MARKET SUMMARY (2/18/20) – FIGHTING THE TAPE

Go with the flow.

That’s generally my motto when trading. If you follow my trading long enough, you’ll see that my style tends to be fluid, unstubborn and emotionless. Or as close to that as I can be – I’m still human after all.

Though I’ve been leaning short and looking for spots to make short bets all year, my latest short bet a few weeks ago was quickly proven wrong as the market made new highs early last week. I knew it was a low-conviction set-up when I made these bets, and the risks played out.

At the time, negative divergences were building, and momentum was trending to the downside. There was a set-up for some real downside if support broke. However, the market held right at support and instead powered through all of the divergences. 

This essentially reset the clock in terms of expecting an immediate visit to new lows and an extended sell-off. It might still happen, but we would normally expect it to take a while to play out from here: possibly a sharp sell-off, then a few attempted failed rallies, before a final big move down. See the next section for some more detail on what the technical picture might have to look like.

This morning’s gap down might be the catalyst for more trendlines to start breaking and technicals to start confirming. But I’ll remain patient.

I know it can be confusing – my short-term view is fluid and can and will change frequently, while my longer-term view is usually more stable.

Here’s the quick summary where I stand:

Long-term hasn’t changed – I still expect new highs and the bull market to last well into this year. The buy-the-dip mentality that worked all last year is still in effect. There just aren’t any long-term bearish signals building. If your time frame is more than a few months, it’s probably not worth trading.

Short-term – a little trickier. I’ve been trading to try to catch an elusive multi-week move down. This can follow a few paths. It could be a grinding, choppy move down, which builds downside momentum, but eventually ends with climatic selling. Or, we could get a January 2018 ambush move down which takes us to oversold levels right from these highs. Either way, I’ve been willing to take a few shots early. The risk-reward is enticing.

I added to my short market position on Friday as the market broke at least one important daily trendline, and technicals like the MACD and DMI, while not officially crossing below its signal, have been noticeably fading. The other signs I was tracking (bellwether stock divergences, sentiment, etc.) also made me comfortable adding.

My plan has been to ease in to a short position, knowing that it would be hard to catch the exact high. The technical picture could change significantly this week if this morning’s weakness has any follow-through. Whatever rallies we get from here (even a new this week is still possible), I would still expect risk-reward to continue to point down and I’ll be adding to my short.


4 THINGS ON MY MIND

1. In general, it’s rare to get extended sell-offs in the broad market without some sort of build-up in downside momentum first. Most experienced traders know that real sell-offs happen from oversold levels. Yes, you can get sharp corrections from parabolic highs. But significant corrections that last for more than a few weeks, breaks through supports and surprises to the downside (like the kind we had in 2018, and even the 5-10% ones we had in 2019), take awhile to build up technical damage and momentum to the downside.

To give a visual example, watch the MACD. You really need both the MACD line and signal line to be negative as a starting point for a big correction. That’s the classic bearish formation that implies prices are going down at an accelerating pace.

You can get pullbacks/consolidation that will turn the MACD histogram (the bar chart) red and the MACD line crossing below the signal line. But that situation can come with the overall price trend and MACD line still positive. For a real extended downside move, you usually have both lines in the negative. That’s where real capitulative moves happen. We’re not near that yet.

Can it surprise? Sure. There definitely have been sharp sell-offs right from the highs (January 2018 for example). This market can always move fast. But until then, I’ve been keeping any downside expectations in check in the near-term.

2. SPX below 3,280 is my current line in the sand when things would look bearish on a multi-week period. That’s obviously a bit down from here (-3%). I would expect any down days before we break that level to see some bounces. It’s really a process of creating a pattern where supports are breaking and momentum keeps reversing downwards. 

3. Bitcoin pushed higher over resistance last week. A pullback here and re-test of that level would be normal. Chart still says we have to stay bullish. Sentiment still makes me nervous – everywhere I look I see everyone talking about $20,000 targets and how bullish the chart is. That’s normally not the best time to be long BTC, but we’ll see. I haven’t done anything but hold my longs since late last year. 

4. I’m not going to guess how Apple (AAPL) trades today after their coronavirus pre-announcement last night. What I do know is that most seem to expect the stock to hold up fine and many expect it to bounce back quickly.

Everyone is repeating the same argument: “It’s only temporary…it sets the bar low…Remember when they pre-announced during the trade war and then the stock doubled from there?”

All I know is that I never want to take a position when it feels like everyone is on the same side.


A CHART THAT CAUGHT MY EYE

OSTK – Overstock

This has been a great trading stock for the last year. Look back to the craziness last year, when it had a +200% rally and a +100% rally (in basically a week’s time), as well as some spectacular collapses.

It is one of the most-shorted stocks out there, at one point having over 40% of the shares outstanding shorted. That’s usually a recipe for some huge short-covering rallies.

Fundamentals, as you can guess, are messy. Who knows even what they are?  A crappy, second tier e-commerce company? A Blockchain company? I’m not going to even get into that debate.

Focusing only on the chart – we have a classic set-up. A long (really long) extended period of positive technical divergence on the MACD. Today, we actually have a positive MACD in a bullish configuration, and price is holding above support from both the 100-day moving average and previous breakouts.

So I’ll keep it simple. I’m long here (or would be adding, preferably on any dip). I’ll stop out if it breaks below $8.00. Obviously, this is a volatile, high risk-high reward stock – the swings will be big. If it works, I’ll look for another monster rally like it had last year. I like playing this with options as well. I’ve made little bets that either go to zero or will be a 5-10x gainers.

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