Is it time to go long on the US stock market?

by | Dec 28, 2018 | Stocks/ETFs | 0 comments

The US stock market has been dropping recently. In the last three weeks, before the recent bounce, the drop on the S&P 500 index was more than 16%.

You may be wondering if after the last bullish candle it is now time to go long, and the downtrend is over. Let’s discuss it.

From a technical point of view, the 50 MA (Moving Average) is below the 150 MA, both sloping down. At the same time, the price is below the 200 MA, that is also sloping down. This means that the market is in a downtrend. Hence, it is not the ideal time to look for long opportunities with a trend-following strategy.

However, the situation may be interesting if you are using a countertrend (mean reversion) trading strategy or a long-term investing one:

  • if you use a countertrend trading stragegy, you may look for a temporary bounce up. The goal is to take profit before the market resumes the downtrend, that is a likely (but not certain) scenario
  • if you use a long-term investing strategy, this may be a good time to accumulate shares of great companies. In fact, they can now  be bought at a discount price. Of course, it would be better if the entry is confirmed by some bullish price action. Alternatively, you employ a DCA (Dollar Cost Averaging) approach where you invest the same amount of money regularly. This way, you can ignore the price action.

The main point here is that regardless of the market conditions, you can identify opportunities. However, it is crucial that you follow your strategy and do not change it to “fit” the market. For example, suppose that you bought some shares of a company using a short-term trading strategy. You should not hold it after a big drop and justify this choice by saying that it is now a long-term investment.

Respect the rules, and you will save a lot of money!