Technical analysis: ‘Serious damage has been done’

From Richard Smith, PhD, Founder, TradeStops:

Serious damage has been done to the financial markets in the past two weeks – very serious. Don’t let anyone tell you otherwise.

No one should be kidding themselves that what’s happened in the past two weeks is just a little late summer blip – building up some energy to rally into the fall and winter. I’m not saying it couldn’t happen but it isn’t the odds play.

Everywhere I look, technical damage has been done – and it’s like nothing we’ve seen since 2008. Here’s an update on the dozen or so charts I’ve been following for the past month.

First we’ll take a look at the major indices – S&P 500, DJIA and NASDAQ 100. All three have moved beyond their normal volatility ranges for the first time since early 2009.

All three indices have penetrated their Smart Trailing Stops. Additionally, the Smart Moving Averages are also rolling over in all three cases.

You can see it more easily here when we zoom in SPX:

However, as you can also see above, the major indices have all promptly risen right back above their Smart Trailing Stops.

I can feel the collective relief of the media. It’s as if everyone is saying, “I have no idea what just happened there but I’m glad that’s behind us now.” This correction is being portrayed as if it were the temper tantrum of a two year old – fierce but quickly forgotten.

Yeah, right.

If it were just the major indices that got whipsawed like this, it might be one thing. Incredibly, however, every single one of the 9 SPDR Sector ETFs that we’ve been following has also broken its Smart Trailing Stop. Take a look.

Materials (XLB), energy (XLE) and utilities (XLU) all have a “look out below” feel to them while the remaining six sector ETFs all have the whipsawed look to them – a quick hit of the stop and then right back up above the stop.

This is not normal market action. This is not the “pause that refreshes” prior to an end of the year rally.

Of course, anything can happen, but I’m increasingly concerned about the damage that has been done and the complacency I’m seeing in the media. I’m personally happy to see my stops getting hit and giving me the opportunity to move some capital to cash.

If the markets rally right back up from here, my Re-Entry Rule indicators will get me back in. I will have definitely lost a small chunk of gains but I’d rather risk that than risk seeing a market meltdown that gives back all of the hard fought gains of the past 6 years.

By the way, not everything is gloom and doom in the markets. Believe it or not, there are many opportunities that performing quite well.

I’ve recently put together a list of 300 different equities and ETFs that I monitor with my SSI toolbox (Re-Entry Rule, Smart Trailing Stop and Low Risk Zone indicators). The lists covers stocks from the S&P 100, NASDAQ 100 and a group of about 100 ETFs such as the above sector focused ETFs.

Let me show you a few examples of equities that are still performing incredibly well.

From the S&P 100, both Home Depot and United Health Care are still going very strong. Since triggering Re-Entry Rules in 2009, both have been unstoppable and very well behaved. Home Depot is currently up 426% since then while United Health Care is up 362%.

Other stocks from the S&P 100 that are thumbs up per their SSI include well-known names from biotech, retail, defense and healthcare.

Finally, I’ll leave you with this incredible example from the NASDAQ 100 – Regeneron Pharmaceuticals (REGN).

It’s a stunning example of the power of staying in your winners.

It’s been a liberating experience for me to be able to more or less ignore the news during the recent market mayhem. I hope it has been for you too.

To keeping your head when all about you are losing theirs,

Richard M. Smith, PhD

Crux note: As you can see, Richard’s tools are incredible at keeping your emotions from getting in the way of profits. You can learn more about Richard’s proprietary TradeStops tools and how he came up with them right here.

× Subscribe to Crux
Want more posts like these?
Comments
Like us on Facebook?
Crux Contributors