MARKET SUMMARY (1/17/20) – DEFYING GRAVITY

The market doesn’t care about you.

Yes, the S&P 500 is overbought. And the technicals are losing momentum. And technical indicators like the MACD and DMI have been building negative divergences. But the market is going to do what it’s going to do, and we have to respect it and not fight it. Never forget that the market doesn’t care about what we want to happen.

I’m never afraid to be flexible and move away from a trade I’ve made. This was the case this past week, when I cut my losses early on a short trade I made a few weeks ago. 

So what changed? 

Well, from a pure chart point of view, you have to respect any breaks of support or resistance. That means when you’re short, you have to respect a market or stock that is able to make a new high. It resets the whole chart and should reset how you view that chart. One of the biggest mistakes most traders make is being too stubborn.

The other thing that changed for me was my general feel that sentiment was too bearish. This is much harder to measure, but I’m confident in my experience and gut on this, and it’s obviously worked well in the past. I was just seeing too many charts pointing out the same negative divergences I was and too many people calling for some sort of pullback. So sentiment was not on the side of my short.

It feels like there might another few weeks of bear beatings before we get any meaningful downside.

Once again there are too many possibilities, both bullish and bearish, in the very short-term for me to feel confident about any trade. Remember, all I need is a handful of correct swing trades every year.

I still think there is a tradeable pullback coming soon, so the ideal situation would be another few days/weeks of lazy highs that I can buy puts into. I’m happy to wait for that because that would greatly improve my risk-reward on any short.

Longer-term, the story is the same. The bull market should last well into this year. Any pullback I’m trading on the short side will be short-lived and probably not even worth trading for most of you. I’m thinking this year will be another year full of buy-the-dip trades, except with some more sizable swing moves. 


5 THINGS ON MY MIND

1. In general, there are more interesting charts I want to short than go long. Many of these charts are similar to the market in that there haven’t been any catalysts to go short or any trendline breaks, but there are massive negative divergences building up. They are almost mirror images to my favorite long chart pattern, that worked so well on recent long ideas PINS and BYND.

Some of these names I’m either short, have small put positions in, or am watching for a trendline break to enter a short:

AMAT
ADSK
ADBE
BMY
FTNT
MU
SPLK
TKR
NVDA
LULU
CTXS

You’ll notice a common theme. Most have similar chart patterns and are mostly well-liked (and thus crowded) names that have strong “fundamental” stories. That’s fine with me – I’m not in these for the long-term. I’ll delve into the LULU chart in the section below.

2. What will I be looking for to re-enter a short in the S&P 500, Nasdaq or other market index? Well I certainly don’t want to stand in the way of an up trend that is breaking above resistance, with technicals turning up. So I’ll at least be looking for some sort of peak in the MACD histogram (the green bar graph on the MACD chart), which should indicate that the MACD is ready to roll down as well. That might give me a slightly better entry point, and since I plan to play with short-dated put options, the extra time value from those extra days is crucial.

If I make another anticipatory bet, I’ll be sticking to my rule of thumb of 4-6 days of positive MACD where it might peak.

3. Timing is crucial when you’re trading. It’s also one of the hardest parts about trading. You’re going to be wrong often and you have to have the right mentality when you’re wrong. One thing that helps is to have a process and stick to it as often as you can. I did make a little short bet on the market last week, but I was aware it was an anticipatory bet. According to my process, I was early. It worked out on many of my bets last year, but this one looked like my timing was off. No big deal – I sized the bet knowing these puts might be losers. I didn’t have many losers last year, but I’ve had many in my career. Take a loss, and move on. 

4. Bitcoin is a cleanly bullish chart, with not much to do if you’re long. It has cleared any resistances fairly easily, which strengthens the idea that the most recent bottom was a significant one. The price chart has multiple levels of support below in the $7,600-$8,000 area, so we don’t need to think about selling until we at least start breaking those. I’m somewhat concerned with the overly bullish sentiment (too many others are also seeing the same bullish price action that I am), but BTC is overall trading healthily so I’m not too worried yet.

5. Semiconductors were supposed to be the biggest beneficiaries of a trade deal. After Phase 1 of the trade deal was signed this week, the SOX and notable individual names like AMDNVDAMUINTC etc. were up as expected, but many were not making new highs with the market. 

This is a divergence worth noting. I’ve been negatively biased semis (for the short-term) and this action feeds that bias.


A CHART THAT CAUGHT MY EYE

LULU – Lululemon

I have a healthy respect for any stock I short. In a bull market, any short is dangerous, and there really aren’t many true fundamental structural shorts (the companies that are dying businesses or eventual bankruptcies). So I end up taking short-term scalp shorts in “good” companies, using only the chart as a guide. This worked last year when I shorted the seemingly strong cloud software names at a time when they looked strongest.

Lululemon by all accounts seems like a fine company whose business is OK. So any short on LULU is a tricky one. 

Yoga pants? Yup, everyone loves them. The fitness market is strong, “athleisure” is trendy, Lululemon has a strong brand, blah, blah blah.

But the chart set-up is decent for a short – new highs being made with negative MACD divergence and MACD (momentum) ready to turn down if the stock breaks support. It’s a short that should work if the market pulls back, which I expect will happen in coming weeks.

From a risk-perspective, they don’t report earnings until March, so we won’t have some sort of earnings-related positive news to blow up this short.

I’ll short here with a stop at its recent high. So I only risk 2%. If I want to give it a little room for a false breakout, I’ll make my stop-out at -5% – a tolerable risk level for me. 

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