When I wrote for the Italian edition of International Business Times, I’ve alarmed many times the investors to not going short on the US market. There were no reasons for doing so. I felt obligated to wrote these articles since many “gurus” warned that the market was about to collapse. They said so in 2011 and then in 2015, when the Chinese economy gave some signs of slowdown. And now they are doing it again.
Since Trump arrives at the White House the US stocks gained momentum (again). And then again many start to warn for an imminent sell-off. Is this another false alarm or it is really going to happen?
Should we go short? What the monthly charts tell us
The Trump’s rally may looks impressive but if we open a monthly chart we can realise that it is coherent with the medium-term trend. Let’s have a look at the monthly chart of S&P 500.
As we can see, the S&P 500 index is moving within an upward trend channel since 2008. The prices tend to remain within this channel: when it hits the lower trend line we have a rebound; otherwise, when it hits the upper trend line we have a little correction. But we have never seen a trend change. The same goes for Nasdaq and Dow Jones.
Back in 2015 the bullish trend lost momentum and the indexes started to go sideline. It was in August when the investors began to worry for a China’s market crash. Back then, I was quite surprise to read such alarming articles on many important newspapers. This article of The Economist, for example, is full of negative rhetoric. It forgot to mention that in the summer the low volumes could amplify the movements. All experienced traders know that. If we look again at the monthly chart we see that the drop was significant but not to the extend to reverse the trend. Indeed, the indexes remain within the bullish channel.
In 2016 the US equity markets recorded their worst start to a year record. And we had many good reasons to be worried: the Brexit referendum; the instability within Europe; the world economy slowdown. Then again it was like a market crash was imminent. However, people who focused on bad news lost a big opportunity to jump in the market.
Go with the trend, never go against it
This is a basic rule in trade but it is also the most easy to forget. I’ve seen many trying to anticipate the market, despite they were already familiar with trading. They start to accumulate short positions in the hope to catch the big drop. But it is a path which leads to ruin.
Now let’s back to the monthly chart of the S&P 500 and focus on the last two candles. Do you see some signs of reverse? There is absolutely nothing here. The body of the last candle is still within the previous one. The index need to break the lower trend line to reverse the trend and we are still far from this level.
What can we expect in the next few months?
If we look closely at the monthly charts we see that the S&P 500 is about to test the upper trend line, while the Dow Jones is testing it and the Nasdaq has already broke it.
This bring us to think at two possible movements: the S&P 500 breaks the upper resistance and the bullish trend accelerates; the S&P 500 hits the resistance and we enter into a new sideline phase. In the latter case we can expect a test of the lower trend line. But again, if we don’t have the breakup of this support there’s no meaning to talk about the bear market.
It is true that we have many reasons to worry and the summer is not over yet. I’ve already expressed my pessimism on the US economy in this article, but the market doesn’t works like that. I will come back on this later and I will explain why the market goes up despite many variables many point to a crash. Meanwhile, stay safe, stay with the trend.