How to Start Nibbling for a Near-Term Bottom.
You all know that I do not believe in predictions. I believe that we do not know what will happen in the market until after it has happened. I have been saying markets are oversold in the short-term for a couple of days now. But I have no idea when it will bottom.
I was asked the question what I do in these circumstances. I guess just saying that I am a trend-follower does not mean a whole lot. So, today I will go over very briefly what I mean and what I do.
Here is the SPY daily chart over 1 year.
It is quite busy and here is some description of what you see:
There are 4 simple moving averages - 10, 20, 50, and 200 period. I say period which in this case is days because this is a daily chart.
The green and the red horizontal lines are the weekly expected move levels.
The blue trendline is something I drew based on my analysis. We can see that price closed below it today.
Under the candlestick chart I have the MACD and the RSI.
This is my standard setup.
We can see that the RSI is in oversold levels. However, the MACD is still negative, and the moving averages are strongly bearish.
Here is how the hourly chart looks like over 30 days:
The patterns are very similar to the daily chart. So, I will not take any action.
Now, here is a daily chart of XLU:
Notice how oversold the RSI is.
Now, here is an hourly chart of XLU:
We can see that the RSI has indicated a reversal AND the MACD has turned positive. That is when I nibble and open a small, long position using options. Note that there is every possibility that the price will reverse tomorrow. In that case I will get out with a small loss (or maybe no loss as I already have a small gain - but the point is I will get out).
If the pricing trend continues to improve tomorrow, I will add more to my position until the time the 10-period crosses over the 20-period. Then at the first sign of a price reversal I will close my position.
This allows me to start taking a position at the first hint of a price reversal and allow me to increase my position as the price gets stronger. This way I do not have to guess, and, at worst, I get out with a small loss.
Here is GDX similar situation:
Long note for a weekday. But note that this is just an overview of my system. It is not detailed enough to be replicated. Someday I will write a more detailed note.
Also note that this is for very short-term purposes as markets look oversold and not to be confused with an overall approach. The markets are still very bearish, and we should believe they will remain bearish for now.