No One Rings a Bell at The Top

 

There's no magical indicator or chart formation to tell us that we have in fact seen the top in stocks. Like the perma-bears, many will try and predict the top only to be wrong year after year until it happens. Then they will tell you they told you so. This isn't very helpful. 

It's easy to zoom out and look at a monthly chart and surmise how crazy people were buying tech stocks in 2000 or not seeing the writing on the wall in the financial crisis of 2008. It seems obvious that price levels had gotten to extreme levels and a big correction was due. But guess what? In real time it wasn't that obvious at all. 

What I'm getting at is tops are more of a process than an event (I'm pretty sure I heard this first from Dave Landry who has written 3 books on trading/investing). The saying stuck with me once I took a closer look at the price action around the last two major tops.  

Let's go back in time to the year 2000 and look at the QQQ...

 

 

Yes, the initial collapse was cause for concern. The market dropped over 30% in less than a month but it was met with buyers near the 200 day moving average (a widely watched indicator helping to determine the longer term trend). What if you were not participating in this "hot" market and were waiting for lower prices to get in? This was your chance.

After a couple weeks price got back above the 200 day moving average and started to trend higher. It would've been very difficult to say with certainty that we had in fact seen the top. It would also be difficult to stay completely out of technology stocks. We all know how this plays out but lets take a look anyway.

 

 

Maybe things were different in the financial crisis of 2008? With the help of hindsight there should've been some indication that the market was going to crash. 

Let's go back to 2008 and look at the SPY...

 

 

Not exactly what I'd call an obvious top. 

The SPY did sell off 20% which was a clue that the trend had changed, but I'm pretty sure after that double bottom a lot of participants were feeling more confident that the worst was over.

If you had missed a good portion of the 90% gain over the last 5 years, this was your chance for redemption. And for those who sold near the top on the way up, you could now get back in at a discount. Fantastic!

Once again the 200 period moving average on the weekly chart acted as support and a nice double bottom showed up to sweeten the deal. The chart doesn't look that bad. No exhaustion gap or parabolic spike higher but once again this didn't end well...

 

 

Everyone knows about the tech bubble and the financial crisis and how bad stocks sold off, but it was only an event in hindsight. In real time the tops were a process that brought false hope with every rally, sucking in and confusing the most amount of participants possible. This is why successful investing is so difficult.

This leads to the million dollar question. Are we experiencing a topping process right now? If only someone would ring a bell to let us know. 

Having said that I'll leave you with a monthly chart of the QQQ and some questions to ponder. Is this a market that looks like it's offering a great entry point leading to higher prices? How does the risk vs reward look to you? Is there more upside than potential downside? 

 

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