MARKET SUMMARY (3/20/20) – FALLING KNIFE

Are we there yet?

With every new low, every trader’s itchy trigger finger gets more and more anxious. Bullish or bearish, everyone seems to be looking for at least a short-term bounce. And as usual, with everyone watching the same things, the market keeps ambushing them with surprises. 

I’ll repeat what I’ve said for weeks – this is a dangerous market that most traders shouldn’t be playing in. We have all year, and many years after that, to trade and use tools that have worked historically. This is a market where normal tools don’t work. Even though I’ve been able to navigate it reasonably well, I’ve had to adjust how I look at my usually trusty indicators and trade a little more on instinct. Not exactly a consistent way to make money.

I’m sitting on a small long position, built up over the last few days. Like with many of the bets, I’ve kept them small enough that I can live with taking losses, especially on the options. Long-time readers know how often I preach sizing your bets as one of the most important parts of trading. 

Don’t worry, I see the same things you’re seeing about nationwide shutdowns, corona cases threatening to spike into the 100,000s and even millions. There’s a human part of me that can’t help being influenced by the headlines, but there’s a trader part of me that views things very differently.

If you go back and read all of my e-mails from the past year, you’ll see a consistency in my trading style. I went short In January and February when all the news was good and every basic chart pointed higher, and bought the dips last year on every negative trade war headline or Iran war threat. This is the art of weighing sentiment and charts.

My bets during this crash have been small, quick and mostly profitable. Despite bring in the middle of a historic decline, I have made only long bets since February 14 and have made money on almost every one.

For the first time in weeks though, we have the charts beginning to line up for a rally that lasts longer than a day.

Sticking to my basic trading rule of thumb, 4-6 weeks into a MACD signal is when I start to look for signs of a reversal. We just completed week 5 of a monster MACD down move, so timing is getting close. It’s also lining up with weekly RSI and stochastics oversold signals.

I have no emotion on this bet – there’s no magic support level I think we’ve hit, I have no opinion on whether we get a quick dead cat bounce, or it’s THE bottom, or whatever. I’m trading only what I see in front of me, and will play it by ear. If I see a decent risk-reward bet, I block out the noise and take a shot. If it’s a loser, I won’t be stubborn – I’ll take my loss and move on to the next one. 

I do notice that there are a large number of Twitter traders in the last few days putting out 2,200, 2,000 and 1,800 SPX price targets. It’s become a little too popular an idea that the market needs one last capitulation move down. That doesn’t mean they’ll be wrong, but as usual, when I’m long I like it when the crowd is looking lower.


4 THINGS ON MY MIND

1. As I mentioned last week, as long as the monthly technicals remain in bullish formation, primarily a positive MACD, I’ll give the benefit of the doubt to the long-term bull market. Well, it finally broke down this week, so we have to respect it.

Now, the month is not over, so nothing is a sure thing yet. The monthly chart dipped into a similar bear formation in December 2018, only to save itself in the last week of the month. Could we see that happen again? Maybe.

But, for now, I have to officially be in the bear market camp. 

What does that mean? In the short-term not much, since I’ve always traded short-term both ways, regardless of what the long-term trend is. But it does affect how I frame short-term contrarian trades. Last year, I was able to step in and make aggressive bull bets when the market seemed to be falling apart and charts were breaking down. I was able to do that because I had a big picture bullish framework. For now, I’ll go with the opposite – any powerful rally that looks like a breakout, every good news, will be chances to look to go short. 

I’ll repeat though – the month isn’t done yet. So there’s still a chance to bounce back. Also keep in mind that this really is a unique market. Look at how different this bear market looks than previous, long-lasting bear markets. Unlike previous bear markets, which built up negative technicals for many months before finally breaking into a bearish formation, the sharpness of this move into bear territory is unique. That means that anything can happen from here.

If we bounce right back into bull territory next month, i’ll switch my stance right away, Be flexible.

2. Slowly, but surely, and quietly, there are individual stock charts that are turning bullish. It doesn’t matter that most of them are the obvious names that everyone expects will do well in this coming social distancing, work from home, recessionary world. Even if they seem to be rallying for short-term reasons, whatever the reasons are – more toilet paper buying at Walmart, more Campbell’s soup, more Zoom video conference calls – they are still stocks that are attracting buyers. After several weeks of having every single chart screen as bearish, having a dozen bullish charts is a critical change. This action is not the same as last week and usually comes before a broader market rally.

3. Bitcoin remains bearish overall. The rally in the last few days is encouraging, and if we have follow through, it will help turn the weekly charts bullish. It won’t take much. As usual, we’ll wait and see. I’m still holding my long-term holds, and may add if we start seeing resistance breaks and positive technicals.  

 

4. I posted this on my Twitter: “Human nature extrapolates the most recent experience. A lot of the noise right now is biased to political agendas or bullish/bearish bias. Here’s what I know about supply and demand shocks: masks, toilet paper, and some other supply issues will be fixed sooner than you think.”

Trading is all about emotion and psychology. The market is forward looking – don’t react to what you’re seeing now, especially with things that can change very quickly.  


A CHART THAT CAUGHT MY EYE

ZS – Zscaler

Zscaler is a stock that I highlighted in this very section all the way back in my November 25, 2019 e-mail. The stock looked like a long and was trading at $50.39. At one point in the weeks after that, the stock was up +35% from the time of the e-mail. Fast forward to today, even after the recent market crash, the stock closed Friday at $53.64, still profitable from that November buy signal. Given how the market has dropped -20% since that November 25 date, most would love that kind of relative performance. 

Anyway, ZS once again flashed bullish on my charts this week. As the rest of the market continued its free fall, ZS was a relative monster, going straight up everyday, slicing through several possible resistances. MACD and DMI momentum technicals are confirming this move. The broken resistances give us several support levels below (and for me to use as stop levels). It’s also attractive since, unlike the high flying MSFT and AAPLs of the world that came into the bear market crowded, over-owned and near their highs, ZS has been consolidating near its lows for longer.
 

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