The market is off its lows - but is it a bull trap?
So, we’re still on the sidelines with no definitive signal from the market. It’s boring, I know.
Looking at the chart it shows that we have climbed out of bear territory but are still deep in correction territory. However, the-short term trend is up so what are we looking at? Is it a bottom reversal, and we are now headed back into a bull market? Or is this a bull trap?
Just to refresh your memories of bull and bear traps, here’s a diagram:
So which is it? Bottom reversal? Bull trap? I don’t know, but neither does anyone else! As with everything in the market, the only way we know for sure is after the fact. But we are still a long way off a bull IN signal.
Something has to change!
Right now, the market volatility is high as there is so much uncertainty. High inflation is a problem, as is the political situation. It is tempting to assume that everything will be OK after the midterm elections – but will it? Lets look at the last time we were in this situation.
In 2018 Donald Trump, a first term president, was facing the midterm elections on November 6, 2018. It was widely expected that his government would lose their majority in the house. In 2022, Joe Biden, a first term president will face midterm elections on the November 8, 2022. It is widely expected that his government will lose their majority in the house.
Can we see any parallels in the two situations? And can it give us any insight into what is going to happen? Here’s a chart of the months before and after the 2018 midterms.
We can see that initially the stock market was ho-hum about the results and continued sideways. Then, in December there was a sudden drop, causing the S&P 500 to drop into bear territory. It then abruptly reversed, and went into a long-term bull market, later interrupted by Covid.
Was the December drop something to do with the midterm results? Or was it other factors? Does this predict what will happen this year? Again, we don’t know, but can make a guess. Markets price in known factors and if an event is expected then the current price reflects it
Responding to ITM Queries
I do love hearing from readers, and to date I have answered all emails personally, if somewhat late in some cases! Some of the questions are excellent and it seems a shame to answer one person when many others may have the same query. As well, many people are writing in with the same question and it seems a bit silly to answer the same question over and over. Plus, the volume of mail is getting so great it is proving difficult to manage personally.
What I shall do from now on is answer the questions in the blog, rather than directly email the people who asked. Please continue to send in your questions and I will answer them to the best of my ability, or point you to someone who can.
So, let’s start with one question I have been asked many time recently: Why does ITM use closing prices? Why not highs or lows?
Why ITM Uses Closing Prices
Every trading day has 4 pieces of data: the open, the close, the high and the low. The open and close don’t change, they are what the stock was trading at when the market opened and closed. The high and the low can change frequently during the day – we can only tell what they are after the close.
There is a saying: amateurs open the market, professionals close it.
Technical analysis typically uses closing figures. The other 3 figures are useful for deciphering the mood of the market during the day, especially pictorially via candlesticks, but the close is where the professionals have decided is the ‘’right’ value, and so that is what we use.
It is imperative for backtesting and having reliable results that the same data is used throughout.
There have been many trades that would have been a lot better, or worse, if we had used the open price or the high or the low. But we have to be completely objective and always use the same measure, so we use the one that the rest of the world uses: the closing price. That is generally accepted as being the actual ‘price on the day.
And So To Spain
I am afraid the sun and the sea have melted my brain and I have no insights or philosophies, other than summer is so much better than winter! ( OK, apart from skiing.)
This photo will explain why.