Is that the Bottom in the S&P 500?

• Posted by Greg Harmon
• on August 26th, 2015

The fall in the stock market has got traders that have been bearish (and wrong) for 6 years beating their chest like gorillas. Let them have their day in the sun. You called it, great, now what? Thankfully one traders wife finally gets to see her husband with a clean shaven face. So there are some good things that have come out of this move of more than 10%.

It may sound funny as a guy who looks at charts, since they are nothing but history, but I like to put the past in the past and look forward. No time for prolonged celebration if you win or deep sorrow if you lose. I grew up in the Lou Holtz school of behavior: Act like you have been there before. So I am looking at the last two days price action and trying to look for an edge going forward.

For most traders that boils down to is the market going to fall more, is it settled, or is it ready to reverse. This can frame the quick moves and individual stock set ups to look for. For investors the same question is relevant, but from a different perspective. With a list of stocks to buy at deep discounts, is it time to buy them or will the discounts get bigger.

So what is the answer?

Let me start with this. I do not know. I did write some thoughts about why I thought a bounce would be coming soon here, but even in that stated I don’t know when or if it will happen. What I do know is that the markets have moved higher all through their history and will continue to make new all -time highs. I just don’t know when.

With that said the price action Tuesday following the big gap down Monday was both constructive and horrible. Constructive in that it showed prices bouncing. Not bullish without a new high. But horrible with the last hour sell off to close at a lower low. Wednesday morning as I write this the S&P 500 is up again. But not yet even touched the bottom of the narrow range that filled most of Tuesday.

In the short term, for the moment, it looks like a range is building. Specifically the range between 185 and 195 on the $SPY, the S&P 500 ETF. A move over 195 would be bullish. It could start a major leg higher, or just be a Dead Cat Bounce as some think (they don’t know either). All you can do look to participate in upside, as long as it goes if that level is breached. A move below 185 is obviously bearish. Sure it could be a fake out before a reversal, but you have real money involved right? If so then you should be protecting against that downside event happening. Buying put options are one way to do that without selling your stocks.

I have been very public on my long term view that the market will go higher for you technical junkies that it is in Wave IV of a 5 Wave move higher that could reach 2500 on the S&P 500 at some point. But there is a lot of wiggle room in between. If this is the bottom it will have been a healthy reset to most indicators. If not, the long term thesis can still hold with a move down to 1800 or a bit more. In the meantime you have homework to do if you are an investor. Protect the downside and build a buy list. If you are a trader respect the range, and prepare for a break one way or the other.

Get my ebook, Markets for 2015 and Beyond, a long term forecast with all proceeds going to charity.

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