The uncertainty continues as the S&P 500 slumped 2.5% by the end of trading on Thursday. The start of Friday saw a 1% gap down and further weakness totaling 5% since Thursday at the time of writing.
The CPI report is likely the catalyst behind today's weakness, but what is the bigger picture for the stock market?
I am a big believer in waiting for closing prices for a candlestick.
- Short-term, I look for the daily and weekly closing prices.
- Long-term, the monthly closing price.
The end of trading today will give us a closing price for the day and the week, which will give us a more unambiguous indication of what we can expect through the rest of next week.
Institutional money also tends to come in the last hour of the day, so the daily candlestick can finish the day with a totally different outlook.
Below is the monthly timeframe.
Are We In A Bear Market?
Despite this recent weakness, it is still too early to call a bear market.
The price is currently trading below the $4.000 round number but above the low of last month and last year. We need to see these levels cleared before we can confidently call a potential bear market and start taking short positions.
Are We In A Bull Market?
Overall, yes, as the bull trend since 2009 is still in play despite this correction. Yet we need to see the price find support and show a degree of recovery before we want to start buying into the stronger performing stocks. Price breaking and closing above the daily 200 simple moving average will be a conservative indication of a recovery. Note that the price is still trading above the weekly 200 simple moving average preserving the bullish bias.
Below is the weekly time frame.
For now, my stance is to continue to remain on the sidelines and allow price to find its footing and establish a clear trend direction. A hallmark of a good investor is applying patience and protecting capital.
Investing is not like a job, a mistake that many make. Money cannot be made through the financial markets like a salary, which is why people turn to day trading for disastrous results.
Money is instead made in periods.
During periods of trend, milk the market for everything it is giving out. Be aggressive but apply solid risk and exit management principles, and you will be rewarded handsomely. Let the profit come to you.
During periods of correction, stand aside and protect your capital and profits.
As the saying goes, sound trading is simple but not easy. The most powerful principles are simple to learn but executing them consistently is the challenge.
Make the right decisions, and your portfolio will look rosier than ever. Plus, you have a skill set you can pass on to your loved ones, a skill set the schooling system will never teach.
Now that is a legacy to be proud of.