This weekend I focused on the LARGER, long-term picture of the stock market to make it overall easier for my brain to comprehend.
- Merely when "what" moving average crossed what moving average (on a monthly, not daily or weekly chart) would be a decent indicator of trend? I wasn't going for exact science here but more a common sense approach when it comes to the long haul. Just "when" should I bail and sit on my hands with my IRA? *This" unfortuantey is a topic for another conversation.
- The BIGGER question was at what point do I really want to jump back in and "buy on the cheap"?
I should explain that I trade based on 80% technicals (fibonacci combined with chart patterns) and only about 20% fundamentals but my trading style is to buy at a support rather than a breakout. This became my personal preference after having been "shook out" of breakouts once too many times over the years. This style is not for everyone but buying at support, I feel my downside risk is more clearly defined and I ride the stock higher before many others pile in. I'm notorious for buying double bottoms, wedges that have broken out and have come back to test support and even right shoulders at their bottom, as examples.
- In a correction, the 30month EMA has hands-down been support more often than not, then followed the 50m SMA unless there's a larger issue occurring. (click chart to enlarge)
- For example the "tech crash" of 1970. Not only was there "euphoria" on the future growth of computer companies, tech was trading @ 119x P/E (!), earnings were flat or nonexistent, some analysts such as Dun & Bradstreet felt techs boast of 30% earnings growth was a myth and there were also the near-fatal mission of Apollo 13 and Nixon sending troops into Cambodia. Selling can beget selling with one thing after another and with this 25% correction, the 200m EMA was support.
- In 1973-74 there was a larger correction thanks to (in part) the oil embargo where gasoline jumped 4x in price (and it's effect on consumer spending) as well as, of course, Vietnam. The support this time (what I'd call the buy of a lifetime after a 47% drop) was the 400m EMA............and this was support in 2009 as well.
- During the market "crash" of 1987, the 50m SMA provided the safety net after 32% was gone.
- In 2000-2003 (another huge 50% dump), the 200m EMA found huge buying interest.
Obviously there are many more examples and it tends to vary but ask yourself "where do you want to buy?" and even more importantly.......where is smart money buying? Even if I was dollar cost averaging, I wouldn't want to buy near a top and average down more than I would have to. Pension funds have that cash flow to buy at the top and hold losses for long periods of time - we don't!
Obviously don't take my word for it. Try it for yourself. Pull up a history monthly chart of $SPX and overlay the 20EMA, 30 EMA, 100EMA, 200EMA and 400EMA. Add a 50 SMA, sit back and scroll through time. In my opinion if you're a long term investor, these our orders should lie. Certainly a good portion of my portfolio will continue to be swing trades based on daily and weekly chart but for long/holds, IRA or what we call "drawer stocks", this is where it's at if you ask me.
Now..........where are you going to buy based on the current "possible" stock market correction?
Trade safely my friend