Before You "Buy The Dip" - Look At This One Chart

Authored by Charles Hugh Smith via OfTwoMinds blog,

Hello reverse wealth effect.

There's a place for fancy technical interpretations, but sometimes a basic chart tells us quite a lot. Here is a basic chart of the Dow Jones Industrial Average, the DJIA. It displays basic information: price candlesticks, volume, the 50-week and 200-week moving averages, RSI (relative strength), MACD (moving average convergence-divergence), stochastics and the MACD histogram. These kinds of charts are free (in this case, from StockCharts.com).

This is an ugly chart.It's ugly because the decline to date is still far above support levels (the 50-week and 200-week moving averages) and the indicators have only just started registering sell signals. This means that price will have to decline a lot more to test previous support and send the indicators to levels that signal reasonably low-risk entries.

In other words, there's nothing suggesting this is a buying opportunity in this chart. Rather, it suggests a decline of another couple thousand points would be perfectly normal in a weekly chart with a big fat MACD sell cross and sinking RSI and stochastics.

Even a decline of 6,000 points to 18,900 would be technically very typical of an over-stretched asset snapping back to long-term support.

Buying the dip is a good way to experience churning whipsaws. Up 350 points, then down 450. Nice if you can second-guess the trading bots, not so nice if you assume every dip should be bought because the market always rallies from every dip. Maybe, maybe not.

Something changed, and no, it isn't just the easy-money sell-volatility trade blew up. All the other easy-money sure-thing momentum plays are now in doubt: the buy the FAANG stocks sure-thing, the buy the DJIA sure-thing, the buy the New Nifty 50 (Boeing et al.) sure-thing, the buy emerging bonds, stocks and and FX sure-thing, the buy bonds because interest rates will continue drifting lower forever sure-thing, the buy utilities sure-thing (the 15% drop since December 1 put a dent in that sure-thing), the buy REITs sure-thing, and so on.

If the momo trends that enabled every trading bot to make money by buying the dip and selling volatility go away, how will everyone make money? The short answer is that it suddenly becomes much more difficult to make money and keep it.

God forbid that money managers and punters would have to actually do their homework and pick stocks based on fundamentals. And what happens when those fundamentals start deteriorating as "growth" slides into "stagnation"?

Hello reverse wealth effect. As everyone feels poorer (because their phantom "wealth" evaporated), then they're less inclined to borrow and blow tons of money that's not actually theirs.

In the meantime, check out the cool correlation of bat guano, the yen pushed forward 6 months, lumber futures, the Big Mac Index, and the LIBOR/bitcoin pair... the quatloo is a screaming buy.

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Comments

eclectic syncretist mtl4 Thu, 02/08/2018 - 10:40 Permalink

One could also simply look at the fact that the 10yr bond hasn't even hit 3% and the market isn't liking it, or that the Fed funds rate is only 1.5% and the market looks toppy. The Fed is now stuck pushing on the proverbial string. And the Fed says it's going to sell over two trillion in US treasuries off its balance sheet, in addition to raising rates 3-4 times in the next ten months? Not without crashing this thing down like a butane-filled Hindenburg!

In reply to by mtl4

IH8OBAMA Hugh_Jorgan Thu, 02/08/2018 - 12:21 Permalink

It's not the meager rise in rates that is concerning.  And, it's certainly not the chart displayed in this post.

What has to be weighed against the bull continuing was pointed out in a ZH article a couple days ago.  The FED is unwinding its balance sheet at the current rate of $30 billion a month and will be increasing that amount each quarter.  It's essentially QE in REVERSE.

 

In reply to by Hugh_Jorgan

conraddobler Thu, 02/08/2018 - 10:30 Permalink

All of life reminds me of that very simple game people play with a bat where you call dibs.

It's all good when you still have some bat to grab but then all of a sudden the other guy has dibs and you just fucking lose.

Everyone playing in a monetary system is playing a losing game where someone else already has ultimate dibs.

So all this horseshit is just horseshit, the guy running the money scam can lose 100 fucking times and ultimately win cause really when you own money and the right to make it, you own the world.

Don't be stupid people the market is owned by those who own money, they can make it do whatever they want it to do.

Gadocat Thu, 02/08/2018 - 10:35 Permalink

This is a dollar event.  You can not evaluate this with traditional MACD theory.  A crash in the dollar will result in a melt up.  You saw a shake out before the move.  There may be others, but the rocket will take off. 

balz Thu, 02/08/2018 - 10:36 Permalink

There was a "ugly sell signal" with "plenty of air below" in April 2017 as well. Just another proof technical analysis is pure bullshit.

Hugh_Jorgan Philo Beddoe Thu, 02/08/2018 - 12:09 Permalink

"Remember them there Hindenburg omens?  Yeah, technical analysis..totally fucking useless."

This is what makes us want everything to crash, so we can look toward a return to organic markets.

However, the reality is that until they outlaw HFTs (at a bare minimum) who's to say that there will be any change after a massive economic reset? All that will happen is the sycophants in the MSM will point all the sheeple at .GOV to create new sweeping controls to ensure that "this never happens again". We could end end up worse off than we are now in some respects...

In reply to by Philo Beddoe

taketheredpill Thu, 02/08/2018 - 10:46 Permalink

"the buy bonds because interest rates will continue drifting lower forever sure-thing"

 

Ummmm...that "sure thing" blew up the night Trump got elected.  

 

Right now watching US 10s test the top of the 1989-2018 downtrend channel.  If the risk asset bull market is going to continue then US 10s MUST break above 3.0%.

If US 10s don't break higher....just go back and look at what happens when US 10s test the top of the channel and head back down...

...like in 1994, 1999, 2007....

conraddobler Thu, 02/08/2018 - 10:46 Permalink

The next step in this grand illusion is obvious.

They are nearing the point where the cross winds of their hijinx will eventually kill the real world economy dead.

They all know this but that point while out there is still a ways into the future, but it is NOT unplanned for, this is all part of the plan.

It's like a crony lever to populate all positons of power with cronies.

This will come in very handy when they drop all the pretenses and just rule us all with an iron fist.

Why would they do this?

What the fuck do you think people like this do for a fucking living?

Trump is playing a role he's just controlled opposition, another faction leader that will preside over the conversion that's all he is.

When the time comes, always for your own good, then the switch will be flipped and we will convert to a command economy because they will have the AI to approximately pull this off.

It will not be close to optimum and there will be ZERO personal liberty but things will still lurch along with only a few people owning everything.

CAUSE THAT'S THE FUCKING PLAN!!!

U. Sinclair Thu, 02/08/2018 - 10:47 Permalink

The bots made a reversal.
They can do the math with rising interest rates.
The big remaining question: Is there a Powel put to protect the market???

taketheredpill Thu, 02/08/2018 - 10:54 Permalink

Central Bankers wanted to let the air out of the markets.

I'm sure right now they're thinking "so far, so good".

I've been managing money professionally since 1991 and I recall that once the momentum shifts, you get to find out where the exposures are.

The best part is seeing how far out over their skis people get and what kind of ingenious ways people find to shoot themselves in the head.

Son of Captain Nemo Thu, 02/08/2018 - 10:57 Permalink

Speaking of "dips"...

Most accurate comment on this thread and the selling and "buying" of BTC by none other then "free money" Max Keiser of RT America (https://www.rt.com/business/418206-keiser-roubini-bitcoin-bubble/)

"...it has been shown that Bitcoin price is the most manipulated thing on the world. ...big owners of Bitcoin sell/buy to themself trough many fake accounts to simulate transactions with higher prices. ...seems like max Keiser forgot to say that."

conraddobler Thu, 02/08/2018 - 11:04 Permalink

It's all rigged, all fucking rigged and have people ever once noticed that life, life itself, is very enjoyable and presents plenty of challenges on it's own without introducing the cunning deception of mankind into the mix?

Taming the earth is childs play compared to dealing with the deceptive powers of peoplekind.

Peoplekind are the problem.

I kind of love and hate people at the same time, mostly because they are so full of potential and so full of shit at the same time.

No one is fooling anyone anymore but themselves, when you cheat at solitaire you have won NOTHING you ignorant fucks.

We have more important things to do and you can never own someone's soul unless they give it to you.

You can kill me, take everything I have, but you will never get my soul.

NEVER!

Easyp Thu, 02/08/2018 - 11:10 Permalink

I hold gold and silver as a hedge yet the price is down not up which suggests the stock markets have further to go before the next bust.  If I am wrong gold going up should cushion my stock losses.