Stock market crash: time to buy stocks?


*This was written as of Thursday’s close.
In yesterday’s market study I said that the U.S. stock market would probably fall a little more. Upon further analysis, I said that the S&P would probably fall below its 200 dma to at least 2729.
Lucky call or not, that’s exactly what the S&P did today.

If you’re a long term trader/investor, then this is a decline to ignore. It never ceases to amaze me how people think that the world is ending because the stock market fell 7% (which happens twice a year, on average).
If you’re a short term trader, the question is obvious: should you buy?

Start buying now by scaling in

The key to trading is focusing on risk:reward.
As I said yesterday, these sort of mini-crashes don’t usually resolve themselves in 1 day. The market usually chops around (sometimes with a bullish momentum divergence) for 1-2 months before heading higher.
With that being said,

  1. The medium term risk:reward is very bullish.
  2. The short term risk:reward is mixed (because bottoms are a choppy process), but it leans bullish right now.

Here’s the data for why stocks will go up

For starters, the S&P 500 is now more than -3.8 standard deviations below its 50 day moving average (i.e. massive gap down below its lower Bollinger Band).
As you can see, this is EXTREMELY bullish for the stock market medium term and long term. And for those who think that the stock market will “crash like 1987”, this signal came out AFTER the 1987 crash.

Meanwhile, the S&P 500 is down 6 days in a row, while falling more than 2% during 2 of these 6 days. In other words, a bit of panic selling.
Historically, this marks EXTREME FEAR in the stock market. This happened at a lot of medium term major bottoms for the U.S. stock market:

  1. August 2015
  2. August 2011
  3. February 2009
  4. October 2008 (after which the S&P made a big 20% bear market rally)
  5. etc


Balls-to-the-walls short VIX?

VIX (volatility index) continues to spike. VIX is mean-reverting.
VIX’s 9 day RSI is now above 90! Historically, this pretty much marks the top in VIX…

… and bottom in S&P.

Momentum is extremely oversold

Contrarian momentum indicators are extremely oversold right now.
The S&P’s 14 day RSI is now below 18. This means that the U.S. stock market’s short term downside (over next 1-2 weeks) is limited.

Meanwhile, the S&P’s 5 day RSI is below 4. This is as low as it gets, and the S&P almost always rebounds over the next few days.
However, “extremely oversold” RSI can lead to more choppiness in the short term (i.e. bullish RSI divergence).

Sentiment

Sentiment is starting to exhibit “extreme fear”. (Sentiment is a contrarian indicator. Extreme fear = bullish).
CNN’s Fear & Greed Index is now at 5!

The Fear & Greed Index is now lower than it was in February 2016 and February 2018!

Conclusion

When the market crashes:

  1. Stay calm and unemotional
  2. Focus on facts and data
  3. Focus on risk:reward
  4. Know your trading plan/model, and stick to it.

Right now, the facts and data are telling us:

  1. Could the stock market fall some more in the short term? Of course. Nobody can pick the exact bottom.
  2. The short term risk:reward leans bullish.
  3. The medium term risk:reward is even more bullish.
  4. The road higher will not be easy. There will be a lot of chop along the way.

Those in the Membership Program can see how we’re trading the stock market’s crash.
And lastly, some funny things to brighten your day

CNBC and Donald Trump

CNBC has FINALLY decided to deliver their “Markets in Turmoil” special tonight. Experienced traders now that when CNBC does this, it’s a good contrarian sign to buy (they’ve delivered this report at a lot of market bottoms).

Meanwhile, Donald Trump is raging about the stock market (and the Fed).
Historically, when CNBC releases “Markets in Turmoil” and Trump starts to rage, the stock market tends to bottom. That’s pretty much been the pattern from 2016 – present.
Meanwhile, the stock market has made a “vomiting camel formation”. Time to run for the hills guys 😉

And lastly, here’s the web traffic for BullMarkets.co today (notice how it’s only at 7 pm). The last time it was this high was the exact February 2018 bottom.

Click here for more market studies

10 comments add yours

    • Yes I would, except I don’t trade VIX, so I don’t know what the best vehicle for it is (options? shorting VXX)?

      • You could buy $SVXY if you want to “short” VIX without actually shorting it or buy put options.

      • Hey Troy,
        you are doing great on your website – thank you for that! Keep it up! I wanted to ask you what is your reason to stay away from trading VIX? I am a novice trader and still learning – VIX seems quite easy to trade on a first look – shorting via options or direct VXX short came up in my own “investor-noobish” mind, when I saw its movement… so why experienced investor/trader like you stay away from it?
        Thank you.

        • VIX as a market is easy to predict. But I haven’t found a good vehicle to trade yet.
          The problem with VIX ETFs: crazy ETF decay.
          The problem with options: when VIX is very low, future options have a high strike price (i.e. people are already expecting the price to spike).

  1. Nice Job Troy, thank you!
    Have you ever studied the se of fear&greed index as a contrarian signal for short term trading (i.e. buy when it is too low?)

    • Hi Carlo,
      No I haven’t. I’ve only seen pictures of it over time. CNN doesn’t release the historical data for their Fear & Greed Index

  2. Hi Matt,
    Can you please send me the link to where I can see that Dow Jones stat?
    I don’t think a visit to the February lows is likely.

Leave a Comment