Caution Warranted Here…

Nothing is more exciting than finding the right investment and hitting the ball over the fence.  I absolutely love finding emerging technology stocks that generate returns of 100% or more over the course of a year or two.   When it happens, it can be glorious.

This is not the type of environment where investors should be swinging for home runs.  Actually, my exposure to stocks right now is almost fully hedged.

We are in the middle of a Federal Reserve meeting, with news coming out tomorrow.  It is always a bit risky trying to forecast market direction when you don’t have all the data.  I offer an apology  in advance – this is going to be a somewhat “gear-headed” post.  This is what the charts are saying:

1)  Long and Intermediate Term Trends:  I’ve backtested multiple trend-following systems on the S&P 500.

My favorite long-term system, the 20 and 30 week EMA (exponential moving average) went bearish in mid-august.    Over the last 10+ years, this has been very good at signalling major market turning points.  (all signals are marked with an oval).  Click on chart for better resolution.

Meanwhile, my preferred intermediate-term indicator, the 20 and 30 day EMA went negative in early August (top section, below chart).  This is a more sensitive indicator, but somewhat  more likely to give off false signals.

2)   Relative Momentum  is waning  (mid section, below chart).  Each recovery high for the market shows a slightly lower high for Relative Momentum – which measures the frequency of positive movement relative to frequency of negative movement.

3)  Volatility  is still very high.  The average daily range of the S&P 500 is around 30 points per day (bottom section, below chart).

Since August, we’ve been in a “falling flag” formation, with the current trading channel between 1160 and 1250.  We may also see resistance at the falling green line (50 day EMA, top section).  On the downside, we have potential to hit 1,000 if this pattern completes itsef.

Technical analysts are sometimes referred to as the “heretics of finance”  and reading the charts uses the same skill sets as old-fashioned fortune-telling.  On the other hand, it is what most active traders use on a daily basis.    I’ve found that technical analysis can be a good tool for identifying appropriate times to take on investment risk.

This doesn’t appear to be one of them.

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