If you’re breathing a sigh of relief because the Dow Jones Industrials rose a whopping 669.40 points (or 2.84% yesterday), don’t think you won’t have to hold your breath again.
We’re not out of the woods yet.
The market’s jittery, to say the least. A super-solid move upward on a Monday, which handily erases an ugly drop the previous Friday, could just be what Wall Street calls a “dead cat bounce.”
Here’s where the dangers lie, how to play this rally if it continues, and how to tell if it’s a head fake.
Listen to What the Markets Say
If there’s one lesson you must learn, it’s that the market does what it’s going to do, no matter what anybody says or predicts.
Sure, there are reasons that analysts give for the direction they expect the market to go in. And, most of the time, they make a lot of sense. But it doesn’t mean they’ll be right.
After the market’s made whatever moves it’s made – whether it’s over years, quarters, weeks, days, or hours – those same analysts will give better reasons for why the market did what it did. Because it’s always easier after the fact to dissect your subject when it stops moving.
The problem is that markets never really stop moving.
So what I do to figure out which way the market’s likely to move, especially over crazy volatile periods like we’ve been experiencing since February, is to listen to the market itself.
Yes, the market speaks. All markets “speak.”
They speak in a sign language that translators copy verbatim as technical analysis.
All technical analysis is, is a record of what the stock market, or any market for that matter, says it’s doing (intraday price action) and has done (closing price data). If you listen to the market, it will tell you what it’s thinking about doing next.
It’s not perfect, or even always right, because just like people change their minds, markets do, too.
Translating “Market Speak”
What’s got everyone worried lately is the market’s talking out of both sides of its mouth since February.
In price data terms, it’s frightening.
The big drop the Dow saw on Monday, February 5, 2018 amounted to a record point drop of 1,175 points (or 4.6%). As bad as that was, it was worse intraday. Before the market closed that day, the Dow traded down 1,597 points to 23,923, before closing at 24,345.
It doesn’t matter that the percentage drop wasn’t a big deal. The worst one-day percentage drop was 24% in October 1987.
What matters was the steep slide: the Dow traveled more than 22,000 points up and down from the open on Monday, February 5, 2018 to the close on Friday, February 9, 2018.
Now, that sounds like crazy talk.
But that was just the beginning of the market’s volatile language.
After falling 10% to 24,345 in the first week of February from all-time highs just made in January, the Dow rallied back to almost 26,000 by almost the end of February. Then it fell back to around 24,500 in early March. Then it rallied by mid-March to near 25,500. Then, just when some people thought it was safe, it tanked last week to 23,533.
That was a scream for help.
At 23,533, the Dow closed below the low it closed on February 5, which was 24,345. That’s 812 points lower.
But it gets worse. Friday’s close was actually below the intraday low on February 5, which was 23,923. It was 390 points below the intraday lows of the record one-day point drop in February.
Look at this one-year chart of the Dow. The blue line throughout the chart is the Dow’s 50-day moving average. The horizontal red line going back to October is the Dow’s support, which happens to also be a double-bottom. And the green line from the highs down to near 25,000 is the Dow’s resistance.
Clearly, we’re far from out of the woods; assume that the wolf lurks behind every tree.
The story the market’s telling right now, to anyone who’s listening, is that it is weak. It’s weak, and it couldn’t hold onto the old February lows. It plummeted through them and closed far lower.
But, before making new lows, the Dow tried to rally a couple of times. And each time, it made lower highs; it couldn’t get back to the highs that just preceded it.
That’s a sign of weakness.
That red line that connects the lows this year and goes back to October is now the Dow’s support line. If the Dow breaks below that, especially if we rally for a while and can’t climb higher, and then break that support, it will probably mean the Dow’s got a lot more to go on the downside.
On the upside, the Dow must get above the green resistance line, which is now around 25,000, to be “safe” again.
Keep Your Eyes Peeled
If the Dow can’t get above 25,000 and keep its head above water, and instead gets there and falters back to test support, things could get ugly.
The market’s saying we’re not safe yet. It’s telling us what is good and bad for it. That is what you have to listen to.
If you want to try and catch this bounce, go ahead. The market could break out above resistance and head higher. Just make sure you use stop-loss orders and raise them as the market (and, hopefully, your stocks) rebound higher.
If you see the Dow headed back to test support, you better have your protection in place.
This is not to say that there aren’t possible winners within this volatile market… Very few are able to trade well, but there is always a way to find the profits.
And when I say “profits,” I’m not kidding. I’m talking about six triple-digit wins and over 1,722% in total gains (including partial closeouts) in just 2018 alone…
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Get yourself and your portfolio in perfect position, and you’ll be able to handle (and profit from) whatever the market does next.