Long term hypothesis

Today S&P500 successfully test 1040 and rebound, very positive sign to long? God knows. The only thing I know and trust is risk reward ratio. In a very long term, the only factor distinguish a good trader and a bad trader is risk reward ratio.

Theoretically, a trader will never lose a single dime if he do the right thing at the right time. There are only three things trader can do with the market, long, short or in cash. That mean if you are not sure or there are no substantial evidence to prove that the market will move to a specific direction. You should not open any position.

We are in a very critical market decision point right now. S&P500 either hold at 1040 and rebound or break down from there and get another support at around 990-1000.  There is no way to open a position at this critical juncture. It just like playing roulette in casino.

When I encounter this kind of situation, I will sit back and take a look at the big picture, that mean the longer term of this market. Which is the main theme I want to share with you today.

Above, you can see a very long term 160 months moving average support the last market crash in 2003. It also act as a resistance few times this year. Obviously, the support was broken on May around 1170.

The second picture above you can see the 200 days moving average, this is most widely watch as a indicator of market health. Also, it was broken at 1107 on May.

The last picture above is the 80 weeks moving average, which is a very good moving average to follow. You can see how beautiful it act as a resistance and support during the 2008 market crash. It almost touch the support around 997 which is the support I am watching right now.

I show you this picture because I want you to climb higher and have a better perspective.

I have two hypothesis about the current market.

1. The market will hold 1040, then rebound to the critical resistance which are 50 days, 200 days and  160 months moving average ( 1152, 1107, 1170 ), after that market will resume the second phase of this bear market.
2. The market will break through 1040 and drop further to 997 or lower, then rebound to the critical resistance which are 50 days, 200 days and 160 months moving average ( 1152, 1107, 1170 ), after that market will resume the second phase of this bear market.

I am still 100% in cash right now although I have a bear bias on the current market, I am leaning to the second hypothesis I mention above.