Analysis, Perspective, Trading
“Boom, Boom, Out go the Lights” –
Where Stocks and Bar Bands Meet
By Joe Duarte for March 25, 2018
Anyone who’s a fan of classic rock or bar bands who specialize in
the genre will recognize the two anthems for which the still active
blues rocker Pat Travers is best known: “Boom, Boom, out go the Lights”
and “Crash and Burn.” These two songs are the essence of the blues
featuring tales of lost love, infidelity, and self inflicted personal
struggles intermingled with searing guitar riffs. And, in timely fashion
given the recent action in stocks, they seem to be as good a description
of the moment and potential direction of Wall Street as any price chart.
Moreover, these songs may become especially personal to investors,
who bought the recent dip and perhaps even the subsequent price top
as they inspect their quarterly mutual fund and brokerage account statements
in about a week’s time. As a result, I would like to salute Pat for
his inspiration for this column and if he’s reading it, I’d like for
the prescient Mr. Travers to drop me an e-mail and tell me the titles
of any new song he’s working on, just in case I should be even more
cautious of the market.
Last week, in this space while alluding to the FOMC meeting and the
political situation in Washington DC among other things, I noted: ‘There
is an old saying on Wall Street; beware the ides of March. Of course,
that’s a reference to the fatal stabbing of Julius Caesar by his senate
“buddies” in 44 B.C. and its aftermath. Indeed, there have been some
dramatic events in the market and history in previous Marches. And
while the ides, March 15, have already passed, there is a certain feeling
in the air that the influence of this historical date isn’t quite done
I guess the ides of March did get an extension this year. So the
real question after a 1400 point drop in the Dow Jones Industrial Average
over a few days is whether this is the proverbial panic bottom and
swift turn around or whether this is the beginning of the highly predicted
but yet fully arrived bear market pranced out regularly in reports
and predictions by the perma-bears.
Market Breadth and Liquidity Are Scary
I hate to say it, but the charts look frightening. First, the most
indicator of the past eighteen months indicator, the NYSE Advance Decline
line (NYAD), has delivered the type of technical divergence which has
preceded every major stock market decline since 1987. This is evident
when one looks at the chart of the Nasdaq 100 Index (NDX, below) which
made a new high soon after the February bottom and compare it to the
NYAD’s complete lack of confirmation over the same period when it failed
to even come close to a new high, signaling the potential for even
worse losses awaiting in the wings.
Specifically note the following about the NYAD chart:
1) Since the 2016 electoral win by President Trump, the NYAD has
rebounded from every low point – usually a tag of the lower Bollinger
Band - to deliver a new high, until the recent February decline where
the line faded well below any major high point. This is a big deal,
as it is not just a classic technical divergence, such as what occurred
in 1987, 1990, 1999, and 2007 but it is also the disruption of a reliable
chart pattern that has stood four previous tests in the last eighteen
2) If NYAD breaks below the support area established near the 165.0
K line, we may see the market’s breath decline to levels not seen since
the summer of 2017 and perhaps worse.
3) The RSI indicator never made it to overbought, which means that
there were never any real buyers in the market and that the sellers
now have nearly full control of trading.
Nasdaq 100 (NDX) and S & P 500 (SPX) Deliver Technical
Over the last couple of weeks I’ve noted the negative posture of
both the On Balance Volume (OBV) and Accumulation Distribution indicators
(ADI) for the NDX and SPX indexes. Indeed as the Nasdaq 100 zoomed
to a new high the ADI and OBV were slumping, an indication that the
sellers were dumping stock onto the dip buyers. This proved to be correct
as last week’s swoon in both indexes, combined with the technical divergence
in the NYAD delivered confirmation that the market’s trend is now to
the down side until proven otherwise.
Aside from the generally negative look of the NDX chart, and the
soft look of both OBV and ADI, note the following: ROC, a measure of
momentum is crashing, suggesting that more selling lies ahead. Next
and perhaps more telling, raw volume (pink volume bars) on March 23
actually rose. This argues for further selling as the sellers have
few buyers to counter them rather than for the market to find support
at the 200-day moving average for NDX, which is likely the next target
on the down side.
The S & P 500 chart looks even worse. While NDX recently made
a new high – albeit a suspect new high – SPX never made it back to
its previous high and has now rolled over badly, closing at its 200-day
moving average on March 23. ADI and OBV are negative here too, although
raw volume did not rise, which may be worth keeping in mind, although
is hard to interpret at the moment. Finally, as with NDX, ROC just
crashed again signaling that sellers are in control and that this is
not over just yet.
We are in the Trading Zone
We are at a critical stage of this bull market. If the market finds
support within 3-5% of the March 23 close on SPX, especially after
a very dramatic selling climax and rebound, the bull market may survive,
albeit in a battered state. If the selling slows down but continues
unabated, we may indeed be in a new bear market, which could be somewhere
in magnitude between the 1987 and 2007-2008 varieties – perhaps delivering
a 25-30% decline before reversing.
But don’t fret. Successful traders are risk managers and in this
market staying out of the way is the best strategy. Thus having high
levels of cash, trading small, and having a short term time frame are
the cornerstones of surviving this bear raid and living to trade another
Finally, Mr. Travers, if you’re out there, I hope your record sales
rise as people get in tune with your anthems. And as the bar bands
say: don’t forget to tip your waiters and waitresses; they are working
hard for you.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
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