The Chart You Can’t Afford to Ignore

by John Lansing | September 11, 2012 12:05 pm

I first put my subscribers on “death cross watch”[1] in August. Right now, with the S&P 500 Index’s 50-month moving average at 1,158 and the 200-month moving average at 1,153, the lines remain incredibly close to crossing to create the ominous “death cross.”

The blue line is the 50-month moving average, and the red line is the 200-month moving average. When they cross, watch out.

This is truly a remarkable development, as we can go back to the 1930s and mull over more than 80 years of data without a monthly death cross sighting on the S&P’s chart.

But to give you an idea of what happens when a death cross occurs: In 1930, the S&P 500 was trading in the $25.90 range and dropped to an unthinkable $4.40 by 1932.

If we fast-forward to the 1940s, the S&P 500 formed a “golden cross” in which it has remained for the past seven decades. Now, nobody knows for certain what will happen if we get a death cross, but in more recent years when it has occurred on other major indices around the world, we’ve seen declines north of 30%.

The upside to these crushing drops is that after they occur, the index can resume a longer-term bull run.

The problem is, pundits and politicians are almost delaying the inevitable because they’re so caught up in the fundamentals — just like we were last week, with everyone hopped up on QE3, Draghi, deteriorating fundamentals, bond buying and the like.

It’s a lot like I when I was a kid and I acted up. Every time, my mom would say, “Johnny, wait until your father gets home.”

It was that threat of having to wait until my father got home that actually stopped me from doing whatever naughty thing I was up to. But that doesn’t mean I was ever able to escape the punishment that came when my father walked through the door.

That same “threat” has the market on its best behavior, but with even the staunchest of short traders finally shaken out of this market, there are few bears left. It appears I’m one of them, though by no means am I a perma-bear. I just can’t ignore how awful these charts look, despite how badly investors want to pretend that everything is fine.

I also can’t ignore bearish trends when we’re in a bearish trend. And I can’t overlook the potential that we’re facing a once-in-a-lifetime market event, even though the “experts” are so intent on pointing out, “Well … we do have Bernanke, who wants to get re-elected. And, yeah, he’ll probably do QE3. So, I know these charts look awful, but let’s just go long awful and hope that Uncle Ben bails us out.”

Despite the S&P’s push up in price to four-year highs, let’s not forget that the Dow didn’t hit those same highs. And don’t forget the underperformance of the S&P mid-caps. I can show you all of the things that aren’t happening.

But bottom line, investors can try to make the case that 2 + 2 equals 5 all day long, but I’m not buying it. From the S&P 500’s daily chart, to the weekly chart, to the monthly chart — no matter what language you speak, 2 + 2 will always eventually equal 4. At this point, the only question that remains is: When will this cross happen?

What I can say with all certainty is that before we see the bearish cross on the S&P, an event will precede it that will trigger an initial sharp drop. That decline will cause the moving averages, which are so close together, to finally cross.

As a trader, you need to know that I think market’s climb is on borrowed time. That’s why I’ve got my Trending123 stock traders defensively positioned in leveraged, bearish ETFs, while my Parabolic Options members are exclusively in bearish puts.

And my Power Trading at the Open[2] day traders and I have been using highly volatile, yet effective, weekly options in index ETFs. We typically focus on very short-term trades — ideally, just a couple of minutes — in the iShares Russell 2,000 Index ETF (NYSE:IWM[3]), the Nasdaq-100 Index (NASDAQ:QQQ[4]) and the SPDR S&P 500 ETF (NYSE:SPY[5]) to make our profits, so don’t be fooled that a declining market means you need to sit on the sidelines.

  1. “death cross watch”:
  2. Power Trading at the Open:
  3. IWM:
  4. QQQ:
  5. SPY:

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