Market Review at Multiple Timeframes

I wanted to break the markets into multiple time frames and show you a couple indicators to give you an idea of what I will be looking for when I deploy money for the next 2 to 4 years.

Here is my “Roadmap”. If the markets are above the Red and Blue lines, then I am selling over-extended rallies and buying pullbacks into the Red and Blue lines, because we are by definition then in a Bull Market and I want to be on offense.

If the markets are below the Red and Blue lines, then we are in a Bear Market, I am on defense and I am looking to short rallies into the Red and Blue lines and buy over-extended crashes.

I have been telling anybody who would listen that when price closed a month below the Blue and then Red lines, that it was time to raise cash, because I was afraid that this would be a replay of the 2000 – 2003 Bear Market. Pretty good call, eh?

See those green lines”? That is the bottom of the last Bear Market and the price range is proving to be a magnate, sucking prices down into them. I would be very surprised if price does not go below those levels before this Bear Market is over. I believe this, because it would scare the heck out of the unprepared and induce them to sell at a very bad time.

The bottom of the chart is the “Bullish Percent Index”. This essentially measures the percent of companies in uptrends. Panic bottoms have extremely low readings in this indicator. This is the lowest I have ever seen the indicator. But when it reverses up, it will confirm a rally that may be profitable to own. I will discuss this indicator in detail as a bottom appears to form.

http://www.investopedia.com/articles/trading/04/080404.asp

One more thing about his chart – see the Green Circle? That is the bottoming process of the last Bear Market. This Bear Market will also end in a bottoming process. So don’t go jumping out the window if you miss getting fully invested on the first decent bottom. The odds are real high that it will be revisited, and maybe undercut, at least once.

You may be asking yourself why I was so convinced that we would replay the 2000 – 2003 Bear Market. It is because we are now replaying the 1966 – 1982 Secular Bear Market.

See how the market trades in long rallies followed by extended periods of consolidation (violent sideways trading)? The rally phases (Secular Bull Markets) are characterized by increasing multiples and decreasing inflation and interest rates. The consolidation phases (Secular Bear Markets) are characterized by compressing multiples and rising inflation and interest rates.

We are just replaying the 1966 -1982 timeframe. I’m not a rocket scientist. I just study a lot and recognize what the markets have to tell me. The endgame to all of this is really nasty inflation and a huge spike up in interest rates designed to kill that inflation (ala Paul Volcker).

So we are in a Crash leg of a Secular Bear Market. I will do a detailed post tomorrow on potential bottoms for this Crash leg. I am not telling you these numbers will be fulfilled, but if we get down to them I will be on alert for a potential big rally. And this is really all I can do is try and figure out high-probability situations and be on my toes if they materialize.

Now I want to look at the daily action of the New York Stock Exchange ($NYA). This index is a broad representation of what is going for the average stock. On Friday, the $NYA closed below the -35% band (Black Line) for the first time in this plunge (Red Arrow). What I see here is a 13-day consolidation after the plunge of late September and early October. Friday may have been the first day of the next plunge. Or it could be a retest of the October 10 low. We’ll see. The next few days will tell me whether I should be shorting or buying.

I am concerned about the chart – the Volatility Index ($VIX). Call it a fear gauge – the higher the number, the more expensive insurance becomes (Put Options).

What concerns me is that the VIX just broke out (Green Arrow) of a multi-day consolidation (Green Lines). It is bad for stock prices if the VIX has another leg higher. I will be watching this closely.

Here is the Dow Jones since the October 10th bottom. I keep bringing this chart up to show how the markets are being driven intra-day.
The Pink Line is -1 Standard Deviation below the 260 period moving average. See how it has capped trading the last few days, where rally has topped at the Pink Line (Pink Arrows)?
The Purple Line is -1.5 Standard Deviations away. It has served as support for each bought of selling (Purple Arrows).
The Fibonacci Levels (Blue Lines) have also come into play as I mentioned they would last week.
I added the -1.25 Standard Deviation (Black Line) to show how it has been the key pivot for all intra-day trading the last 3 days.

The last few days I have done some short term trades to try and take advantage of massive intraday volatility. I have done this for myself and for a handful of clients.

The majority of my clients are in cash. For long-term allocations, I will be using the Daily, Weekly and Monthly charts to give me areas of potential reversals. Unless you can just sit there and watch things all day long, I would use the longer-term charts and a combination of volatility bands, standard deviations and indicators to determine when to try and enter stocks. I’ll keep you posted.