MARKET SUMMARY (3/2/20) – MONSTER SELL-OFF

Last week’s e-mail was titled “Time for the bears to eat.”

Wow – did they ever.

A truly historic decline. Every few years the market does something no trader has ever seen or could possibly imagine. This decline was for the ages.

Fortunately I was on the right side and finally got paid on the bearish bias I’ve had pretty much all year. I hope some of you profited as well – or at least avoided some losses.

In a market as fast-moving as we’ve seen, and will likely continue to see for many weeks, my market analysis here is going to become meaningless quickly. Any view I have could change literally by the minute. We’re going to see support levels fail, resistances get destroyed, and sudden market reversals. Volatility should remain high, so price swings will be huge. This is a very, very hard period to trade.

In the back of my mind I have a general idea of where I want to lean.

Let’s unpack the game plan for now.

1. Very near-term (next few days): I’d rather be long for quick-hit bounces. Yes, everyone is trying to catch the same bounces, but I luckily waited and avoided being too early. With ample profits from my short, I can take shots at what will likely be furious rallies.

Be careful though. Everyone knows the market had a historic sell-off and oversold readings are off the charts. Which means everyone else is also trying to catch these same dips. Unfortunately, the dips that will be the best buys will be the most dangerous looking ones.  

2. Short-term (next few weeks): Markets are only in Week 2 of breaking down and will be choppy and bearish for a few weeks. Bearish might mean lower lows (likely), or just big sideways moves. If I trade, I’ll trade small because of the swings. The better route is probably to not trade at all. 

3. Intermediate-term (next few months): As unlikely as it feels, the bull market remains in tact, so this correction is a buying opportunity. I’ll look to add swing longs that I’ll hold for weeks/months when we complete the bottoming process in a few weeks. In theory, the bottoming process means making a low, rallying, and then re-testing that low with positive technical divergences. That textbook bottom is a little too well known these days though. So I’m ready for surprises.

As crazy as the market has been, this is a simple game plan that should help guide me. 

Let’s remember a few rules for the next few weeks:

Don’t chase losses.
Be patient.
Be flexible.
Trade less.
And keep your bets SMALL.

Beyond that, it is dangerous to have a set idea of how this market will trade. That’s why this section, which usually outlines some sort of bullish or bearish bias, really has no bias. I’ll go with the flow. 


6 THINGS ON MY MIND

1. Buy low, sell high, right? A week ago if someone asked most traders what they’d do if the SPX quickly corrected 15%, and was at weekly support levels, most would say they’d be buying. Well, everyone can talk the talk, but most find some excuse to not execute when they get the opportunity. We do know that we are at technical oversold levels not seen since December 2018. So my bias can’t help but be taking shots long.

2. Get ready for tons of noise the next few weeks. You’ll see your entire Twitter, blog, and media feed filled with analysts throwing out price levels, higher target prices for a bounce, lower targets for a further crash. It’s all guessing and it’s all gambling at this point. Control your FOMO. Most of these trades won’t work. Outside of a few gambles, I’ll hopefully control my itchy trigger finger and mostly watch for a few weeks. With a huge gain already for the year, I can sit back and miss out on some action in what will likely be a very hard environment to make money trading.

3. Bitcoin is further confirming its recent short-term bearish cycle. We’ll have to wait and see how long it lasts. The all-clear buy signal if you’re on the sidelines is $9,700, which would imply it will have broken above the 50-day moving average and the broken support (black horizontal line). I’m still holding my longs as long-term positions since I still think the bottom made in December was a significant one. I don’t mind these short-term pullbacks. If anything, I prefer them.

4. This is a good time to remind myself of two big things from my trading last year. One – I didn’t make any trades until March 8. Two – I stayed on the sidelines from October until December, making no trades because there just wasn’t a juicy set-up. And I still finished the year with a monster gain. Making no trade is often the best trade.

5. The new line in the sand in SPX for the bulls to take control again is 3,260. It’s obviously a lot higher than where we are. If we get close to those levels, I might short since it should be resistance. People still remember the December 2018 bottom, which was a true V-bottom that never looked back. I doubt it will happen the same way. Instead, I’d expect something more similar to a typical bottoming process of a rally off a low, then a re-test or several re-tests (including new lows) that happens with positive technical divergences.  It could take weeks.

6. Use stops. Especially if you can’t be in front of the screens every minute. Which is most of you. You can set them at wherever you want keeping in mind how volatile the stock is, what your time frame is, what your risk tolerance is. But set them. Set it and forget it.


A CHART THAT CAUGHT MY EYE

DBX – Dropbox

This is an especially good time to stay away from the super-crowded, heavily traded most popular stocks. The AAPLs, AMZNs, etc. Yes, they’re the “best companies in the world” and are trading at huge discounts to a week ago. So if you have long -term time frame and conviction, go ahead and buy and hold.

But if you’re a shorter-term trader, be careful. They will be subject to some wild swings since they are the most widely owned. So market volatility will cause them to act irrationally and unpredictably.

So I’ll stick to looking at some less crowded names.

DBX caught my eye as one of the few stocks that has held support during the bloodbath. It has pulled back strongly since it gapped up on a good earnings report, but is still holding support and is in a bullish technical configuration. It had also built up a nice bottoming formation on the weekly charts heading into this.

Like with any long in this environment, I’m keeping my stops tight on this one. I’m long here with a stop at $18.50, which it almost broke Friday. I’ll hold as long it doesn’t close below my stop.

Leave a Reply

Your email address will not be published. Required fields are marked *