In this morning's Profit From the Pros Steve Reitmeister asked us "Am I supposed to be scared of this pullback?" I think across the board most of us agree and aren't afraid at all. But it got me thinking, when would I be scared?
First of all, let me tell you it takes a whole lot to scare me. During the financial crisis I sat across the desk from some very worried faces as their portfolios were down nearly 40% on the year. Need a quiet place to think? Try a bank lobby in early 2009. I have lived and breathed some very scary markets. If you've watched me on the round table you'll see I have a lot of scalp showing to prove it.
Now that we can take emotions out of the picture, where do we get scared? I like to look at the charts to give me this emotionless opinion. I have a few of them that will offer up a greater understanding.
Short term I look at monthly pivot points on the S&P 500. Pivot points are 7 levels calculated based on the prior month's high, low, and close. By using last month's values these levels serve as points of reference throughout the trading month. In total you have what's known as the pivot point, 3 levels of resistance above it and 3 levels of support below it.
Now before you call this technical voodoo and a self fulfilling prophecy think about this. Using data going back to 1960, the S&P 500 hits its monthly pivot point 80% of the time. That is a large enough sample size to make this statistically significant. Where is this month's pivot point? 1821
Looking at a daily chart you can see that the market has a long way to come down before it hits the bullish trend line support in the high 1700s. Even if it violated this trend line, that doesn't spell eminent doom for the market. Maybe we would be range bound for a bit rather than a downwards death spiral everyone is so worried about. Another key level that everyone looks at is the 200 day moving average. Currently that sits at the same level as the February 7th intraday low at 1737. I know 110 points on the S&P 500 sounds like a whole lot, but in today's market it's really not that much.
It's easy to get caught up in looking at day to day price movements and daily charts. When I'm in need of prospective a peek at the longer term picture often times pacifies my paranoia. In this case the weekly chart dating back to 2005 helps make sense of the madness. Using the same analysis I use on a daily stock chart and applying it to this chart we have the market firmly in an uptrend. Support sits in the mid 1700s. Stochastics are in an overbought position and have been for the better part of a year now. If this was a momentum stock I would say buy the dips or if you're antsy buy the breakout to the upside if it happens. It would take a violation of the 25x5 SMA to make me think otherwise.
There's one other part of this chart that caught my eye. The topping process that took place in 2007. You have a sharp dip down that touched the 25x5, just like we had in early February. Then the market rallied, dipped again a second time, but the second time it dropped below the 25x5 and retested the previous low. Then you had a retest of the high, the market exhausted, reversed and lights out. This helps me with my clear answer to where I would be scared.
1. A drop down to retest the early February low at 1737
2. A rally back up to new highs
3. A reversal at the new high - Call it 1905
So there's my nightmare scenario. But to simplify it, I'm scared at the February low of 1737.
What are your thoughts? What level on the S&P 500 do you need to see to be scared?