Pullbacks versus Corrections: 8 Tools That Work

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Here’s a little “How to” tell if it’s a regular market Pullback versus a serious Bear Correction. I strongly disagree with those that claim market timing is toxic. Review this sample of eight simple stupid charts. These types of tools should help you side-step all major corrections. Focus on reviewing these charts at the major turns, you can effectively separate a pullback from a correction.

At the risk of boring a shit ton of Team Members who are familiar with these tools, I hope you’ll forgive me and let me indulge in a simple review. For those who have yet joined as a Team Member, go here.

The first caveat is that these eight charts are a systematic routine of stepping through in an orderly sequential fashion that results in a clear verdict on the market move being either a pullback or a correction. These eight sample charts alone do not render a verdict, but merely give a simple stupid glimpse into the process.

At the most basic level, a market can only exist in one of 3 states. An uptrend, sideways trading or a downtrend. Depending on your own personal trading/investing time frame, use the moving averages to render a decision on which of the three presently exists.

Team Day Trader Tools That Work 1

This tool shows us the NYSE and new highs minus new lows. Change the period (number of years) to gain insights into its behavior in past corrections.

Team Day Trader Tools That Work 2

I could make a case that this is a leading indicator (not a co-incident indicator). Draw a trendline on the unemployment rate. When the downtrend breaks and begins to move up, you needed to take note as historically this precedes a market correction.

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Stop and consider what you are looking at – a 10-year chart of three industries which are hyper-sensitive to present economic conditions. Hotels and occupancy rates reflect the health of our economy on a daily basis. Telecom usage as well. Entertainment expenditures too. Zoom in and look at the past two months. Presently, these hyper-sensitive industries have outperformed the NYSE by roughly 100%.

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This 20-year chart is similar to unemployment in that trend changes here should be noted. Due to the laggard nature of the data, look for confirmations and divergences between the markets trend and industrial production trend.

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It is a fact that earnings drive the market. This is a sensational chart to push out to 20-30 years, then zoom in to the past year. The conclusions are undeniable. When earnings increase, the markets increase. When earnings decrease, the markets decrease. Since September 2016, the earnings have been increasing.

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Market tops differ but the price patterns rhyme. When you review past market tops, a number of recurring Bearish signals can be seen. Review the expansion of the Average True Range (ATR) and On Balance Volume.

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This 20-year chart strongly suggests that housing starts (black line) is a leading indicator versus the S&P 500 (green line). In both the corrections of 1999-2000 as well as 2008, it broke trend prior to the market.

Team Day Trader Tools That Work 8

The bottom line is that the collection of market timing tools that I’ve assembled in this Blog (as well as many others, with the many suggestions of our user community) allows traders and/or investors to build an unusually accurate masterpiece of the stock market with which they are able to render a powerful “go” or “no go” verdict based on present market realities and not hyped-up news reports.

With that said, “We have great challenges and great opportunities, and with your help, we will meet them together!” – Jason

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