MARKET SUMMARY (12/30/19) – SKEPTICAL SHORT

Trying to pick tops is an easy way to lose a lot of money.

In the modern era of financial Twitter and trading blogs, being the first to catch the next Big Short has become an obsession. The easiest way to get a lot of Twitter followers is to make a confident call to short the market and tweet out a few charts with -20% crash predictions. Something about being bearish just resonates with perma-bearish traders who are looking for someone to confirm their biases.

I mention this because I am short-term bearish the market right now, but don’t want anyone to overreact to my positioning. This is a fairly unemotional bet – I’m not calling for a crash or the end of the bull market. I’m simply playing a reasonably good risk-reward bet with a very small-sized position. And I’m comfortable making this bet because I’m playing with profits from all of the long market bets I’ve made money on this year.

As the market grinded to a new all-time high, I continue to hold some small short positions. I’m using put options with only a small amount of capital at risk. I placed these trades with the mindset that these were likely going to be losers. Despite the market lingering near the highs, there’s still hope for these positions.

The SPX ended the week near its highs but showing definitely weakness underneath the surface. While pushing to new all-time highs, it failed to do so with strength. SPX was unable to re-establish the daily uptrend it had broken or make new blow-off breakouts, and technical indicators like the MACD and DMI are rolling down from negatively diverging levels.

So the set-up is here for some sort of pullback. As I’ve said, I’m not expecting much in terms of a pullback. On this current trade we may not even get more than 1 or 2% down and no more than a day or so.

Going forward, the big picture remains strongly bullish.

I’ll repeat this for my new readers: I’m still expecting a bullish market well into 2020, so we should be focused on buying the dip and profiting (just as we did multiple times this year).

That said, we will definitely get many scary dips. It seems like a distant memory, but think back to the sentiment and headlines and noise we got when the market fell 5-8% during the summer. There was real fear. And obviously we’re hoping for some similar opportunities next year.

Until then, patience is the name of the game. 


4 THINGS ON MY MIND

1. I’ll finish the year +83% in my market direction trading account. Every trade was posted live and for free on Twitter, starting with my first post on March 8.  Not every year will be this successful, but I’ll certainly be sticking to my process.

If I were to dissect what helped this year in particular, it was the confidence in my bullish bias which allowed me to ignore the fear that built up on the mini-dips. That really only comes from experience.

The other part of the success was the discipline when trading. I know many of my readers have taken my course, or followed my trades long enough to recognize exactly the set-ups I’m watching. The 3 Cs (Catalyst + Chart + Confirmation) worked again and again – both on entry points for my market bets, and the hugely profitable individual stock trades I made.

If you’re interested in my trading course, check it out here: Technical Analysis Made Simple.

2. Tops are usually a process. There’s an old saying, bottoms are V-shaped because they’re emotional, tops are rounded because they are controversial. That’s a good rule of thumb when trying to trade big market turns.

Occasionally there are emotional blow-off tops, but they are much more rare than financial Twitter would have you believe. Usually, its a process of pulling back to supports, bouncing, wearing down those supports and eventually breaking.

3. Bitcoin continues to act well. The set-up was constructive at its last lows and so far it’s slowly building a decent bottom. It won’t be fully bullish until it can break above $7,600-$7,700, but it’s certainly bullish enough for me to be long right now.

4. Semis are looking and feeling like the cloud software names did back in the summer. If you look back to this past July, cloud/SaaS software names were making all-time highs and the market was still chasing them. They looked like suicide to try to short. I highlighted WDAY in my “Charts That Caught my Eye” as a short candidate in my July 22 e-mail. The rest is history, with the stock falling -30% from that point .

I think semis are similarly looking ripe for the shorting. On that note, scroll down to the Charts That Caught my Eye section…


A CHART THAT CAUGHT MY EYE

QRVO – Qorvo

As the market tests its highs and I lean bearish, I’ll naturally look for individual stocks to short. One of the things I don’t talk about enough is how an overall market view can give you that added little conviction in an individual position.

QRVO has the classic short set-up for me when I’m looking for stocks near their highs. The massive MACD negative divergence that has been builidng is a nice set-up.

On the fundamental side, QRVO has been a hedge fund darling, being one the go-to names to play the 5G cycle. Obviously, 5G is one of the big themes every growth and tech investor is clamoring for. So naturally, we’ll try to zig when everyone else is zagging, and take a shot with a well-defined short set-up.

As with any short in a bull market, we won’t get greedy. But as I said in the section above, semis really feels and acts like cloud software did in the summer.

I am shorting this here, with a stop if it breaks its recent highs with technicals confirming/turning up.

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