Well, that was fast.
Things can change quickly in the market. Good traders let the market tell them what to do, and during this past wild week, the market told me to take some shots on the long side and hold on. I posted my trades on my Twitter (@marketmind3).
Admittedly, I was initially just following the plan I mentioned in last week’s email: The market should be in sell mode for a few weeks, with opportunities to take shots both long and short for quick 1-2 day trades. I nibbled at some long positions Monday, expecting to hold only for a quick bounce.
However, Monday’s huge selloff triggered enough extreme readings to make me consider that the bulk of the price lows have been seen:
So Monday really saw some off-the-chart extreme technicals. Is it enough for me to be confident we’ve seen the bottom?
The answer is…maybe.
Typically, when a stock or index makes a short-term low, I look for a repeated pattern:
Phase 1. A price low with extreme momentum readings.
Phase 2. A bounce with enough time to set-up momentum divergences.
Phase 3. A re-test of the areas of the low, or a slightly lower low, with positive momentum divergence.
That’s the textbook pattern, and we may have already completed it. We had the Monday sell-off. Then on Wednesday, SPX opened down hard in the area of the Monday low, then rallied strongly the rest of the day.
In my mind, that action looked close enough to consider it a complete bottoming process.
On the other hand, the time spent rallying was a little too fast (2 days), so its possible we are still in Phase 2 – the initial rally off the lows. In this case, a re-test of last Monday’s low is still coming. And as we discussed before, technicals still say we’re supposed to have a couple more weeks of weakness. If this is the scenario we’re in, I would look for us to linger and test these highs for a few days this week before heading back down again. Either way, when we do sell off again, I wouldn’t expect more than slightly lower lows at worst.
In either case, for now I’m willing to hold my bet on the long side (with reduced size). If we fall again this week or next, I’ll be looking to add, as we would be approaching the 4-week time frame for this bear period.
If you’re not long already, what’s the ideal strategy? In my opinion, the set-up isn’t great right here for a low-risk long. Ideally, you wait for a re-test of the lows and buy there. Otherwise, if the market has bottomed, unfortunately the re-test is behind us and you’ll have to wait for an opportunistic mini-dip as the market moves higher.
5 THINGS ON MY MIND
1. Instead of obsessing over millions of charts (charts that can convince anyone of any scenario), I like to simplify things and just pick the 2 or 3 charts I find most compelling for the current scenario. In this case, I’m focused on the massive technical momentum capitulations in December and this past Monday. The December readings point to a rally that could last well into next year, and Monday’s charts point to a resonable chance at a near-term bottom.
2. While I often preach being patient and waiting for a falling market to start turning up before trying to go long, there are benefits to taking a shot before everything lines up perfectly. In the case of my long positions from Monday, my entry price gives me the luxury of sitting through a potential near-term sell-off or re-test of the lows. It wasn’t a complete catching-a-falling-knife situation though. A few things triggered my buy: positive MACD divergence on very short-term 5-minute charts, the sell-off hitting the 5-day mark on the daily MACD (right in line with my 4-6 period rule of thumb), and just my gut feeling that bearish sentiment got extreme too fast.
3. Many of my subscribers are inexperienced traders, and the one thing I’ve always noticed with inexperienced traders in general is how they underestimate how fast the market can move and how often you have to be flexible. Despite the market technically still being in sell mode, I’m open to the idea of the market rallying right out of it faster than anyone expects. This kind of bear trap situation would be typical of an intermediate-term bull market, which I still think we’re in.
4. Strictly speaking, my new line in the sand for SPX to go back into confirmed bull mode is above 2,965.
5. Bitcoin. I might miss this latest rally. In keeping with the trading mentality theme of this week’s e-mail, sometimes you have to be willing to miss out on trades. Fear of Missing Out is a dangerous trading weakness for most people. With Bitcoin I can usually control my FOMO – I just know too much about how easily it is manipulated, especially while I sleep. I’m OK waiting for the safest, most obvious set-ups.
Chart-wise, its bullish biased again, but there are warning signs as the technicals aren’t strongly confirming.
A CHART THAT CAUGHT MY EYE
CGNX – Cognex
Cognex has been a name I made money on during their run up from 2016-2017. It was up over +400% in that wild year, and I was able to catch a lot of it.
Since peaking in November 2017, it has spent the last few years in a grinding downtrend, with tradeable multi-week rallies the whole time. It looks like its setting up to see another one of those rallies now.
If it can break the downtrend since March, we have MACD momentum indicators turning up for at least a multi-week rally.
Fundamentally, they’re a robotics and automation play, and I like their position in a decent market. I’m most interested in the company’s vision systems – essentially automated, robotic manufacturing systems for all sorts of end markets. It’s a long-term, steady market that will continue to grind higher for many years. They recently guided down their earnings, citing a weak macro environment for autos and industrials spending. While the global economy will continue to show weak spots, I’m letting the stock action guide me as to how much has already been priced in.
Strategy: I’ve already nibbled a little, but its a more obvious buy if we break into the green area. I would stop out somewhere if it breaks support in the red range. Adjust to your own risk appetite.