With last week marking the end of the month, we took a deep dive into the near and long-term picture surrounding the market.  If you missed it, CLICK HERE to go directly to last week’s update on the state of the market.  This week, the markets have taken a negative turn, volatility has started to pick up again, and it seems that the 45-day sprint off the December lows has started to become a bit fatigued.  Has the new month shown us a market that has reversed into an uptrend?  Let’s take a look…

I’m going to start this week’s article off with a little education.  Each one of the rectangular marks you see in most of my charts are called “candlesticks.”  They were given that name because they look a lot like candles, where the body of the rectangular part represents the “candle,” and the upper or lower points that stick out represent the “wicks.”

While these charts can look a little messy, what I love about candlestick charts is all the great information you get, packed into one little candlestick.  Look at the example below.  If the candle is “hollow” or “empty” (think “air” or “light”) that means the market opened at the bottom of the candle and went up throughout the day, closing at the top end of the candle.  If it’s “filled” or “solid” (think “heavy” or “down”), that means the market opened at the top, but then went down throughout the day, closing at the bottom (like the example below).  The “wicks” as one of my mentors (Charlie Kirkpatrick) calls them – or “shadows” in other schools of thought – simply represent the highest point of the day and the lowest point of the day.

We won’t get into the plethora of candlestick chart patterns, but let’s just end this little Investments 101 by saying that candlestick charts can provide us with extremely valuable information, especially in the short-term.

Case in point, look at the chart below, which is the S&P500 as of Thursday’s market close.  As you can see, we have four “solid” (heavy) candlesticks for each of this week’s market action, which means that all four days were down thus far.  The first one opened up right at the red-dashed ceiling of potential resistance from Oct/Nov/Dec’s highs and failed to breakout yet again.

Let’s step away from the candlesticks now and make a couple other observations about the market today.  Aside from the 4th failed attempt to get above the ceiling mentioned above, the market also closed back below its 200-day moving average (i.e. – 200-day trend) again, which is not a good sign.

Granted, it’s early yet, and I’d want to see another couple closes below the rose-shaded area before I’d get too worried.  However, when you combine the weakness in price movement with the fact that momentum continues to struggle to get above the healthy level of 70 (in the bottom pane in the chart, above), it definitely creates some concern.  Also notice that momentum has crossed below the unhealthy 30-level a few times this past six months, which is also not a positive sign for the market.

If you go back to last week’s article and update on the market and scroll down to the second chart, you’ll notice that the market has now back into the red “danger” area and out of the “caution” zone (albeit barely).

Our exposure to the stock market remains extremely low, highly defensive, and until the risk vs. reward landscape improves, creating better, lower-risk setups for potential growth, we’ll remain conservatively positioned in all our portfolios.

When the market starts to show us that it’s exiting this flat, trendless range with a negative bias, we’ll change our approach along with it.  Until then, it’s a game of patience and calm.

Till next time…

Adam