In my last article, I discussed how the pullback on the S&P 500 was nothing more than just that, a pullback.
The natural movement to the stock market is seasonal and tends to repeat. September has a history of being the weakest month of the year, so the declines of the last 3 weeks are not surprising.
Listen to your media channels, and you will hear a picture of doom and gloom. This causes panic and decisions that will lead to regret. Instead, understanding the seasonal movement of the stock market combined with learning to focus on the charts will result in you having a more objective approach, leading to a much better performing portfolio.
I have highlighted the double bottom price formed in September and October of last year when price initially dropped almost 11%, and the media channels were again calling a top and a market crash. The trend that followed moved nearly 26% once price broke out.
This September, price has dropped just over 5%, and the media channels are again calling another top and a market crash.
A better approach is to look at support levels and see where price is likely to pull back before a more likely bounce to the upside. Why is a bounce back to the upside more likely?
Because as the saying goes, the trend is your friend until the bend at the end. The trend has been bullish since 2009, and that is the direction you want to be going in. Pullbacks are not bends. And a bend is when price dictates a bend and not when you are scared into believing there is one coming.
Below I have the daily chart of the S&P 500. I have drawn in the support levels that are of concern to me. If price starts breaking through these levels, particularly the 200sma on the daily and weekly timeframes, we may see a bear market unfold as we did in 2000 and 2008. This is where risk management and exit management come into play. Whenever you place, you are accepting the risk in case the worst-case scenario unfolds. People tend to forget this. A good investor always focuses on their downside first and lets the profit come to them.
My bias, for now, remains bullish, and I will continue to hold my long positions on the best-performing stocks in my portfolio. Breakouts tend to happen towards the end of October which can then very likely result in the Santa Claus Rally. I will let price dictate and react accordingly.
Zaheer Anwari – Co-founder of Sublime Trading