MARKET SUMMARY (9/30/19) – ON THE EDGE

A couple of ugly weeks and market technicals are rolling down, almost turning negative. Bearish right?

Not so fast.

In theory, there are a lot of mixed signals. This is normal – the market never makes it easy. 

All week, I was ready to cut some of my 80% long position, but the SPX never quite closed below any of the important support levels I was watching (2,960 and 2,950 for starters). And with the market well into a daily sell-off, without any real damage to price support, I actually came into the weekend more bullish. We’ll see how the week unfolds to see if I’m right.

If you step back, the market is now many days into a bearish cycle and oversold. A couple weeks ago we tested the previous all-time high and started to pullback – no surprise, as that high should be strong resistance.

This current pullback has lasted long enough to get the market oversold again, without doing too much technical damage. And now the market is so close to turning up that when it does, it should be a strong move.

In other words, even though we’ve been selling off for a couple weeks, it hasn’t turned the charts definitively bearish, and has actually gathered fuel for a move higher. Will we get that move right away? It’s possible.

What keeps me bullish is that we have multiple levels of support below, we’ve had multiple attempts to break that support this past week without breaking, and we’re now far into this daily sell. Yes, the weekly technicals might roll over here with any weakness this week, but I’m holding on until we actually see it.

If the market turns up and rallies from here, we’re only 2% from all-time highs, and FOMO could get us there quickly given how oversold we are. Also, even if we do turn down here, we have some obvious support levels we can sell at to limit any losses.

Whatever happens in the very short-term, I still don’t expect any sell-off to significantly break the August lows, so I’ll likely still hold some longs. The bull market should still last well into next year in my opinion.


3 THINGS ON MY MIND

1. With everyone watching the same levels and looking at the same charts, trading has become very tricky.

Being able to analyze sentiment is critical. This is where trading experience is important because gauging sentiment is so subjective and imprecise. I use Twitter as an indicator, but its very subtle. 

I bought on August 5 and added on August 23, both based on my gut-feeling on qualitative sentiment from financial news, Twitter and buyside chatter. Similarly today, I think we are closer to a violent bottom than a top.

2. I brought up this chart a few weeks ago as the market was going through a wide, choppy range in August. The market reminded me of similar action in 2011. Since then, we got the big jump up out of that range, just like we did in 2011.

If you squint, the last few weeks are still rhyming – a test of the resistance and then a scary drop to retest that breakout point. Obviously, the analogy isn’t exact (it rarely is), but in my mind, it puts this trip back down to the breakout point in context.

In 2011, we actually broke back into the chop rectangle (it would be the equivalent of dipping down to 2,920-2,900 in today’s market). Either way, it was a dip that should have been bought. Just like I’d expect it to be today.

3. Bitcoin finally made its big move. After boring us all to death with the sideways chop and trapped in a triangle for weeks, the move after we broke down was unsurprisingly big and fast.

So now what?

I’m not a big fan of trying to catch bottoms in volatile stuff like Bitcoin. When I went long back in the spring (posted on my Twitter in April), I liked the apathy the market was showing. I’m a believer that tech/momentum stock bottoms are best when no one is paying any attention, when all hope has been drained.

We’re obviously not quite there yet with Bitcoin today. We just started to break down and everyone is still looking for price levels they’d be buying at. So as usual, I’ll focus on time and look for short-term technical divergences that can give a good risk-reward buy spot. 


A CHART THAT CAUGHT MY EYE

SQ – Square

Square was one of the high-flying momentum darlings last year. At its peak last year SQ was up 630% in less than a year. It topped out in September 2018, and since then has been in a long, brutal trading range, most recently trading back near the bottom of that range, down 50% from its highs.

Overall, it’s still ugly. But we’re well entrenched in a long period of monthly and weekly ugliness. The daily chart now looks promising for at least a tradeable bounce. In the last few weeks, we’ve broken a downtrend and traded back above some reasonably strong resistance (the black line in the chart above).

All the while, the short-term daily MACD has hammered out some notable positive divergence.

Strategy: I’m looking to buy here, with a stop at $56, the area of the recent closing low. If we turn up from here, watch for the weekly MACD to turn green and hope for the usual 4-6 weeks of strength.

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