MARKET SUMMARY (8/4/19) – HOW LONG WILL BEAR MODE LAST?

The market can turn very quickly, and it did that last week.

After two months of near relentless rally, the S&P 500 reversed quickly and it looks like the bears will get a chance to try to assert themselves.  

The warning signs were there, with the most recent highs showing negative momentum divergence, just waiting for a trigger to turn back down. Once it turned, as is often the case these days, the move was pretty swift. My caution a few weeks ago ended up being right and hopefully my subscribers had a heads up.

So the market is in sell mode. Support has been broken and weekly technicals have turned down, implying we should be looking for a few weeks of weakness (let’s say 4-6 weeks). As I write this, S&P futures are down another 26 points overnight.

Despite my bullish long-term bias, we’ll be flexible and take what the market gives us in the short-term. This is not a time to guess. In my mind, there are still multiple possibilities, so we’ll stand on the sidelines and let the market tell us what to do.

When the market turns down and technicals roll over like it did this past week, two things can happen – it can go down and get oversold enough to bottom or it can go sideways and work off its overbought condition with time. I’m open to either scenario.

So let’s keep it simple. 

Bearish:
The weekly charts: Weekly momentum (as I measure them by my customized MACD) are only in Week 1 of breaking down, implying weakness for a few weeks. This should be the overriding bias for the next few weeks.
Sentiment: This is unscientific, but my gut says even after the big sell-off this week, a few too many are looking to buy this dip. It might take more volatility in time and price to work off that mentality.

Bullish:
Near-term charts: We’re oversold on a 1-hour, 4-hour and daily basis, so a bounce, if it has enough strength, could reverse the weekly charts quickly.
My long-term view – If we’re still in a bull market, surprises will be to the upside. If this is truly still a bull, we shouldn’t pull-back much more than 5-7% from the highs (we’re off -4% right now).

I may take shots at very-short term trades on $SPY (both long and short) over the next few weeks. We might have decent short-term trading opportunities for awhile. Overall though we should have limited upside so I’m happy to try to sell rallies for a few weeks. 

My line in the sand is now SPX 2,995 / SPY $299.00. If we can trade above that, we’re out of the bearish woods and I’ll quickly turn bullish again. 

Trading is as much art as it is science. If it was as easy as just following charts robotically, everyone would make money. So even with charts saying we might be at the beginning of a sell-off, we’ll stay flexible. Get ready for mixed signals, head fakes and sudden reversals. 

Longer-term, my outlook hasn’t changed. I’m still BULLISH. The big trend is still UP.  My gut tells me whatever dip we’re in the middle of will be a buyable one at some point (maybe sooner than we expect).

4 THINGS ON MY MIND

1. There are an equal number of sells and buys on my watchlist that tracks important bellweathers and market leaders. This is a big difference from the last few weeks when most names still looked bullish. 

Especially ugly were the Cloud/SaaS software names that have been the clear market momentum leaders this year.

Names like WDAY (highlighted as a Sell in “A Chart That Caught My Eye” a few weeks ago) all got smacked hard this week. All the charts look the same for these names (OKTA, TWLO, SPLK, etc.). This kind of damage doesn’t reverse quickly. 

2. I tweeted this week “Patience is critical in trading.” My trading profits went to a new level when I learned to control my urges to have a bet on at all times. Being patient means missing out on trades. I’ve often said when I’m teaching trading to new traders and in my courses that calling the exact top and bottoms are great for the ego, but over the long-run can usually hurt you more often. With the charts broken, I’ll give up up the first few points off the bottom if I have to.

3. Bitcoin is showing some life, but still confirming a big choppy range. It’s trying to rally again, but weekly technicals are still pointing down so my best guess is there’s more downside coming.

4. Cannabis stocks might be near a bottom. They’ve been left for dead and forgotten, but a couple of the big names like Aurora (ACB) and Canopy (CGC) had nice reversals Friday. I like how the market is focused elsewhere. Time to pay attention and maybe take some shots here.

A CHART THAT CAUGHT MY EYE

EA – Electronic Arts

Another video game stock?

I highlighted Activision (ATVI) in this section a few weeks ago and that seems to be working, so why not take a look at EA too?

EA is a little less bullish, but if it follows ATVI, a breakout could be imminent. Most of all, I like the fact that these stocks have been on their lows as the market has been rallying, so we have lower expectations and a potential for some rotation. 

EA in particular was hit by negative data points on their recent APEX Legends game update, so sentiment is low. 

Strategy: Buy on a break above $102.50 if momentum technicals turn positive. I would stop out somewhere in the red range. Adjust to your own risk appetite.

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