We Are Vulnerable to More of a Decline and We Should Remain Aware of That

There is a reason to throw the caution flag up in this market. Let's start with one of the basic indicators I like to use to help keep me on the right side of the market. On the daily charts, the moving average combo I like to use is the 5/13 ema combo. I'm not going to say this indicator is right ALL of the time and on all charts, but if you look at this daily chart of the SPX you can see for yourself if watching this combo can be helpful. You can also overlay these averages on other charts and it will be obvious if this indicator has any value on that particular chart. It has worked well in the SPX so far. I'm not saying that this is the only thing you need to analyze the markets, but it's a very helpful tool.

If you look at the daily SPX chart below, you will see that a high % of the time, when the 5/13 ema is in a buy mode with the 5 above the 13, the market trends higher. Conversely, when the 5/13 ema is in a sell mode it trends lower until it flips back to the upside.

With the limited data we are looking at on the chart, the only time we saw some real follow through on the downside was after the February highs were made. Note that recently we saw the 5 ema cross below the 13 and this tells me the market is vulnerable to the downside. Does this mean that we will see another decline similar to the decline we saw after the Feb highs? No, but it does tell us that we are vulnerable to more of a decline and we should remain aware of that.

Now let's look at something else that my daily chart is suggesting... we watch for our next time/price decision. First let's talk about some timing factors. On this chart I have two cycles that came due on Friday 9/11. I'm also seeing a cluster of cycles between 9/15-9/16 via the timing histogram seen below the chart. This overlaps the other outright cycles due 9/16-9/17. What does this tell me? Well, I want to anticipate a possible low and reversal back to the upside within this time window. Maybe Friday's low is key. What we have to watch for next is whether or not we start to see any swing trade buy triggers. I would like to see the 8/34 ema cross back to the upside on either a 15 or 30 min chart before focusing on the buy side again. At this point the 5/13 is still in a sell mode. What this tells us is that if we do start to see our shorter term buy signals against the timing decision, we should play it tight since we remain more vulnerable than usual. If you want to be super conservative, you can wait until the 5/13 ema shifts back to the buy side on the daily chart.

As far as price is concerned, one other thing that I want you to see is that the recent decline in SPX is right now very similar to the other prior larger swings. They are not "equal", but they are similar for sure. These swings are illustrated on the chart and the larger declines were the 275.11 point, 267.47 point and the recent is 277.64 point into Friday's low. Since this decline is similar to the other two, this is another reason to anticipate a possible tradable low/upside reversal. It's very important not to ASSUME that we will see the reversal. We do want to wait for reversal indications before considering the buy side again. If we don't see them...prepare for more on the downside instead!

If you need help with TRIGGERS please watch this video.

If you would like to learn more about my trading methodology, please watch this.

At the time of publication, Caroline Boroden had no position in the securities mentioned.