When “dumb” money acknowledges its limitations, it ceases to be dumb.
Gold. Silver. Oil. China…
Everywhere I look I see falling knives.
Ten years ago I would have been reaching out to grab a few of these “bargains”.
Today, I look at my charts (in this case, 2 year charts) – and see just how much money they’ve saved me from losing (more on that in a moment). Here are the charts:
Thank goodness for that!
Looking at them again today cures me of my temporary urge to jump in at these “low” prices.
Could we see these same patterns play out in US stocks? Absolutely. Here’s where things stand as of the end of last week:
It could be that we’re seeing a false positive here. I can’t rule it out. But I definitely have my doubts.
Question: Is there ever a right time to catch a falling knife?
Answer: Yes. After it hits the ground!
A good example of a falling knife that fell to the ground and was ready to be picked up is Altera (ALTR).
Altera had roared out of the gates following the 2007 – 2008 market crash and risen over 200% in a couple of years before falling precipitously and stopping out in late 2011.
The Smart Moving Average (green line above), however, kept us out of Altera’s various bounces of the next few years until it was clear that this knife didn’t have further to fall.
Finally, in late 2014, the Smart Moving Average started to turn up and the Re-Entry Rule was finally confirmed.
A more recent Re-Entry Rule example is EWI – the ETF that tracks the Italian stock market. EWI was stopped out in October 2014 but the trend has resumed upwards and a Re-Entry Rule was recently triggered in July 2015.
Intriguingly, in light of this week’s pending interest rate announcement from the Federal Reserve, we’re seeing a similar pattern in the yield on the 10 year Treasury.
Interest rates could finally be on the rise. This week should be interesting.
So the next time you’re tempted to catch a falling knife, run a quick check in TradeStops Pro to see if the knife has hit the ground. If the Smart Trailing Stop has been hit then wait for a Re-Entry Rule to trigger. You won’t regret it… and you’ll still have all your fingers.
To still being able to count to ten on my hands,