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
Figure 3 – Growth of $1,000 invested in Dow ONLY after September Trading Day #13 through the end of September (1955-Present)
New Concern #5 – Daily Elliott Wave counts for SPY and QQQ are signaling the potential for a very sharp decline in the near term.Figure 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”.