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According to the metrics I use I consider current conditions a bear market until proven otherwise (below 200 DMA, 50DMA below 200 DMA, weekly MACD on sell). For me, that means all price action is interpreted from a bearish perspective.
I have both an investment approach and a trading approach. One aspect of the trading approach is to constantly look for and identify low-risk, high reward chart setups. Potential inflection points where X should do something and if it doesn't you exit immediately and if it does you simply ride the trend for whatever you can get out of it. The point is the potential move from that inflection point should be sizable in one direction while also providing you the opportunity to know if you are wrong right away. This is consistent with both the highly profitable recent short silver and long gold trades documented here in this board in real-time with the chart analysis.
So what is the bearish setup. Here is the scenario I am looking for. It might not happen. Heck, it probably won't happen because it is too much "too the script". But if it does, it would provide an excellent 6-12 month short the market trade.
In 2007, the broad market put in a giant head and shoulders topping pattern with the peak at 1565 and neckline at 1400. Once the neckline broke in January 2008 the market quickly declined to close to reaching the downside price objective, based for a month or two and then started a counter-trend rally back up to the declining 200 DMA. On May 19, 2008 the high of the day was 1440 with a close of 1426 which was marginally above the neckline of 1400. The 200 DMA that day was 1428. One key TA principle is that moves will fail at key resistance points. It doesn't get much more textbook then that. Obviously, in hindsight that was a tremendous opportunity to go short for the next 6-9 months.
So where are we now. The broad market just put in a giant head and shoulders topping pattern with the peak at 1370 and neckline at 1260. The rapid drop more then fulfilled the downside price objective to 1120. With the last few days, it looks like maybe a short-term counter-trend rally is starting. The current 200 DMA is 1284 and will start to converge down closer to the neckline over the next few weeks to a month or so. So the parallel move to 2008 would be a rally past the neckline up to that declining 200 DMA. That would be the ideal entry point to take a highly leveraged short trading position. If the market can retake the 200 DMA on a weekly basis, then you bail on the trade.
I like that I think the fundamentals are aligned here. In spring 2008, most mainstream economists still had not even acknowledged we were in a recession despite the fact that in hindsight we know it began in 2007. The consensus view was for a second half pickup. Hussman had already made his correct recession call months earlier.
The parallels to right now are eerily similar. The consensus view appears to be for a slowdown but no recession. Just another mid-cycle slowdown. In contrast, Hussman was emphatic this week with a strong shift in tone matching the November 2007 call.
It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions.
My instinct tells me the drop we've seen so far priced in a slow-down, but the market still hasn't priced in a recession that really hammers profits. All this is consistent with my view that what we've seen the last two years was not a traditional business cycle upswing, but a government fiscal stimulus/monetary policy cycle that has run its course.
Summary: The chart pattern mirrors 2007/2008 and the fundamentals of the economy seem to support the bearish market view along with a recession. On a trading basis, look for ideal bearish setups to present themselves in the next few months. [more]