Today was a really interesting day in the markets. Opportunities to learn important lessons, and reinforce fundamental skills were plentiful.
The market opened this morning in a gap down situation. This means that when the bell rang on Wall St. at 9:30 AM to signal the start of trading, the SPY opened up lower than yesterday’s close, at around a price of 140. See the chart below.
That opening price on the SPY chart can been seen as the bottom of wide open portion of the farthest right candlestick figure on the chart below. The SPY continued a steep slide after the open, the lowest price point of that slide being marked by the lowest point of the thin line portion of the candlestick, otherwise know as the tail. After that low point, the market reversed and continued to climb for the rest of the day, filling the gap between yesterday’s close and today’s open, and then continuing to power along on a high volume trade to close above the 50 DMA ( 50 day moving average, the red line). Note the above average volume represented by the taller green bar on the bottom of the chart. The open space in the candlestick means that the closing price was above the opening price and the green color means it closed higher today than yesterday’s close.
This pattern is a sign that the buyers are in control of the market direction for now, and there is more clarity about where the market participants want to move the prices… higher.
Yesterday we closed with much uncertainty, below the 50 DMA acting as resistance to higher prices, and with a bearish close to the day’s trading at lower prices and increased volume of distribution of stock.
It was smart risk management to protect against the loss of hard earned profits that were made if you had them running from last Friday’s reversal. Your goal should be to own stocks that are moving higher in price, and exchange the stock for cash when the prices are losing value. If you were stopped out today at the open and were back in cash with more dollars than you had one week ago, you made money in the market and congratulations.
What to do now?
It is pointless to talk about why the market may go up and down, as there are always convincing arguments to both sides. A smart investor reads the chart to decide what to do and when. We can see a healthy SPY chart on both the weekly and daily views below. The prices continue to appreciate, the attempt to push the market lower was thwarted, and prices are above the key moving averages. This is an all clear sign for the most part. A few words of caution. The dramatic swings in price have not proven that they are about to calm down. There can be more volatile days ahead until a more quiet and predictable pattern is the norm. Just compare the relative calm of mid August on the chart to what we have had the past few days.
Bottom line is that it makes sense to put dollars to work and buy some stock, but proceed with small position entry buys, and only on the best charts. Always have the trade planned in terms of where your line in the sand may be if the expectation for higher prices fails to materialize
Let’s look at some charts to help develop a sense of what you should look for.
There are thousands of stocks to look at. How do you even begin?
I like to look at the IBD 50 list of top stocks available at IBD.com for a great selection of quality stocks. IBD does a great job of filtering out the diamonds from the coal.
IBD’s top stock these days is DDD seen in the chart below. This designation does not assure you that if you buy it you will make money. It just means it is a good company with exceptional growth prospects which tend to offer the kind of risk reward for capital appreciation investors look for.
Do you buy DDD tomorrow?
From my perspective, today’s action in DDD shows very positive accumulation of stock driving the price above the range that it was in for the past few weeks. Ideal behavior in a stock you already own.
But if you get in tomorrow will there be a repeat of today? Where do you place a stop? Looking at the chart, if this is a stock you want to own, and you see this push higher on volume as a sure signal to get involved (particularly because the overall market wants higher as evidenced by the SPY action,) buy some stock. If you have $1000 to allocate to this one position, perhaps buy $250 worth. Place a stop below today’s low point in case the stock does not act as expected, and buy more shares as the stock climbs in the days to come. We can talk about how to exit a winner in the coming days.
Below are some addition charts to consider. Ask yourself: Is the chart indicating strong buyer accumulation? Is there resistance overhead from potential sellers of the stock? Is the stock so far above a moving average that it will have to correct and come down soon? Has the rug been pulled out and the Chart now “damaged,” in need of some time to repair and stabilize before a march higher?
We will talk more about these issues in the days to come.