Let The Market Catch Its Breath:
Last week I was interviewed by a major media outlet and said, I want to see the market pullback. At first the reporter was surprised and asked why would anyone want to see the market fall? I answered and said because it is perfectly healthy to see the market pullback after a strong rally. Over the past few weeks S&P 500 has soared to fresh record highs and deserves a breather which will set the stage for further gains down the road.
Shallow Pullbacks Are Healthy:
Just like we all need to sleep at the end of the day- the market needs to pullback after a strong move (up or down). As long as these pullbacks are relatively shallow in size (small % decline) and scope (they don’t drag on for months)- the market is acting perfectly fine.
A Note Of Caution: Don’t Chase Stocks
A note of caution, careful chasing stocks up here after a big move. Over the long term you will do much better if you resist the “urge” to buy just because stocks are up (a.k.a chasing). The market will pullback again- it is just a matter of when, not if. It appears the market is in the early stages of that much needed pullback.
Magnet:
Longstanding readers of my service, The Midas Wave, know that it is important to objectively analyze price action. One of the best ways to analyze price is to study where the market is compared to the popular moving averages. The most popular moving averages is the 50 day moving average (DMA). As a quick review, a simple moving average is a smooth line that is plotted on the chart that shows the closing price for the last X number of days. In this case, it would be the last 50 days. Another popular moving average is the longer term 200 DMA. That just calculates the closing price over the last 200 days. The reason why this indicator is so important is because it is based on facts, not opinions. No one can dispute where the market closed at any given time, but everyone has an opinion on where the market should close in the future. A little trick of the trade is that the 50 DMA acts as a magnet for the market. When the market is extended (far away from the 50 dma) one should expect a near term correction to occur which would help work off the over bought conditions.
Air Pocket:
Take a look at the S&P 500 and see where it is compared to the 50 dma line. Novice investors get caught buying AFTER a big move, but incorporating this trick into your analysis will save you a lot of money. That is why a pullback would be healthy for the market.
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