Let’s keep it simple.
Is the market ready to resume a rally or is there more downside? Well, the charts are saying one thing and sentiment is hinting at something else.
The charts are still saying we should stay cautious.
As you know, I usually try to err on the side of just letting price action and charts tell me what to do. No matter how much recession and trade war risk there is, the markets will ultimately discount it all and focus on punishing the side everyone’s on. So ultimately, I’ll pay attention to all of these headlines, but respect price action above all.
For now, charts still say we’re in week 4 of downward momentum, based on MACD and DMI. OK, fine. My rule of thumb of 4-6 periods for any momentum move says we’re right on the cusp of where weakness should end. Sometimes it works, sometimes it doesn’t, but we’ll play the odds and say we are in the time range of a turn.
The obvious risk is that with support sitting right below, even one more week of weakness could get nasty. Even so, it should be short-lived and odds still favor limited downside. Ideally, any bottom would be a process of lows and retests of those lows, which could drag everything out for a few weeks longer.
Sentiment tells a different story.
As much as I believe in just listening to the charts, I have no problem taking properly-sized bets before the charts all align. From a risk-reward standpoint, sometimes you have to take a little risk and take shots before everything is perfect. That’s what I did a couple weeks ago, scooping up some longs up well before a turn was confirmed. Admittedly, I made that trade anticipating it to be very short-term scalp, but I stayed in it, and am still in it.
Why? Sentiment is about as negative as I’ve seen in awhile.
Sentiment is a hard thing to gauge. Unlike charts, measuring sentiment is obviously completely subjective. Yes, there are “sentiment readings” but I find them to be random and unreliable. So I rely on my gut and my 20 years of experience. It’s obviously as much a guess as anyone else’s. But I’m seeing pretty much everyone posting charts predicting another leg down (just as my charts are saying). I’m seeing recession headlines everywhere – even the late night talk shows and politicians’ twitters reached fever levels of recession chatter last week. I’ll mark all of this noise as contrarian indicators.
So I’ll sit on my longs, knowing I’m trading in the face of my basic charts. Since it’s riskier, I manage that risk by sizing my bet accordingly and by having defined stops. In this case, the stop would be a break of the uptrend or support, with technicals confirming.
As I’ve been saying, since my intermediate-term view is still bullish, I’m still expecting surprises to be to the upside, until proven otherwise.
At the end of the day, I think we’re close to a tradeable bottom. If you’ve been following along, we side-stepped the bulk of the pullback by taking profits in early July and have been waiting patiently. Looks like we might have a chance very soon to catch another rally up.
In theory, the path I laid out last week is still the expected, normal path we should be watching for: oversold bottom, followed by a rally, then a final retest of the lows with positive divergence. That process may still need to play out (we might be in that rally phase), which will extend this whole process out for a few weeks (getting deeper into the 4-6 week time frame). This should still be in the back of our minds…and would be a gift. I would love a chance to get aggressive on long positions as the market makes new minor lows. Emphasis on “minor.”
I’ll post live trades on Twitter if things change. Make sure you’re checking @marketmind3 and I’ll mark any trades with the hashtag #marketmindtrade
3 THINGS ON MY MIND
1. My new line in the sand is SPX 2,940. If the SPX closes above 2,940, I think longs are much safer and opens the door for the bull market to resume. It’s a little bit of an obvious level, so I’d still be ready for some head fakes and reversals to shake everyone out.
If you’re not long already, I would be taking a shot nibbling a little at that level, just to have some on if the market wants to trap bears and go higher without the usual bottoming process. There would still be the risk of a revisit to the lows, but at least for my risk tolerance, I could sit through it.
2. Bitcoin is still bouncing around in a cage, trapped in this triangle. Technicals are still fading, so if I were to guess, I’d say we break to the downside next. I’m waiting patiently.
3. I posted a list of stocks on June 17 that I thought looked interesting as long ideas. Checking in on it, the list has been solid (VC, JD, TLRY, ATVI, SPOT, ANET, SYMC, WDC).
If you just bought this basket and held, overall it was up +9.8% vs. the S&P 500 down -0.2% during that time period. That performance includes TLRY -22%, which presumably most people would have stopped themselves out of earlier. WDC was a blowout winner +52% in those few months.
Just for fun, here’s another list of names I think look like good longs. Do with it what you want, I’ll be trading them in some capacity in my personal account. I won’t publish my actual trades (I’ll stick to mostly market directional bets that I’ll post on my Twitter), but we’ll check in on this list in a few months to see how it performs if we just buy and hold.
A CHART THAT CAUGHT MY EYE
SHAK – Shake Shack
Shake Shack has the best burgers (don’t argue with me). And it also has one of the best charts you can find.
Normally I use this space to highlight a chart where there’s a potential trade setting up. In this case, there’s really not a trade set-up I like for SHAK. Instead, I wanted to highlight it because its one of the case studies where my technical analysis process would have worked perfectly.
I focus on a pretty basic step-by-step stacking system to analyze charts. Anyone who has taken my course knows it: 1. Catalyst (trend/support/resistance), 2. Chart (chart pattern), and 3. Confirmation (technical indicators). Rinse and repeat.
SHAK was about as textbook as you can get.
1. Catalyst: Break the Downtrend.
2. Chart: Inverse Head and Shoulders
3. Confirmation: MACD positive and above the signal line, DMI flips to green.
And all the way up, bullish configuration of moving averages, no breaks of support, technicals confirming.
SHAK is up +98% since that weekly trendline break in February.
That’s a lot of beer (and burger) money. I wish it could be this easy every time.