9/18). If this S1 support level of ~22750 or so is broken, the next level we would test (S2) would be the mid-October 2017 levels of 22350 or so. The last level of support I can see (S3) is 21700 or so, or September 2017 levels, if S2 (22350) is broken. Keep in mind that this S3 level would represent almost a 20% drop (or near the definition of a bear market), if it occurred.
Will all of these happen? Will the market/DJI continue with the sell-off bottoming through supports until that key 21700 level that defines a bear market scenario is breached? That I can't answer. But based on the downward trend lines, I don't think the selling is done and I DO think there is another large selloff after we bounce off the upper downward-trend line, and that we test 22750 (S1) support easily by later this week. 22350 (S2) support is only another 400 point drop after that, which is not that hard to imagine. Keep in mind that ALL 3 of these supports could be taken out by just ONE 1000 point drop day, which as we know we have seen more than 2-3 times already in February 2018.
(DISCLAIMER: I'm mostly cash now but have a short position/puts on QQQ, and may add puts on DIA/SPY soon. This information may be useful in determining when to start opening up a long position, or possibly when to BTFD or STFR for a short-term swing play, but as everyone knows, it is very difficult to time the market. Do your due diligence and examine risks)
