Hoping for the Best (Preparing for the Worst)

  • SumoMe

It is Monday morning and the stock market is higher and that’s fine with me.  I like higher stock prices.  In fact, given the recent oversold readings from some indicators there is a chance that we have seen the “bottom” and that the next leg of the bull market is now underway.

However, as I wrote about in this article, I am “concerned” that another down leg – and a potential test of recent lows – may be in the offing for the stock market.  While I claim no ability whatsoever to “predict” the future, I do like to try to be prepared.

Keep a close eye on this current advance.  If it fails – for reasons I will detail in a moment – there is (at least in the opinion of one straining as always to remain objective writer) a chance that things could get ugly fairly quickly.  So my best advice (such as it is) at the moment is:

Pay close attention and be prepared to act

So here is what I see and one way to hedge against just such an event (some of this is updated from this article).

The Current Market Setup

Old Concern #1 – The major market averages are below their respective 200-day moving averages.200masFigure 1 – Major market averages all below respective 200-day moving averages (i.e., the trend is “down”

Updated Concern #2 – SPX appeared to break out to the upside from a small triangle and that breakout out may have failed.failed breakoutFigure 2 – A failed upside breakout often (though not always) portends trouble

Old Concern #3 – From the end of September Trading Day #13 (9/18/15) through the end of the month, the Dow has lost ground 40 times in the last 60 years with a net loss of -45%.2

Figure 3 – Growth of $1,000 invested in Dow ONLY after September Trading Day #13 through the end of September (1955-Present)

New Concern #4 – Weekly Elliott Wave counts for SPY and QQQ have completed 5 waves up.4Figure 4 (click to enlarge) – SPY and QQQ Weekly Elliott Wave (completed 5 waves up)

New Concern #5 – Daily Elliott Wave counts for SPY and QQQ are signaling the potential for a very sharp decline in the near term.5Figure 5 (click to enlarge) – SPY and QQQ Daily Elliott Wave (projecting sharply lower)

My ability to “predict” the future is essentially non-existent.  However (and fortunately) I can recognize “potential danger” when I see it.  Given the litany above and especially with the major averages all trading below their 200-day moving averages, it is critical to respect the trend and to prepare for a possible retest of recent lows.

That being said, it is also not necessary to “bet the ranch” on the downside.  Investors and traders can use options to “risk a little” to “hedge a lot”.

In my next piece I will highlight an example of one way to “risk a little” to “hedge alot”.

Jay Kaeppel

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