MARKET SUMMARY (2/24/20) – FINALLY THE BEARS EAT

Here’s where it gets tricky.

You won’t always be on the right side of a trade, but when you are, you have to navigate greed and discipline – when to take profits and when to let some ride. Usually the answer is a little of both. 

So let’s dissect my recent (so far successful) short trade as a way to figure out the next best move.

If you’ve followed me long enough, you know that I never completely robotically trade only the charts. Obviously, the charts are a major guidepost for me. But I also factor in sentiment, fundamentals, qualitative factors. In fact, many of you have seen some of my best trades happen when I explicitly comment that the charts are way too obvious (especially when everyone’s charts are saying the same thing).

Take the current set-up. The charts led me to short the market – adding short trades on February 5, 11 and 14. I was a little early, but my bet was that even if the market didn’t decline from my entry points, the upside would be limited because of the weak technicals set-up. 

So now, we have a confirmation of that short-term bear case. Trendlines have broken, technicals like the MACD and DMI are rolling down. Normally I would expect this sell-off  to follow the same rule-of-thumb I always look for: 4-6 days of decline before a bounce. But also 4-6 weeks of overall decline.

Its a rule of thumb that clearly doesn’t work every time. No process does. But it works well enough and is a good guide to keep my trading discipline. Certainly, history says that after a 4-6 period of decline, the low hanging fruit has been picked.

Anyway, I’m staying short-biased for a few weeks, as the weekly charts have also turned down. I’ll likely try to keep at least some short exposure on at most times, in the event we get some sort of out-of-the-ordinary sell-off (faster or bigger than history would suggest).

Short-term though, I think it will be tricky for a few reasons.

First of all, if you remember last week, I noted that the rally had enough technical strength to reset the clock. So I would normally expect back-and-fill action. The force of today’s gap down will do a lot of technical damage, so how the day trades will be important. But even though my outlook through March is bearish, we might still get some last gasps of rally.

The other thing that makes me nervous about getting too bearish right here is the obvious mirror to the decline from only a few weeks ago. That almost never works out exactly the same. So I would normally expect some sort of twist just to shake out the most simpleton traders.

Overall though, I think a lot of damage has been done. We have enough confirmations that sellers will step in on rallies at any resistance level we might face.

A close below my new line in the sand 3,310, which looks likely today, would clearly turn the next few weeks bearish. 

So the overall lean should be to sell the rallies, targeting that 4-6 week sell-off into March. I don’t really have a price target. When I’m short, I operate with the assumption that bottoms are emotional. Think back to the bottoms that I was buying in March and August of last year. There was no one saying “buy this dip” and “we’re at support”. So we’ll have to wait and see what levels we’re at when we get that emotional response. 

As always, if sentiment gets too bearish too quickly, I’ll be quick to cover shorts, and maybe even go long. 
 


3 THINGS ON MY MIND

1. If you’re down for the year, like I was prior to Friday’s sell-off, you don’t have to make it all back with one trade. I suddenly had some profits on some of my shorts, and booking profits on those quickly is a good example of trading discipline. These were options that were losers, then quickly became slightly profitable. I didn’t need them to make back all of my losses, even though I considered it a possibility that they would.

I also knew I had March put options with more time on my side, so would still make money if the sell-off got nastier than expected. 

2. Bitcoin still looks bullish. I’ve been cautious given the widespread bullish sentiment, but as long as it acts well, there’s no need to overtrade. The steadiness and price action as it holds weekly support is a big positive. MACD and DMI look to be trying to roll over, but ideally price will only enter a consolidation phase and cycle through the momentum pause while still holding support.

 

3. When I have a market bet on, I’m always looking for confirmations and divergences. When the market sells off, it always helps when big, important individual stocks are confirming the market move, with breakdowns in their own charts. Often, if I want to add to a market bet, I’ll instead add to a broken individual stock chart, which may be earlier in its bearish pattern. A couple names that notably broke down on Friday’s market sell-off were FB, MU. We’ll get more today.
 


A CHART THAT CAUGHT MY EYE

FB – Facebook

I normally prefer trading the less known, or more controversial names. However this week, Facebook caught my eye.

With mega-cap names, it’s safe to assume no one has an information edge. So I feel like they do tend to trade efficiently and the charts can be respected.

If you’re bearish the markets, the FANMAG names (FB, AMZN, NFLX, MSFT, AAPL, GOOG) have the added benefit of being the crowded names that everyone owns. You can only sell what you own, and usually everyone from big funds to retail investors owns these liquid names. If you recall, in the 2018 crash, the mega-cap FANG stocks actually underperformed even the high-beta momentum stocks.

The FB chart is simple here – important trendline has broken, with MACD turning negative again. DMI and other technicals are confirming the bearish set-up. I shorted some Friday and will use the range of the recent highs $214-215 as my stop level.

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