Does this seem familiar? We're kicking off a new week on the market pretty much on the same foot we ended on last Friday. Right out the gate, the major indexes each shed more than 1%, which resulted in their worst respective starts to December trading since 1980.
From doubts about the bullishness of global growth, continued tariff tensions, and worries about an aggressive Federal Reserve policy coming on Wednesday, there's just so much weighing upon the market.
Now, all of the major indexes - the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 - are in correction territory, having lost all of their gains for the year.
But there's even more than all of that going on, and you'd drive yourself crazy if you tried to pay attention to the noise each and every day.
But I'm here to make things clear for you and, more to the point, make sure you're steadily profiting no matter what's happening...
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There's an Exception to Every Rule
One of my Ten Commandments of Trading - one that happens to be my absolute favorite - states, "The trend is your friend."
I love this Commandment. It's simple, easy to gauge, and easy to follow.
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But there's a follow-up to the phrase that's just as important as the first sentence. And people don't mention it. That's to say, "The trend is your friend..."
"... until it isn't."
Folks, the bottom line is that the trend isn't a friend right now, at least not for bulls or buy-and-hold investors.
If you're trading my research recommendations, you're doing well - building on the "perfect" month we closed out recently. When you're nimble, when you're trading, even a brutal downtrend (like the one I see coming) can be a friend.
But if you're not, to be brutally honest, it's starting to look as though the trend could turn into a flat-out enemy pretty soon.
The 50-day moving averages on all the major indexes are trending lower and actively applying pressure to stocks. Despite that, investors are still deluding themselves into believing the trend remains their friend. It's not...
This tried-and-true gauge is either broken, or traders are still looking at the market with rose-colored glasses, expecting the market to just shoot through the roof any day now.
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But the charts are starting to say "No, the market's not shooting higher."
Oh, and by the way, the VIX doesn't break.
But the most bearish aspect of all of this is the bigger-picture backdrop. Right now, the S&P 500 is setting in to close below its 20-month moving average - that's right, its T-W-E-N-T-Y MONTH trendline - for the first time since February of 2016.
And no one's talking about it. But I am. I guess the mainstream talking heads will get to it eventually - probably once we've been below it for a few weeks and millions of investors have been thoroughly cleaned out.
This long-term moving average is the technical "line of demarcation" between a bull and bear market.
Traders should be running for the hills or, at the very least, jogging, but they're not.
A break below the 20-month almost always starts a three-month battle that either turns into a great time to buy stocks as the market rises into a refreshed bull run or marks the beginning of a true bear market.
(As an aside, the average bear market lasts 1.4 years and shaves 41% from the value of stocks.)
Am I trying to scare you? No. Absolutely not. But it's my job to keep you ahead of the crown; I'm just letting you know that we're not done, not by a longshot, with the kind of volatility that has made this market "feel" wonky lately.
Believe it or not, a bear market will actually lower volatility. It too is a "trend," just not in the direction that most people like. But that's why my readers and I love options. My systems allow us to cash in on any trend - up, down, or sideways.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.