The 3 Stages of a Market Sell-off

CNBC wants you to buy, buy, buy! Make them happy that you listen to their MOPE, and buy, buy, buy! Only buy gold.

Call this article “the 3 stages of a market sell – off” or more realistically, how the bulls view market.

This is stage 1. See figure 1 a daily chart of the SP500 with the price bars wrapped in a Bollinger Band. At point #1, you have your first oversold reading when prices touch the bottom trading band. Oh my, the market has pulled back; there is concern amongst the bulls. But don’t worry all your favorite bulls are trotted out in the media to remind us what a great buying opportunity this is. The trading gods have blessed us with an opportunity to print money like the big boys. Jump in you are missing out on all of the fun.

Figure 1. SP500/ daily

fig-a-6.10.11.jpg

Well oops! Stage 1 didn’t work out for the bulls too well. That’s ok. We always have stage 2, and that is where the market finds itself now.

Stage 2 is seen in figure 2, a weekly chart of the SP500 wrapped in a Bollinger Band. And holy buy the dip Batman, price is sitting right on the bottom Bollinger Band (point #2). Concern has turned into an outright schvitz (i.e., a nervous sweat for those not familiar with Yiddish) as the previous call to buy the dip has been poorly timed, and instead of everyone talking about what a great time it is to buy stocks some are actually wondering why they are even holding these worthless pieces of paper. Nonetheless, the bulls are out there pounding the table that it is great time to buy, and their collective voice will only get louder. After all, the market is oversold and prices are sitting on the bottom Bollinger Band and this techical analysis worked great in the 1990′s but wasn’t too hot from 2000 to 2003, but what the heck, I am a bull and all I know is buy, buy, buy!

Figure 2. SP500/ weekly

fig-b-6.10.11.jpg

So stage 1 is buy, buy, buy when prices touch the lower Bollinger Band on the daily chart, and stage 2 is buy, buy, buy when prices touches the lower Bollinger Band on the weekly chart. And you guessed it, stage 3 involves the monthly chart. We are a very, very long ways from that occurrence.

Whether this is the time to buy, buy buy is anybodies guess. However, if you keep making the call, eventually you will get one right, and that is what the bulls like to do — keep making the call until they eventually get one right. I am as hopeful as the next guy and would love to see a rip roaring bull market, but I will let the data guide my investing. There will be a time to be a bull and pound the table.

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