Current position for Active portion of portfolio: SELL – S.T.A.Y. Plus™
Market setup for disproportionate response to bad news……
Last week we mentioned that an intermediate top was likely around the level of 4224 – 4250. Since then, the market has been moving without a tremendous amount of conviction toward those levels. However, what happens next in this scenario?
For the last six months the market has been moving very slowly upward without strong volume or conviction (see the "Monthly" chart below). This shows that there is a lot of hesitation from investors who are staying in the market and/or adding money to the market. This type of hesitation is usually accompanied by a sizable number of these investors placing “stop losses” just below the lows of the last six months. These “stop-losses” are "market sell orders" that will be automatically triggered if the market falls below these levels. These “stop losses” are like cans of gasoline that will ignite if the market receives some sort of bad news that causes an initial sell-off that is strong enough to reach these levels, then there will be a massive cascade of selling, not necessarily because of the bad news event, but simply from these six months’ worth of stop-losses being executed all at once.
Imagine what would happen to the value of your home if several of your neighbors decided that they all needed to sell their home in the same week. This kind of selling can cause exceptionally large drops in value in the market, which can then lead to panic selling. Only time will tell, but if this scenario materializes, we are ready and in the correct position to benefit from this potential reaction.
Weekly Chart with Fibonacci Retracement Percentages (from the all-time high)
Monthly Chart with Fibonacci Retracement Percentages (from the all-time high)