MARKET SUMMARY (4/6/20) – STAY NIMBLE

Stop me if you’ve heard this one.

COVID-19 is going to get worse than everyone is expecting. The economic data has yet to show all the damage. Earnings are about to reported and every company’s guidance will be miserable. The charts are turning down after a dead cat bounce. The market has to at least re-test the lows and/or crash to major new lows. 

Did I miss anything? From what I could tell, that was pretty much the consensus among most “traders” on Twitter, and certainly among a lot of the comments sections.

Well, as usual the market doesn’t make it that easy. That’s why most people can’t make money trading – it’s hard to fight the urge to trade the obvious. There are times when clear chart patterns and logic work, and then there are other times when the market is setting a trap.

It was overall a quiet week for me. I posted a little less on Twitter. I almost went the whole week without trading at all. This should be the norm in such a volatile environment. I’m sure I’m not the only person many of you follow, and I can bet a lot of the most active traders were getting blown out of levels and trades all week. Or if they did trade, they were daytrading and taking very quick profits – a style of trading that most people can’t do.

I made one small long trade at the end of the week. I’ll probably take profits on that quickly and get back to the sidelines. We’re still in a very mixed environment, with an equal amount of bullish and bearish signs on the charts. 

Sentiment feels too bearish to me. More specifically, it seems like the overwhelming consensus is that we’re either in a bear market and huge new lows are coming, or we will rebound, but not before coming down to retest the lows.  

Either way, I feel like there’s an over-eagerness to short this rally. That’s part of the reason why most of my trades in recent weeks have been quick hit long trades.

Quick summary of where I see the charts: 

Monthly charts: Bearish, but hitting some extreme oversold levels
Weekly charts – Bearish, but very tough to short since we’re in week 6 of a down move
Daily charts: Changing every day

The weekly charts are important, which is why I post them at the top every week. It’s just very hard for me to try too many shorts if the weekly charts are so extended to the downside. I’d ideally want a lazy rally back up that turns alleviates the oversold conditions. Clearly, that will take time. Which again reiterates my point – the next really good, multi-week move may take time to set up.

I talk a lot about my line in the sand. It’s a level where I get decisively bullish or bearish in my trading bias. Right now it sits at 2,730.

Be clear what that means – if the SPX can close above 2,730, I will become bullish in my trading bias.

I can guarantee you that many other analysts and traders are watching that level in a completely different way. Many are targeting higher levels like that as spots to short for the impending next wave down.

In my view though, if the bear market is alive, it shouldn’t be able to close above significant resistances. It shouldn’t have technicals and momentum turn bullish. So it would be a definitively bullish signal for at least a multi-week, tradeable rally. 

I may not be buying right there, but would be watching for set-ups and pullbacks. It would make for some nice set-ups I think. Dips can be bought, with stops set that wouldn’t risk too much downside.

Greed is a dangerous thing when trading. Greed and ego I think is the overwhelming driver for why everyone wants to go short. They love that feeling of catching that big move down. They love the idea that they’re being so unique and smarter than the masses. 

The easy short was back in January, February. Today it’s much trickier.

That said, we’re not there yet. As usual, my view, and any good trader’s view, should be fluid in this environment, and could change on a dime. Stay flexible. 


4 THINGS ON MY MIND

1. There are always going to be mixed signals, and always lots of noise. If you want to be bullish or bearish, you’ll have no problem cherry picking loads of charts and analysis that can confirm that bias. It’s one of the hardest aspects trading – realizing that there is no magic chart that works every time. Charts and process are only a guide – don’t be too stubborn about what you’re seeing. 

2. I have a lot of readers that are new to trading and are here to learn. One of the keys to trading that I emphasize a lot is focusing on things beyond the charts. Risk management and sizing is critical. Don’t just look at the bullish or bearish bet I’m making, but watch how I’m making that bet. Notice how I continue to keep my bets small – in most cases smaller than the ones I usually make.

This is especially important to note since I’ve been right so often recently. It’s tempting to see a trader have a hot hand and then get greedy and aggressive in trading along with them. My bets, and anyone’s bets in this environment, are lower conviction and higher risk.   

3. Bitcoin has been hinting at turning bullish for a few weeks, and is once again peeking into a bullish configuration. As of now, it’s acting well and breaking above resistance, with MACD and DMI confirming. I’ve added a little to my trading longs. It’s not an easy, all-clear trade – there’s still some hurdles and resistances above. But it’s a decent set-up since I can buy here with a stop either at the new up trendline or the recent swing low at 6,000.  

 

4. The bad news about trading is that there is no magic process, no magic chart that works every time. Experience and instinct really are big parts of trading. It’s hard to market that, since everyone wants to believe there’s a repeatable, concrete system that can guarantee money. I go out of my way to remind everyone that my chart analysis is old school, classic and very simple, but that the ways I use charts, when I ignore them, and when I trade against them is all based on experience. 


A CHART THAT CAUGHT MY EYE

BBBY – Bed Bath and Beyond

When the market looks like a disaster, it’s normally a good time to look for positive signs in the stocks hit hardest. This is where you’ll want to hold your nose and buy the most terrifying names. At the very least, the massive oversold puke-outs will give you nice bounces to take quick profits. And sometimes you get lucky and catch a significant bottom. 

The key is to make sure there’s some chart set-up and justification, not just randomly catching a falling knife.

Bed Bath and Beyond is one chart that caught my eye. Fundamentals? Yeah, we won’t even get into them because even my mom could probably tell you they’re not going to do so well in a coming consumer recession where no one’s buying houses or making unessential purchases.

But sticking only to the chart, we have price breaking the steep, relentless downtrend. MACD has built positive divergence and has room to run, with RSI coming out of an extended oversold level.

It’s a nice chart set-up since I can buy here, and set a stop if it closes back below the up trendline (-5% down) or even the recent low (-14%). Either way, the risk-reward seems strong to me.

Leave a Reply

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