The past two years we see the stock market steadily climb with low volatility.
All investors and traders have had to do is simply buy the pullbacks within
the stock market and riding the market to new highs. While this has worked
out very well to date, most will in for a big surprise when the market trend
reverses.
As of today, the AlgoTrades algorithmic trading system which uses momentum,
cycles, volume flows and advanced filters signaled that the market is now in
a down trend.
The algo trading system identifies intermediate trends within the market which
his idea for swing traders, or active investors looking to get the most of
out the market and their capital. These trends typically last 3-12 weeks in
length, meaning the US stock market is in for a wild ride.
The big question is if this is just another correction within the bull market,
or the start of something much larger. What appears to be forming is a major
topping phase (stage 3) in the Russell 2000 index. If this is the case we will
see a spike in fear that sends to vix (fear index) also known as the volatility
index sky rocketing into the 30s and possibly even 40s, similar to what we
say in 2011.
In 2011 the Russell 2000 index formed the same topping pattern we have today.
This pattern led to a 30% drop in the index within a few weeks. Will it be
the same or is this time the start of an actual bear market?
With the stock market being so frothy and in rally mode for several years.
We are due for a major bear market to cleanse the market of greed.
The good thing is that the Russell 2000 is a leading index. Meaning it typically
leads the US stock market, which is the SP500, & DOW. We need to watch
carefully as the Russell 2000 tests this critical support level of the head
and shoulders topping pattern it has formed. A breakdown will trigger mass
panic and selling in the financial market.
As of today the SP500 in the DOW still look to be in a strong uptrend at first
glance. But the underlying technicals and market internals are telling us otherwise.
The average investor is likely buying into this dip once again which they have
done for the past couple years. And with the average investor accumulating
more stocks at these lofty prices they will likely be the ones left holding
the bag when the market crumbles.
Since early April 2014 we have seen heavy distribution within the stock market,
though most people don't realize the distribution is happening, a trained eye
can spot when the big money is rotating out of certain high beta stocks, sectors,
and indexes.
In January this year we saw the bond market put in the bottom and form a basing
pattern. Bonds broke out of this pattern in early May and have been slowly
working their way higher since. It's just a matter of time before bonds jump
in value, but it will not take place until the stock market starts a correction
which looks to be only weeks away. Money will flow out of the stock market
and looks for a safe haven, which bonds are the most popular and predictable.
If we take a quick look at crude oil, it has been trading in a large consolidation
pattern for the past two years. Price is nearing the apex of this pattern and
a large breakout will happen in due time. With the economy slowly bouncing
bottom I feel a breakdown in crude oil will be the likely outcome.
Video: Here is my detailed algorithmic trading system analysis on everything
explained above:
Algorithmic Trading System Trend Conclusion
Short term traders should be looking to short any bounces in the market until
our algorithmic trading system signals that a new uptrend has started. Learn
more about how the trend and trades are identified in our last article called "Algorithmic
Trading Beats Out Market Sentiment, The Silent Killer" - Click
Here
Technical analysis and trading is half art, half science. There
are ways to fast track this process if you are a do-it-yourself type of trader.
A great book that provides the process of learning and what to focus on can
be found here: Click
Here
Finally, you can have the August issue of INNER-Investors
Monthly Newsletter Free: Click
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