chart of the day
- In Trading Articles
- Last Updated: 17 January 2015
- By LA Little
Multiple times over the past year I have penned pieces telling you what to look for to know when a crash may occur. These articles have appeared when the airwaves are full of "crash talk" with the most recent one published just a couple short weeks ago when the markets were seemingly cratering. The structure wasn't there then and it certainly isn't apparent now so talk of a potential crash before it is possible is - well - ludicrous for lack of a better term. Fear of a crash is a byproduct of incomplete knowledge and unless you have studied crashes in depth having incomplete knowledge about them is reasonable which, of course, is why the fear spreads and talk of crashes appear on a regular basis.
As said before, crashes do not occur in a vacuum - they do have structure and the structure is what you are always on the lookout for. Of course, to be on the lookout for something, you need some clarity about what it is that you are searching for. Rather than repeat the message again, here are the two original articles that appeared on these same pages a year ago describing in detail the structure one should always be looking for; "Quit worrying about a 1987-style crash" and "Do not worry about a crash until it's time".
As for today's market, after yet another V-Shaped recovery from the lows to the highs, the NASDAQ is once more pushing new highs and making a fool of anyone that dares to disbelieve.
Do note that yesterday it did put in a short term pullback signal (a 2bar reversal) which argues for a sideways to down move on the next bar (today) but this is a very short term signal only meant for traders. The breakout on multiple time frames has extended the customary 2 to 3 bars given that it broke on out on multiple swing points and is likely to have done so on multiple time frames (won't know that until the close on Friday). If it does close over the highs on a weekly time frame, then one can expect 2 to 3 bars of extension on that time frame to come (2 to 3 weeks of sideways to higher prices). All of the above suggests a little choppy trading today and tomorrow but more "up" to come.
The same is true in most of these indexes and the same divergent market persists across the indexes with the tech stocks leading the way up, the broad S&P following and the Russell 2000 lagging badly. That was the same situation earlier this year that led to a large consolidation phase and with the strong indexes up 6 to 7%, the Russell remains negative on the year. That's huge divergence and continues to suggest that all is not well within the broader market's composition. In general, it argues that at some point a resolution will come (either small caps catch up or large caps come down) but there are no technical set-ups that I can see at this time to tell us which it will be. With the long and intermediate term trends solidly up (though extended) you have to keep erring on the bullish side.
In summation, the probability of larger retrace remains possible but unlikely while the probability of a crash isn't worth the paper it is written own. If you are overly worried about a crash, read the articles linked to above and become more informed and move from fear to the reality.
This article originally appeared on MarketWatch on Aug 21, 2014 1:29 p.m. ET