MARKET SUMMARY (9/3/19) – BULLISH-ISH

The Bulls checked all of the boxes they needed to last week.

That said, we’re still in a period where we should expect headfakes and reversals, so I’m prepared for some short-term volatility (as we saw in futures this weekend). And if you remember last week’s e-mail, a return to minor new lows is still possible (and in some ways ideal). 

The market began last week with more extreme bearishness, as the prior week ended with a scary Friday re-test of the lows, and a growing consensus that new lows were coming. I laid out my bullish case last week and why I wasn’t overly concerned with a crash.

A crash that we clearly didn’t get. Again.

After revisiting the August lows a third time, bears were licking their chops, ready for a big move down. Instead, the market started the week bouncing higher and continued to push higher all week. The rally was enough to push above the downtrend resistance level and all the way to test the broken uptrend line.

This is an interesting point in the charts, as both bulls and bears have something to hang their hats on.

Bears still see us in a breakdown of the broken uptrend (the blue line in the chart above), and all last week did was push us high enough to test it from below.

Fair enough.

The bulls meanwhile see the break of the downtrend from the short-term July top and now technicals turning higher.

Though I’m long and still long-term bullish, I’m open to either possibility in the near-term. 

I lean long and am holding for a few reasons that I’ve made clear. The overriding base case is that we are still in a bull market, so surprises will be to the upside. From a chart perspective, we do have a few bullish signals: Broken downtrend, positive momentum divergence during this last month’s triple bottom, and now MACD back into a bullish configuration. 

That said, I would not be surprised by some more weakness soon. Or even enough weakness to send us back to the lows. We’re still under some significant resistance, investors are nervous, and we did have some negative divergence going into the most recent high that we need to respect.

I’m 60% long and am holding. I don’t think it’s completely safe to add, at least until we see some impulsive moves up through resistance. Alternatively, I might add if I see a low risk entry point if we can make minor new lows.


4 THINGS ON MY MIND

1. From a pure sentiment standpoint, my gut tells me bears are actually more emboldened than before. As usual, a little too emboldened. 

Look, I can understand the bearish case. What makes me slightly skeptical of the bearish interpretation of the charts is the same thing that’s been the case during this whole rally: It’s a little too obvious and a little too crowded among Twitter traders. The easy trades rarely make money and it seems like being bearish is a little too easy right now. 

2. Semiconductors as a group looks strong. This is still one of my favorite indicators of market strength. Semiconductors are good signals of fundamental market health since their end markets span everything from technology to industrials to manufacturing. The other thing about them is that they are notoriously tricky. Most hedge funds have gotten them wrong all year. They’ve been a consistently crowded short given how bad the macro news and outlook has been. But the fundamentals guys keep scratching their heads and keep stubbornly shorting, and it just won’t break down. 

3. Finally some action in Bitcoin. We’ve been patient and it so far looks like the right call. Will we finally get the washout I’m hoping for? I’m hoping we start entering a phase of big chunky sell-offs. No need to be early on this one.

4. Software/cloud names looked weak this past week. They were the leaders of the bull market since December, and after breaking down at the highs, they’ve lagged for weeks now. It’s something to watch. Though it would make the bull case a little clearer if they took the lead again, I don’t think its completely critical. Rotation is a part of markets. It looks like FANG, large cap tech and semis might start leading so the market could rally with new leadership.


A CHART THAT CAUGHT MY EYE

USO – Crude Oil

Sometimes I like to dabble in stocks and trades that I don’t know much about.

Crude Oil is something I do not follow. And its something that people spend a lot of time and money trying to trade. Its a hugely data-dependent commodity- inventories, geopolitics, futures contracts. It’s complicated. Talk to any commodity trader that devotes their whole life to it.

And here I come along, just looking at my charts and trying to go long. I’m not even using the most complicated of technical analysis, but my most basic process. But sometimes it’s better to trade without emotion or preconceived biases and history. Simply put, I do see a pretty simple trade here and decent risk-reward.

This is the kind of low conviction trade that I’m usually wrong on, but when I can manage my risk, I don’t mind.

Strategy: Buy on a breakout above the downtrend. Stop or exit on a break of that uptrend.   

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