MARKET SUMMARY (2/3/20) – EVERYONE’S CAUTIOUS

Is this the beginning of the long-awaited market pullback?

Well, as most of my regular followers know, the more “long-awaited” something is, the more skeptical I am.  

It was a choppy week with the most notable move happening with the Monday morning gap down to break the uptrend that had been established since October. After that, it was a whipsaw chopfest all week, ending with the big down day Friday.

MACD and other momentum technicals, which had been diverging and trending down, firmly confirmed the downtrend and we closed the week below the trendline.

So with the charts all pointing down for at least a few more weeks, why am I not more bearish?

Well, for one thing, the chart isn’t a total disaster – the trend has broken, but there is still plenty of near-term support in the area. 3,220 is an area of previous consolidation/support, and 3,214 gets us to the 50-day moving average.

More importantly, I rely on sentiment to trade, not just purely robotically trading the charts. This is especially important when it seems like my view on the charts is exactly the same as everyone else’s. It’s usually not a great trade when the consensus is on your side.

So with pretty much everyone saying that the market was gearing up for a huge sell-off due to China opening Sunday night, the Iowa caucus (and a Bernie win), more coronavirus news, etc. it was hard for me to get too bearish. And it’s still hard to make me expect too much more downside from here.

For now, the weekly chart says stay cautious and it’s probably too early to buy. Daily charts are getting close to oversold, and sentiment is starting to feel overly bearish.

So I’ll stay on the sidelines and wait. I’ll stick with my mantra to never force bets, though clearly I’m starting to lean towards making a bet long rather than short. If S&P 500 can close above 3,280, I’d feel more confident going long again. 

It might be boring just sitting and waiting, but that’s better than forcing a bad bet.


5 THINGS ON MY MIND

1. Patience will pay off. As I sat analyzed every headline and market reaction the last few weeks, looking to see if a trade was finally setting up, I reminded myself that I was able to generate a +80% return last year in my market trading account by staying patient. 

That return was made with only a handful of big swing bets. And notably, that return was made with the first trade not even coming until March 8. 

2. As I’ve been mentioning frequently, I continue to have active positions in various individual stocks. I highlighted some of them in my Twitter, but I can give a little more detail here for you newsletter readers.

Overall, I’m trying to stay at least market neutral, really trying to balance my long and short bets. Most of you can figure out generally where my bets are. I’ve either outright named my targets, or highlighted them in my “Charts That Caught My Eye” section.

Long Cannabis names: ACB, CGC, TLRY
Long heavily shorted laggards nears their lows, with positive diverging charts GME, TLRD, TRIP, OSTK, FIZZ, SHAK
Short semiconductors AMD, AMAT, MU, NVDA, SMH
Short crowded, popular (with high-beta and high-valuation) momentum stocks with negatively diverging technicals – SPLK, SHOP, ADBE, LULU, TKR, DVA, EW.

As always, I have defined stops on each, and am trading them actively.

3. Bitcoin remains in bullish mode, but for very short-term traders there are couple things I’m watching. On the daily chart, we’re at horizontal resistance that might pause things. Also, we have slightly overbought technicals with momentum due for a pause. More importantly, sentiment has gotten little too frothy for me. There really aren’t any bears left, and it’s hard to find anyone not touting a $12,000+ near-term target. I generally don’t like that kind of unanimous agreement. I’m still long, but I wouldn’t be adding here.

4. Sometimes when you miss a trade, it may be weeks or months before the next real set-up happens. A big mistake many traders make is to immediately force a trade too soon, whether its to chase the one they wanted to make, or try to take the opposite side too soon and catch the snap back. 

5. Everyone says they’re going to buy low, sell high. But when the bullets are flying, how many people actually do it? Instead, more often I find investors chasing the latest hot stock or sector. Where were the all the TSLA or BYND bulls last year when both these stocks were trading like garbage? If you want to make real money investing, you have to dig through the stuff that no one else wants. And actually buy them when it seems like all they do is go down.

You’ll be wrong a lot more. But the winners will be monster gainers.


A CHART THAT CAUGHT MY EYE

TLRY – Tilray

I’m stubbornly going back to the well and continuing to target the cannabis stocks as longs. They’ve obviously been trending down and getting killed, but tight stops have helped me limit any losses, and actually make some money. Despite the overall trend, they have worked as long trades, with vicious 20-30% multi-day rallies popping up here and there.

After becoming the poster child for the cannabis stock euphoria from 2018, TLRY has become a nice trading stock if you can pick your spots right.

I’ll focus on the nice looking chart set-up we have here. MACD and momentum technicals are positive and would confirm a bullish configuration if the stock price were to turn up. The stock price meanwhile has consolidated its recent +50% rally (all in four-days!) from a few weeks ago and is holding support of the breakout level and a flattening 50-day moving average.

This is a textbook, basic buy that I go long all the time. Ideally, if it can break out and trade in that green target region, we have an all-clear for some strong upside.

TLRY has the added bonus of being very heavily shorted, which has been an area I’ve been targeting all year.

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