As an investor, I follow a strategic process, states Zaheer Anwari of SublimeTrading.io.
Step One: Establish market conditions—bullish (buy), bearish (short), or stand aside (protect capital).
Step Two: Scan, analyze and shortlist the best high-probability assets to add to the portfolio.
Step Three: Execute a trend-following strategy that allows me to hold and compound winning positions for the duration of the trend (typically 12 to 24 months).
In this article, I will look at Step One—establishing market conditions.
To do this, I use the S&P 500 index as my primary market indicator.
The S&P 500 (SPX) declined by 17% from the high of August, where it found resistance at the daily 200 simple moving average (d200ma), to the low of September, where it is now finding support at the weekly 200 simple moving average (w200sma).
I would not ignore the importance of these two key moving averages regarding their influence over price action.
Below I have the weekly timeframe of the S&P 500. The black line is the w200sma.
Ignoring the 35% decline caused by Covid-19, the last time we saw the price break and close below the w200sma, which materialized into a bear market, was during the financial meltdown of 2008. The price then declined by a further 50%.
Since moving back above in 2010, the price has used the w200sma as support in 2011, 2016, and 2018.
The question is, will the w200sma hold firm in 2022 and force the price back up? If the price does break through, this will be significant, and when we will officially be in a bear market, the first since 2008.
Here Are the Possible Outcomes:
- The w200sma holds firm and gives momentum back to the bulls. A move back above the daily 200sma is when I will resume taking long positions. Note: As a trend follower, this is my bias based on historical patterns but I am still very much prepared for a bear market.
- The price confirms a bear flag below the w200sma, just as we saw in 2000 and 2008, and I start taking short positions. Applying patience for a bear flag is to avoid a fake breakdown. Note: Value investors buying stocks going for a discount will face significant losses.
- The market consolidates at this current price level before dictating further strength or weakness. Here we can only apply patience until the market dictates a clear direction.
Interestingly, the price has bounced by 5% since bouncing off the w200sma this week.
As usual, there is plenty of fearmongering across all media channels. The world is indeed facing challenges, but what's new? There are new, different, and repeating challenges every year.
In terms of price behavior, we see one of those natural corrections in the market that happens every few years. Why it is happening, we can all speculate. Whatever your conclusion, there is no getting away from the fact that it is happening based on price action.
We simply need to protect capital at certain times, allocate risk, and take positions at others. If a bear market is confirmed, I will switch my current stance of capital protection to shorting the market.
As investors, we must stay ready for all eventualities and be prepared to act when optimal market conditions, bullish or bearish, present themselves.
I continue to apply patience for now and focus on the forex market, which is displaying trending characteristics.