We Lost The 21 ema This Morning....

You’re going to get 2 emails from me today, but I want to send out an extra note because the trend appears to be shifting. If you were here on April 4th I sent this out here when we lost the 21 ema at the first time this year in the chart below after-hours and we followed up with our first small selloff of the year. Now here’s the thing, we are breaking below the 21 this morning, it is the light blue line on all my charts and my barometer of when the market is in an uptrend or not.

I am believer that you press your luck when the market is over the 21 ema and when it’s below it, you hold onto your long term positions but add nothing new because we are in a period of weakness. We haven’t CLOSED below it yet which is what you need to see for a trend change, we have to see where the close today is, but we are below it this morning for the first time in almost 2 months. Today is also tricky because 3 of the 6 megacaps have reported and this afternoon we have 2 more in Amazon and Apple. Could they both have great reports and things change? Absolutely but anytime you are below the 21 ema your caution light has to come on and you have to start thinking about taking positions off if we close below there. This is how you avoid downturns.

Downturns do not come out of nowhere. I’ve written extensively on how every downturn begins with a simple breakdown of the 21 ema, put it on your chart and go back and look historically how much pain you would have avoided if you moved aside when the 21 ema broke. Don’t believe me? Pull up any selloff you want and look what would have happened if you moved aside the first day the 21 ema broke. Here is the covid crash below from 2020, that first close below the 21 the SPY was still over 320, it bottomed at 220 a few weeks later. The chart told you when it was time to exit because charts are the flow of money and the market did not reclaim the 21 ema for weeks. Even in prolonged downturns there will be recoveries of the 21 ema for you to go long and then they break again which is where you move aside again, go look at longer moves down like 2007-2009. There many moves back above then another breakdown

Now what are we looking at? This is the 4th move below the 21 ema this year. The other 3 have resulted in continued moves lower for a short while the 2 recent ones are in the highlighted circles below. Could this be an another? I have been pointing out to this bearish divergence building that I thought would play out post election, the election is just 4 sessions away, maybe it is starting to play out now? The next level we want to watch is the recent breakout at 565.16 as long as that holds the weakness may be short-lived.

What I know is, this isn’t time to panic. Stocks have gone up since the beginning of time, our society almost depends on them going up. Still, they do have small periods of weakness and making sure you know when that it is so you reduce your risky positions and leverage in those periods is very important. Could we close up over the 21 ema and this morning be nothing? Absolutely but I’m sending you this warning because as you see in the charts in this post, this isn’t a common event, only 3 times this year did we close below it and all led to a selloff. How shallow or deep will that sell off be I couldn’t tell you, what I can tell you is even if we close there today, at some point we will reclaim the 21 ema and a new uptrend will begin, look below how the day we reclaimed it in early September it led to a 2 month uptrend. Money is made as a long in uptrends, you press things, you leverage up, etc. In these small downtrends money is made either buying puts or just waiting for a new uptrend to emerge. This doesn’t mean close up your long term positions if today is the day, there’s tax implications with those, it means take off the short term trades you have that worry you and start selling covered calls vs long positions you intend to keep and generate some income in a period of weakness.

Everyone talks about how it is impossible to time the market, they’re wrong. It is very possible to see when we’re entering a period of weakness, it’s a simple moving average being lost, embrace that notion, the computers running the markets do. It’s always hope for the best but prepare for the worst. Hopefully Apple and Amazon save the day this afternoon, but if they don’t megacap season is mostly over and the market was warning you that a trend shift was unfolding……

Good luck today I’ll see you with the recap in a few hours.