Could This Be the Beginning of Good Trade Location?

In last week’s Alert, we introduced the concept of “trade location,” a term that simply refers to establishing a good entry point for any equity position you enter. Well, Tuesday’s pullback in the markets could be the first signal that we now are approaching a good trade location in the broader equity markets.

Let’s review here what’s meant by a good trade location, as this concept will be one we use repeatedly in the weeks and months to come. Getting a good trade location refers to buying a stock, mutual fund or exchange-traded fund (ETF) before it’s gone too far above both its short- and long-term moving averages.

If we look at the chart below of the S&P 500 Large Cap Index (SPX), we see that the index is well above both its short-term, 50-day moving average (blue line), as well as its long-term, 200-day moving average (red line).

Buying into the S&P 500 right now does not give you good trade location. Now, that’s not to say that you can’t make money if you buy into an S&P 500 fund right now. But what it does mean is that you stand a far greater chance of making money by buying the shares once they pull back toward a much better trade location.

I think that if we see a 5% to 10% pullback in the S&P 500, it will finally set up the good trade location I’ve been looking for. If this does happen, it will not be the end of the current bull market. Rather, I think it will be your chance to add money to your broad-based equity holdings.

In the weeks to come, we’ll be watching closely for more signs of good trade location, not just in the S&P 500, but also in various market sectors that are showing good trade location — so be sure to tune in each and every Wednesday!