Your Stock Market Analysis
August 16 2017 - Is Your Analysis Boxed In? Good for You By Dr. Van Tharp Trading Education Institute
Last Wednesday, I proclaimed for the entire world to see here on Tharp’s Thoughts weekly newsletter that the markets just didn’t want to go down yet. Then Thursday (8/10) gave us a down day of greater 1% for only the 13th time since February of 2016.
I didn’t actually receive any e-mails telling me that I was a bonehead. But I know some of you were thinking it.
But for most readers, one more big down day added to the few over the last 18 months wasn’t much of a surprise. You already knew that we’ve been in a grinding bull market since that Feb. 2016 double bottom. And with the minor exceptions modest pullback as a result of the Brexit vote and another one due to pre-presidential election jitters, the market has hardly pulled back at all. In fact, the market’s modus operandi for the last 18 months has been: push up, form a sideways box, push up, make another box. Lather, rinse, and repeat. Here’s what it looks like on a chart:
I’ve written about these boxes frequently in this space, so we already know that the boxes containing sideways/directionless price movement give a touch of challenge to us traders.
Which brings us to why I mentioned the stinkin’ boxes in the first place.
Today we’ll use those boxes for something other than shouting about this “Do nothing market” (attach colorful language here if desired). Really, the big question is this: Does the big one-day drop and all the geopolitical rigmarole surrounding the bombastic leader of North Korea mean we should do anything different with our portfolio?
Strangely and wonderfully, the answers lie with our infamous boxes. Let me explain…
I’ve used our boxes to show price channels for congested trading but — they also show us important support and resistance areas. How those box support lines function will tell us whether we should react to North Korean news — or any other news, for that matter.
Small drops in the market (like last week) are to be expected — even in a grinding bull market. I’ll go so far as to say such drops are necessary — they are the market’s way of breathing out after a long breath in.
The key to distinguishing a small drop from something bigger is understanding how far down is too far. And that’s where our boxes can help. Let’s go to a shorter-term chart to see what I mean.
In the chart, we can see that the down day from last Thursday took us back inside the May - July box. The bottom of that box will provide significant support, but is only 3.3% below the all-time high made on eight days ago (8/8).
What would it mean for your positions if the market traded down to the bottom of that box? Absolutely nothing. A 3.3% pullback is very routine.
How about a drop to test the support presented by the bottom of the bigger, February to May box? What would happen with a 6.9% pullback? There would be weeping and gnashing of teeth among those who have grown accustomed to the rhythms of the grinding bull market. But once again, a 6.9% drop would have almost no influence on our market outlook.
A close or two below the bottom of the February-to-May box, however . . .? Now that would get my attention. Why? Because that could set markets up to try for a full market correction. In technical analysis terms, a “correction” is defined as a 10% pullback. And below the bottom of the Dec-Jan box, things would get really interesting. I’ve marked that level on the chart above for reference. The only thing meaningful about a proper correction would be that it would clear the way to test the pre-election close.
For me, there is absolutely no change in the tone of the market as long as the S&P cash index stays above the 2400-2410 range. Below that level, we’ll start looking at a more defensive posture if we challenge the bottom of the February to May Box.
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