ITM Update 13 Feb 22
I had hoped for something definitive to have happened by this weekend – but no such luck. We are still on the rollercoaster, being whipped this way and that way with no idea where it is going next. The funny thing is that it is hard to see what is causing this level of volatility. There have been no really bad surprises – not even the inflation figures were unexpected – and quite a few good ones. Yet the market continues its crazy journey. Which way is it going next?
Obviously, I don’t know; no-one does. But let’s have another look at the chart and see if it has any clues.
The first thing to notice is that the 10-day SMA (pink) has bounced off the 200-Day SMA (turquoise), and so the get out signal was not completed, i.e., there was no ‘white space’ between them. Before the very nasty day on Friday, things were looking positive – but now SPY has closed below the 200-day SMA, which is not a good sign.
On the other hand, there are a couple of interesting developments. The two small candles (arrowed, 2 and 9 February) closed at almost exactly the same point, and the next day it retreated. The closes and the intra-day lows are getting higher. We have a good example of a chart pattern called the ascending triangle, which is a continuation pattern. The theory is that when the price breaks out of this triangle it continues in the way it was trending before the pattern was formed.
But as usual, things are not so clear. We can interpret this is 2 ways:
- SPY was in an uptrend and had been for many months until early January; or
- SPY had started a downtrend and it is going to continue down.
Which is right? Obviously, we won’t know until afterwards, but taking a longer term viewpoint may give you a better idea of the market direction.
Traders (including me) tend to see what they want to see. It could be that we are seeing patterns when none exist, but this one seemed to be worth pointing out. You can decide!
SMA or EMA?
I often get asked about whether to use the SMA (Simple Moving Average) or the EMA (Exponential Moving Average). My reply is pragmatic. If we are trying to work out what other traders are going to do then we use the SMA because that is what most traders watch, and hence act upon.
However, I also keep an eye on the EMA as I think it gives me a better picture of what is actually happening simply because it gives more weight to the recent price movements. I have put both of them on the chart below. The pink ones are the 10 / 200 SMAs, the blue ones the EMAs.
Interesting, isn’t it? Usually there is not much difference between the two, but here there is. The EMAs did not touch, unlike the SMAs. What does this mean? My guess is that we’ve seen the worst of this downturn. I certainly hope so – but I must stress, this is just a guess, not a prediction. I don’t know what is going to happen, I could very well be terribly wrong. But let’s hope not!
In any case, this week should be a watershed and we’ll have a clearer picture by next weekend. Let’s hope so anyway.
(An aside – for Sim (my son) – if you are reading this, sorry about the garish colors. I know you have warned me against them in the past. Told me that I should look more professional. I understand. You are right. But I like bright colors!)
Inflation, Money Supply and the Fed.
All these things are important and are affecting the markets – but there is no way I am an expert on this so my opinion should not count for much. If you want to get some good information on these I would suggest this blog: http://scottgrannis.blogspot.com/ I have mentioned it before, he is the ‘Calafia Beach Pundit’ and he always has some great graphs and talks a lot of commonsense. He only posts every couple of weeks, but it is usually worth reading. The latest one is about the Fed tightening, and I think it gives a good overview.
And the Journal . . .
Well, after warning in the last post about the plethora of ‘low content’ books on Amazon, I got caught up in the crackdown on them. I published the Journal (Mark 1) well in advance of telling anyone it was live, so that I could iron out any glitches before people were looking for it. All was going well until Amazon informed me that it could not be in the ‘Business & Money / Stock Market ‘ category as it was a journal and had to go into the journal area – along with positivity, questions for couples, gratitude and tarot cards!
Obviously, this was not where it should be, but you can’t fight city hall, so I have unpublished it. Back to the drawing board.
I am reworking it so that Journal Mark 2 has even more content and I will try publishing again, this time as a book / workbook. I’ll keep you posted on how that goes!
So this week. . .
Maybe there will be a bounce. Maybe not. Maybe there will be more pain. Watch and be ready to act when you see white space between the SMAs after a death cross.
And remember – the end of a bull market does not mean that a bear market is starting. There is a gap, and we are nowhere near a bear market yet. It’s all explained in the bear market book, but I just want to stress that we are not getting anywhere close to an entry into a bear trade.
Hopefully this too shall pass and there will be better news next blog post.