“Buy when there’s blood in the streets.”
We all know that old market saying. We also know it’s easier said than done.
The market capped off a wild week with a scary Friday dip, right when everything was about to turn bullish. The good news is, if you’ve been following my e-mails, we were somewhat prepared for this. We knew that the weekly charts were still arguing for a weak period of at least a week or two more.
So where are we now?
Let’s start with the extremes in negative sentiment.
In my opinion, we saw irrational bearishness building on Twitter, CNBC, etc. these past few weeks. We’re not talking about run of the mill, “Oh no, the market is down” chatter. I’m literally seeing headlines and tweets of “Broken market.” “Crash coming.” I’m seeing Wave 3 plunge analyses and targets as low as 2,520. Over the weekend, there were a handful of “Black Monday” predictions.
But let’s keep everything in perspective.
All this noise and yet…we still haven’t broken the March lows. We haven’t broken the May lows. Hell, we closed lower twice this month alone.
We’re less than 6% from the All-Time High. We haven’t yet closed below the 200-day moving average support or the May 31 low support. From a price action perspective, things certainly aren’t as bad as some people are making it out to be.
The hyperbole is fevered. The disconnect between what we’re hearing and where the charts are is insane.
Meanwhile, like clockwork, we hit this massive level of headline fear right as we completed the bare minimum of the 4-6 week period of momentum weakness I usually look for before a turn.
That’s an opportunity.
I’m looking to buy (add to my half-sized long positions). I realize I might have to be patient and that I might be early and have to endure some head fakes for a few more weeks. But I’m hunting for entry points.
It’s all about evaluating the different scenarios and putting odds on what I think will happen. In my mind, the odds still favor a resumption of the bull market and any correction being less than 10%. So I’ll stick with that scenario until proven otherwise.
If I’m right, this correction shouldn’t go lower than 5-10% from the highs. SPX 2,720 would be -10% from the closing highs, or down -4.5% more from Friday’s close. Ideally, if you’re already long like I am, we won’t suffer through all of that pain, and may even step aside opportunistically to see how this plays out.
Big picture, I’m a buyer on dips. But we don’t have to be completely reckless on which dips to buy. The market could still go down another 1%, 2% or even 5%, and still be following my expected scenario. So the strategy is to be patient and scan shorter-term time frames for possible entry points: daily and intraday trendline breaks and tests of supports holding, breaking above resistances and technicals turning back up.
One big reason to be a little cautious is the simple one: Maybe I’m wrong. I’ve been trading long enough to know that the best traders (and my own success) has never, and will never, rely on being right much more than half the time. Managing risk during the times I’m wrong is critical. So I’m pretty unemotional about chalking up a loss and waiting for the next opportunity. In this case, I’ll be eyeing a break below 2,740 or the May lows as decent places to step aside and wait it out.
If I’m right and we’re still in a bull market, it won’t be a big deal to miss the first percent or two up. I could still catch a bulk of a move to new highs if I buy after a bottom looks clearer.
But 2,740 is a little while away, and we might not even get there. With the pre-market futures trying to stage a rally this morning, we’ll stay open to any possibility. Including the possibility that Friday’s low is all we’ll get. A break above 2,935, with technicals turning up, would confirm that bottom.
In short, sentiment is on our side. The long-term plan is on our side. And price action and techncials could confirm at any second. So I’m still looking to be a buyer.
Keep an eye on my Twitter where I’ll post long entries I might be taking: @marketmind3
5 THINGS ON MY MIND
1. A few weeks ago I laid out the textbook bottoming process:
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.
We’ve now completed Phase 2. In an ideal world, we started Phase 3 on Friday and we either got that re-test of the lows on Friday, or we’ll get a minor new closing low this week. It could be the buy of the year…
2. That said, just because odds favor something, doesn’t mean it’s that easy. Looking back at last December, we had a “textbook” bottoming process setting up perfectly. Until it wasn’t.
So we’ll keep last December’s failure in the back of our minds. The good news is, I’m a big believer that the market tries to be as tricky as possible. The December failure is too recent (and too fresh in many traders’ minds) for it to repeat so soon. In fact, I’ve seen bears point to the December pattern all week. So let’s hope the market throws a little twist in this time.
3. One interesting bottoming pattern I remember distinctly is back in 2011. It’s a pattern I’m looking to see if we rhyme with during our current bottoming process. A big, choppy bottom with multiple re-tests before we launch up out above resistance.
4. The obligatory weekly Bitcoin check-in says: More of the same. In other words, nothing to do. I’m still crossing my fingers we finally get a dip to the $7,000 range.
5. For what it’s worth, my watchlist of bellweather individual stocks is bearish, but not overwhelmingly so. It had turned pretty evenly split between bullish looking charts and bearish last week, but it obviously reversed back to mostly bearish on Friday. There are still glimpses of bullish signs though. Many bellweathers like CRM and PLAN (cloud software momentum names), NVDA (the once go-to semiconductor growth name), and COST still remain bullish. We’ll keep out eyes on this broad list for an early sign of the whole market turning. If big names in software, FANG and large cap tech turn bullish one-by-one, we’ll respect that as another sign to get bullish overall.
A CHART THAT CAUGHT MY EYE
QCOM – Qualcomm
A simple set-up here for a stock I’ve always generally hated for no reason.
But the chart isn’t complicated. We tried to break above the recent weekly downtrend and might do so with any strength this week. This would inevitbaly come with the MACD turning up and the DMI still in the green already.
QCOM has a lot of risk from the trade war headlines, but if we assume the market is efficient, some of that is already priced in. On the plus side, a resolution of trade headlines and the longer-term 5G cycle are positives.
Strategy: Buy a break above that weekly downtrend line. Stop out if we break that uptrend. Simple.