If it was easy to make money guessing which way the market is going to go, everyone would be rich.

The market has a tendency to give mixed signals, confusing action, and cause the most pain to as many traders as it can. We’re in one of those short-term periods right now. There are plenty of both bullish and bearish signs right now (at least in the near-term).

We had a wild week with many whipsaws. The market swung anxiously after the Fed, tested all-time highs, and then reversed lower to test the first levels of support on Friday.

As nervous as it made a lot of short-term traders, in the grand scheme of things, not much happened.

A bullish case could be made that we’re now in Day 4 of a short-term weak phase, so we could be ready to bounce. This is using my 4-6 period rule of thumb for momentum moves (looking at the MACD histogram). With the weekly charts still bullish, that would mean supports should hold and surprises should be to the upside overall.

The bears meanwhile can easily point to the big double top, the negative short-term momentum divergence, and the overall bearish fundamentals. 

As usual, I’ll focus on the most simple things I can, and look at the big picture using the monthly and weekly charts. Both still have momentum in a bullish configuration, and no clear catalyst to turn bearish just yet. We have support nearby at 2,962, and then 2,950, so until then, I’ll ignore the noise and just be emotionless.

This week will tell the tale. My gut still says new highs are coming, so I’m trying to hold my longs as long as I can without getting shaken out.


1. Momentum names continued to get attention as some prominent stocks like ROKU and LULU were hit hard this week, and many of the Cloud SaaS names that got smoked the last few weeks started turning down again. It’s certainly a sign of weak breadth, but I would argue as a group, it’s not a disaster (yet). Individual names seem to be trading on their own, so there are opportunities here. At a high level, if we just look at the MTUM ETF, there’s negative divergence and a double top (bearish), but it’s also still holding support, and overall not as ugly as some individual names are. In my mind, it’s slightly bearish, but more of an opportunity to pick at names here (see NFLX at the end of this e-mail).

2. Sentiment is one of the hardest things to really identify, mostly because so much of it is unscientific. Yes, there are “sentiment” indicators like AAIIBULL Index and put-call ratios, but those are widely watched and priced in quickly. So sometimes I rely on gut and qualitative feel. I posted this on my Twitter. If you look back at my e-mail from August 23 (the last test of the recent lows), I specifically mentioned the amount of random Tweets and late night talk show monologues that were screaming about the market losses and coming recession. #Trumprecession was even trending on Twitter.

This isn’t a political comment. I just wanted to point out that when people who have never traded a day in their lives are suddenly giving their opinions on the markets, it’s a clear sign that sentiment is extreme.

3. Bitcoin still boring, and still leaning bearish overall. 

4. Speaking of politics, here’s a reminder that a personal political bias is a dangerous thing when trading. I’ve seen this increasing in the past few years. If you follow enough traders on the Internet, I’m sure you’re seeing it too – half of the “analysis” I see involves some sort of obvious political bias. The good thing is it’s provided plenty of juicy trades as the market incorporates clear emotional extremes that we can profit from.  


NFLX – Netflix

Most of you know that I’m a fan of Netflix’s service but I’ve been a long-time bear on Netflix stock. Simply put, I think they have a business model problem and are basically the same as the old studios from the 1990’s, but at a higher valuation.

But I can often put aside biases if a short-term chart gives me signals. NFLX has been beaten down and now we’re seeing signs of a possible buyable dip. This is a dangerous trade because there’s no real support that can act as an easy stop. 

The positive in the chart is that it continues to sustain positive momentum divergence on every low, including this past week’s ugly low. If we use my simple rule of thumb of 4-6 periods before a turn, we can see on a daily chart, we could reverse up here soon, and would probably do so with yet another positive MACD divergence.

Strategy: Buy on a short-term break of the downtrend. The stop would be the previous low we just made on Friday (or wherever the low ends up being). Size it small until it starts making positive action (breaking through resistances, holding the first supports).

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