It’s an old truth that no one pays any attention to market analysis when prices are moving up.  Only when markets enter a stomach churning sell off, as we are now witnessing, does anyone take notice.  As a market participant who uses technical analysis to make sense of market movements, it’s always interesting to look back at the moments of peak volatility to assess market position versus the popular news.  Here is our commentary from almost a year ago:

“…At times when stock markets react violently to news, it’s very useful to step back and assess the strength of existing trends.  Unless there has been increasing evidence of a deteriorating trend, the assumption has to be that the underlying trend will prevail once the shock of a news event has passed.  We’ve seen this phenomenon in effect consistently over the years.   When trends are strong, that is an implicit vote by investors to buy at increasingly higher prices.  When this happens, prices stay consistently above their long term moving averages.  But markets ebb and flow based on the aforementioned fear and greed dynamic and when a price shock brings prices back to a longer term moving average, those are often opportunities to act.

As we survey the positions of the major stock indices on a weekly basis, it’s clear that the longer term trends are advancing.  What it also shows is that prices have plenty of room to possibly retrace even more and still not be bearish.  We always assume longer term trends will be slow to turn and not be capricious as in shorter term price swings.  Once we have that confidence, we dial the time frame down to a shorter duration such as dailies or hourlies to find bottoming patterns for entry.  The holy grail of price entry is when prices converge on a number of time frames at a critical support or resistance level…”

This narrative written in May last year, could be applied to the situation that we face today, although at substantially higher prices.  It’s probably forgotten by most exactly what was to account for the big market correction in May, but presently, the cause of the current market selloff is being blamed on the Corona Virus panic spreading worldwide.  If one were to read all of the dire headlines and take them to heart, then the implied consequences to world markets makes sense.  Whether or not the issue becomes the fatal market issue it’s predicted to be is of course unknown.   What we can note from observing over 40 years of market swings is that observing how markets react to these issues as determined by millions of participants is more important than the stories offered by popular media.  In simple words, what are the big players actually doing with their money?

When analyzing the movement of stock prices, any combination of standard or custom indicators can provide clues as to the likely path of future prices.  The most important thing to understand is that the results of an analysis will point to the likely direction of prices given what’s known by market participants.  There is no magic or voodoo involved.  There is good reason for this and that is that as long as markets are a function of human input, price movements will conform to historical patterns of human behavior.  In other words, the well known factors of fear and greed will move stock prices.

Technical tools can objectively measure the extent of fear and greed at key turning points in the markets.  They objectively show how and where money is deployed and the challenge for traders and investors is to ferret those clues.

One of the most fundamental clues is the direction of popular moving averages.  In short, this very simple tool enables traders to ascertain the direction of the overall trend.  By definition, as prices advance, they will track steadily above a given moving average, with the 200 day average being the standard.  In periods of great optimism, the prices will be substantially above the moving averages.  The chart of QQQ, the nasdaq etf will illustrate:

The ellipse labelled A shows the position of QQQ versus the long term 200 day moving average in October of last year. Clearly prices were on an optimistic trend.  This continued up until just recently as shown in ellipse B when the distance between price and the long term average was significantly bigger.  What we are seeing now is a retracement to less optimistic pricing but for the moment still above the long term uptrend.  We can also compare the relative performance of the Nasdaq index vs the Dow Jones, vs the NY composite and vs the S&P shown below:

To be clear, this settling off of prices may continue for a yet unknown period of time.  We should also add that the longer that prices stay on their present down trajectory, the more likely that overall trends may change.  But it has been my experience that when trends have been on a broad, strong path, that any corrections back to the moving averages, especially sharp ones, are usually buying opportunities.  Historically, such setbacks have proved to be regressions to the mean.

One of the most fundamental underpinnings for the advance of equity markets are the level of interest rates and related to that, the levels of economic activity.  It’s not clear at this point that this environment will continue to be anything but favorable.  Well then when do we buy?

The task at hand is to monitor the position of the popular indices to ascertain the slowing of downside momentum.  Using technical tools that we have discussed in the past including relative strength and divergences, volume and price behaviors on up days, we stalk those issues that show probability to outperform.  As of recent activity, certain of the Dow stocks continue to outperform and show relative strength in the big cap group.  We will be observing in no particular order, MSFT, INTC, HD, IBM, KO and MCD.  These are very liquid stocks and will be sought after by institutions once the technical smoke clears.   As evidence grows that money is returning to these issues, broader market issues will also be in play.