MARKET SUMMARY (12/2/19) – SHORT-TERM SHORT

I try to be as contrarian as possible when looking for trades. 

As I look at spots to go short here, I realize that it’s not a completely contrarian view. Despite what financial Twitter likes to believe, even with the market at its highs, the “masses” and dumb money are not euphorically bullish. My gut still tells me that most traders have been skeptical of this rally and remain so. This skepticism has been the fuel for the up move.

But certainly, actual positioning does lean bullish and most are much less pessimistic than they were in August and October.

From a chart perspective, momentum has not faded yet, but has been showing negative divergences, and is clearly overbought based on simple metrics like RSI and Stochastics.

A few weeks ago, these indicators pushed me to sell my market long bets, but weren’t quite enough to push me to try a short bet.

I put a small bet on late this week, but did so knowing that it was a low conviction idea. I mentioned that it felt like I was early, and that the market still had some work to do on the upside. It’s somewhat situation specific – I’m up over +60% year-to-date on my market direction trading account so I was comfortable gambling with some put options. 

If we hang out in this area and continue to make negative divergences, the odds increase for a short-term pullback. I may add to my puts early this week, but won’t get too aggressive. This is a short-term scalp trade that I will try to limit my risk on. 

Longer-term, nothing has changed. I’m still in buy the dip mode, and most traders/investors with a time frame longer than 1 year should be too. Even with my short bet, I don’t expect anything more than a 5-10% correction (as has been the case all year).


  4 THINGS ON MY MIND

1. Options are a good vehicle to make trading bets because of the leverage they provide. If you’ve been following me long enough, you know that a lot of my profits this year have been driven by option bets when I make my market predictions.

It’s important to understand my mindset when I make these options bets. To me, they truly are bets. Because of the nature of options (most options expire worthless), I treat them how a professional gambler treats a bankroll. I keep them sized in a way where losing the entire amount is acceptable. In my case that usually means a consistent 2% of my starting bankroll. Placing an option bet is like putting chips on a blackjack table.

Because of this, I’ll typically also target entry points where I’m early, where the charts don’t fully give the all-clear sign. It’s riskier, but you have to be early when playing with options because of bigger swings.

2. When things are looking bearish in the market charts, I often focus on shorting individual stocks before I get aggressively short the market. Even if the market isn’t quite ready to fall, you can find good shorts in individual names that have bearish charts on their own. They’ll work as shorts because of their own charts, and work even better if the market goes down too.

A couple shorts I like for quick trades: ALGN, CTXS, INTC, LRCX, FTNT, VRTX.

3. My new line in the sand to get more bearish would be all the way down at 3,070. If SPX closes below there, I would start entertaining some more bearish intermediate-term scenarios. 

Otherwise, I still assume we’re in a bull market and am more interested in buying dips than getting too excited about short bets.

4. Bitcoin has had a wild couple weeks, with an exhaustion breakdown, a rally off that low and now a retest of the broken horizontal resistance line. If Bitcoin can hold this line as support, we could rally further, but it will really need to start breaking above more important down trendlines and resistances in the 8,200 area for me to get more confidently bullish. I’m long a small amount.


A CHART THAT CAUGHT MY EYE

INTC – Intel

Semiconductors have been clear leaders in this year’s market rally. Generally, that bodes well for the market as a whole. Semis feed into the supply chain of everything from technology, industrial and manufacturing products to electronics and cars – almost every global end market. With semis at a high, I expect global economic data to be strong early next year.

That said, semiconductor stock charts look ready to pause. These stocks tend to have juice when they move, both up and down, so they provide good returns if the set up is there.

INTC looks like a good short trade here. The stock has been grinding near a high, but unable to break through. All the while, negative divergence has been building on the MACD and the RSI is clinging to its overbought levels.

Strategy: Short here with a stop out at the high from a few days ago. The risk is limited to that stop, and there’s downside to the gap level (-6%) or all the way down to the lower supports of the August highs  (-11%).

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