The Technical View: Handling a Stock Market Panic
The ability for investors to take out their smartphones, check the equity markets, and see volatility day by day, hour by hour, minute by minute, and second by second, results in one undisputed reaction: emotion. If markets go down they have to sell, if markets go up they have to buy. Many investors let the media drive their investment decisions ignoring their investment horizon and, most importantly, their long-term financial goals.
The beauty of technical analysis is that it attempts to understand market fluctuations by studying the market itself. As market action discounts everything, investors need to focus on one and only one thing: The price itself.
There is an integral relationship between time frames where short-term ones (daily charts) move intermediate-term ones (weekly charts) which eventually move long-term time frames (monthly charts). Daily, weekly and monthly charts do not all roll over in tandem. They never have. There is precedence in the order of actions.
Having said the above let’s take a look at the short-term time frame (daily chart) of the S&P 500. Looking at the chart below we see that there is a clear Dow Pattern (series of lower lows and lower highs) developing to the downside. At the same time the 20-day moving average crossed below the 50-day moving average confirming the downtrend in the short term.
It is clear from the above chart that the market is bleeding, at least in the short term. The question is where do we stand as far as the medium and long-term trends are concerned? Our medium-term (weekly chart) analysis below shows that there has been some damage. This is observed by the fact that the price of the index has fallen below the trend line and also by the fact that our momentum oscillator (measured by RSI) dipped into the bearish momentum area for the first time since 2013.
Should medium and long-term investors worry? We believe that it is too early to judge. A break below a major trend line, although not a good sign, does not necessarily mean a change in trend direction. The same occurs for the bearish momentum readings, which can indicate a deeper correction, instead of a shallow one. To start worrying, we need to see a series of events and more importantly the price in the medium term (weekly chart) forming a Dow Pattern – lower highs and lower lows. So far there is no such pattern in place.
Looking at the bigger picture (monthly chart) we see that our 2011 and 2008 trends are still intact, so long term investors should not be concerned at this point. In addition our momentum oscillator (monthly) is still above the bearish area, which provides additional confirmation of the bullish trend. Last but not least, despite the damage that was caused to the medium-term trend, there is still no sign of a Dow Pattern (lower highs, lower lows) in place.
As we said in the beginning of this report, short-term prices can oscillate significantly with respect to trend, but the trend doesn’t change all that often in the medium-term and even more rarely on the long-term. This is something many investors tend to forget as they are carried away by the speed and amount of information they get on a daily basis leading them to panic and possibly resulting in wrong investment decisions. So take a deep breath and relax. It may be a bumpy ride but medium and long-term trends are still intact, at least for now.
Costas Pierides CFTe, MSTA
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