MARKET SUMMARY (2/10/20) – BEARISH HINTS

If I squint, I can start seeing bearish signs.

We’ll see if they’re real, or just another headfake.

Even though the SPX continues to chop around near its all-time high, I was willing to make a short bet this week. I knew that I was probably early and that the charts weren’t confirming any kind of reversal yet, but I feel like the divergences and near-term sentiment would limit too much market upside.

Regardless, I kept my bet small, and as with most of my options bets, I’m willing to take a full loss. That’s why I call them bets.

My trading focuses on charts and sentiment. As much as most people want to think there is an exact science to it, it’s much more of an art. When relying on charts and trendlines, very subtle differences in where I draw my lines can be the difference between a bullish or bearish configuration. Learning to live with that imprecision is part of trading. And pretending it’s not sloppy sometimes is a dangerous way to trade (and teach others to trade).

My point in mentioning this is that depending on where I draw my trendlines today, I can draw justifiable lines that has us at resistance and broken support. 

My short bet is also focused on the negative divergences at this high. I used my rule of thumb of 4-6 MACD positive days to estimate that this rally might fade in a few days. And I stepped in early based on very short-term charts turning down (5-minute, 15-minute charts, etc.)

My bet was that if the MACD and technicals were to turn down here, it would confirm a double top in price, with diverging technicals that wouldn’t take much to turn negative. So I liked the risk-reward.

I’m also focused on how some of the bellwether indices and stocks are trading with the market at its highs. I never want to pick a top when there is real money flowing in and important risk-on sectors and stocks are confirming. Today, we have the opposite. Semiconductors, software and even the broad NY FANG+ index (which tracks the big crowded tech leaders) all failed to make new highs as the market did. Semis was the most noticeable divergence.

As always, I’m not emotional about my bets. After I made my bet, I’m not on Twitter cherry-picking news, headlines and charts to confirm my call. Because I’m so focused on catching turning points, and using options to define my losses, my bets are usually set-it-and-forget it trades.

We had multiple 5-10% sell-offs last year, even during a monster year for the markets. I expect we’ll see the same this year.

As always, note that I haven’t moved away from my longer-term belief that, like last year, we will be continuing the bull market and making more new highs well into this year. Hopefully, the next new high comes after a little mini-correction in the short-term that I can make money from.


5 THINGS ON MY MIND

1. Tops are almost always harder to trade than bottoms. Bottoms are emotional and send out extreme technicals signals that one can make money from, even if it’s a quick scalp. Tops are usually grinding, with long extended divergences and lots of headfakes. Also, despite being in a 10-year bull market, there is still the lingering memory of the 2000 and 2008 crashes, and the occasional sharp corrections (2011, 2015, 2018) that are fresh in many current traders’ minds. That makes tops trickier today because the market needs to shake everyone out, including the bears trying to catch the next big correction.

2. I’ve been leaning short semiconductors all year. The massive bullish FOMO to start the year was my initial signal, but since then the charts have been confirming. Yes, semis are generally still acting fine, and near their highs, but there is clear volatility and technical divergences. The semi ETF SMH broke a near-term trendline a few weeks ago, and after a retest this week, could turn down again. The way semis moves with momentum, any turn down could target the intermediate-term trend (red line in this chart) or even the 50-day moving average (purple line). 

3. Bitcoin chart keeps grinding higher. The daily chart hasn’t given any signs to worry about my long position. I’m watching the MACD for a possible fade in momentum, but even that is probably not something worth trading. Even if momentum pauses, things would stay bullish. My lingering worry remains that everyone else is too bullish.

4. With the latest cannabis stock blow-ups this week, it’s important to remind everyone to trade with stops, and to have defined stops when you make any trade. It’s something I almost always mention when I’m describing any trade set-up. Be emotionless and mechanical about your stops. Don’t add to losing positions if they break those stops (which is what too many traders do.) This is Trading 101, but not being disciplined about it is often the cause of huge losses, even by experienced traders.

5. I have a strong obsession with trying to buy low, to mostly go long stuff that everyone hates. Over time, it is a winning strategy. Being contrarian and buying the garbage stocks that everyone hates will result in the big winners. Recently, stocks I’ve highlighted like BYND, PINS, SHAK have all been scooped up on their lows.

The result is that I often own stocks with messy stories or long-term bearish trends. I buy because the charts are giving me signs that these stocks might break out of those bearish trends, but when I’m buying bad stories, inevitably, those bearish technicals and weak fundamentals sometimes outweigh everything. 


A CHART THAT CAUGHT MY EYE

ADI – Analog Devices

I have a tendency to focus on charts that are in the early stages of a turn. Usually you’ll see me highlighting longs that are in established downtrends or shorts that are near their highs in long established rallies. 

This week, I’m picking a stock that would be more universally acknowledged as already in a bearish trend.

From a chart view, ADI has been in a trading range for the past few months, with a strong rejection of recent attempts to make new highs. The price is trading below its 50-day and 200-day moving averages and has several resistances at recent support breaks.

This is all being confirmed by a MACD that is firmly negative, and about to turn down again after a few days of rally. A second momentum indicator DMI is also in the red (bearish) position.

The point being, you don’t always have to catch the big moves and changes in trend. Sometimes, you can ride the wave of firmly established bearish and bullish charts.

As always, I’d prefer to short ADI only on a rally. That might be something as minor as a small up day, or intra-day rally. If I entered short, this trade has some clear stop levels at the 50-day moving average which nicely lines up with the recent mini-rally high. 

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