Chart Of The Week: Don't Fight Papa Dow

JC Parets
June 5, 2019

Life can be simple or you can make things complicated and noisy. It's up to you.

What business are you in? The business of trying to make money in the market or the business of making and/or consuming noise?

I was out in Greece on my honeymoon for a couple of weeks last month, but I was keeping an eye on what was going on. I love the market and I enjoy observing human behavior. So why should I completely shut myself off from something I like doing?

Now that I am married, I would very much like to keep my wife happy, and I also think it's important to get away (see here). So appropriately I shut things off and enjoyed my time in, what are now officially, my favorite islands in the world. It was funny because some of the locals in the Cyclades Islands were telling me how much they wanted to go to the Caribbean. I was like, "Naw man, stay here. Trust me!"

What I noticed from far far away is how noisy the market place can be if you let it. My friend Josh wrote an excellent piece this week about how he takes control of the type of media content he consumes. I thought it was really well written and I agree with almost all of what he had to say. Check out: Why I Don't Wake Up To The News. From beautiful Mykonos and Naxos and Santorini, I was checking in on the markets, because that's what I do, phoning into our desks to see what they were seeing and observing commentary on the twitter, from both intelligent market participants and noisy members of the media. The drama I witnessed was fascinating, especially looking at it from the outside.

Not just in times like this, but really every time, I think it's important to take a step back and really see what is ACTUALLY happening in the market. I think the best picture of what is truly taking place is the behavior of the Dow Jones Industrial Average. The way I learned it was, "Don't fight Papa Dow". The market doesn't always have to be trending up, or trending down. It doesn't always have to be a top or a bottom. Most of the time, it's just in the middle. And sometimes, like it has been since early 2018, the trend is actually sideways. And what's wrong with that?

Here is the chart of the Dow using my new favorite data platform Koyfin:

I've seen everything being blamed from the Federal Reserve, to Donald Trump to Trade Wars and lord only knows what other nonsense. These noisy media outlets are not here to help you. They are here to make things up to get you to consume their content. It's poison. But it will only hurt you if you let it. Check out this video I did with Phil Pearlman about this very topic: They're Just Selling You F&%*ing Buicks.

What is really happening in the U.S. Stock Market is incredibly simple. The demand for stocks over the past 17 months has yet to absorb the amount of supply near these levels. In other words, there are more sellers than buyers up here. And yes, I always get the smart-ass in the room that tells me that for every buyer there must be a seller. But the key here is that there aren't an equivalent amount of buyers and sellers at every price, which is why stocks move up and down. In the case of Papa Dow, it has taken, so far, 17 months and still no breakout. And that's okay!

Something I learned from one of my favorite technicians, Jeff Degraaf, a long time ago was to first identify what type of market environment we're in, before deciding which tools to give more weight to. In other words, rather than just take 'your tools' and always force them upon the market, first recognize which type of market we're in, to then figure out which tools to use next. In this market above, we're in a sideways range. Period. We're not in the media where we have to whore ourselves out to sponsors and fill 24 hours a day of content blatantly making up headlines to justify every 50 basis point move in the market. That's for fools.

Why can't we just recognize that the market is in the process of correcting a historic rally from 2016 through 2017 and some consolidation is very well-deserved. Would you argue it isn't deserved? Would you argue this behavior is anything but completely normal? Go back and study the history of markets for just 10 minutes. You will quickly see periods just like this in the past. Nick Maggiulli and Michael Batnick were recently talking about the future implications of markets just like this and I thought their findings were really interesting. Check it out here.

We at All Star Charts are still in the camp that ultimately the resolution from this consolidation will be higher. "The bigger the base, the higher in space", is how I learned it from charting legends Louise Yamada and Alan Shaw, who believe it or not told me they learned that from their predecessors.

But how long will it take? Who knows? I certainly don't. This is where patience comes in. Do you have it? Can you be in cash? Cash has been working brilliantly.

Do we need to make up reasons for this sideways trading range in stocks? I don't. Do you?

It seems pretty simple to me. It's taking time for the buyers to absorb this overhead supply. We've been talking about it for a while and nothing has changed.

Based on the chart above, we have now tested those levels 3 times. The Nasdaq and S&P500 charts look similar. So does the Global 100 Index. By many measures, the current bearish sentiment readings typically spark a rally. Will this 4th test of overhead supply be the one? Will it take a 5th test? The way I see supply and demand is that the more times a level is tested, the higher the likelihood that it breaks. Why? Because with each test of supply, more and more willing sellers will have already sold (regardless of their reasons). Eventually there comes a point where anyone willing to sell will have already sold. And that's when you get "the breakout".

In the meantime, we're looking for stocks showing relative strength during this period. When the selling pressure lets up, and these stock indexes break out (like I believe they ultimately will), those names already showing signs of institutional accumulation will most likely be the leaders. We have a list of those stocks for Premium Members Here.

I would love to hear from you. Am I keeping things too simple here? Am I missing something? Should I be gossiping more about the trump or the china or the fed?

I like my process. I like keeping my life simple. I was that media slave watching "business" tv all day a decade ago. I've come a long way since then.

Price is the only thing that pays. Price is the only truth we can trust. I won't fight Papa Dow. There is clearly still overhead supply trying to finally be absorbed by demand for stocks. It's taking time, which is perfectly normal. Do you have the patience?

Ping me and tell me what you think.

JC

 

Filed Under