As I was just getting started as a technical analyst, an early mentor of mine warned me that I was getting into the dark arts. The way he put it, “A technician’s phone always rings more in a bear market.”
Over my career I have witnessed this challenge first hand. When the market’s going up, that feels good, except everyone’s a genius in a bull market. No one is going out of their way looking for help.
When the market’s going down, investors seem more interested in gaining some insight from the charts. That’s good. Then again, the market’s going down. Which is not good.
My own emotional challenges aside, I wanted to share three quick ways to think about this market correction.
1) Focus on what is happening, not what should or shouldn’t happen
Investors often fall into the trap of “shouldn’t investing”, where they dismiss a price movement because it simply should not happen. Market X shouldn’t go down because of Market Y, or something like that.
In the end, we don’t get paid on should’s or shouldn’t’s, we get paid on what actually happens. Focus on the evidence, focus on price, focus on the charts. That’s what matters.
2) Corrections are a process and they take time
After an initial selloff, it’s easy to assume that was the worst of it and it’s time to jump back in. That may indeed be the case, but markets don’t tend to put in “V” bottoms. Bottoming is a process and corrections can take time.
In fact, there are two ways markets can correct: in price and in time. Often it ends up being a combination of both.
We may have seen the bottom of this correction. I find this highly unlikely.
For me, I’d rather see some indication of an exhaustion of sellers or an influx of demand before I want to consider the correction to be nearing an end. That means a higher low, a positive divergence, signs of individual stocks recovering, etc. Haven’t seen that yet in my opinion.
3) Keep an eye on market breadth
The industry lost one of the great technicians recently, when Paul Desmond of Lowry Research passed away. I enjoyed getting to know Paul over the years, and especially appreciated his focus on supply and demand.
Paul’s work focused on measures of market breadth based on the buying and selling pressure in the market. Lowry’s work using price and volume in advancing and declining stocks helped me reconsider how I incorporate market breadth into my routine.
So what are breadth measures saying right about now?
Pretty much all breadth measures I’m watching have turned negative. Many of them had been turning south in recent weeks, before last week’s correction. Until we see some positive signs from breadth, it would be difficult to believe that any rally has staying power.
Corrections are part of this game. How you handle a correction from both an investing perspective and an emotional perspective is up to you!
RR#6,
Dave
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