Where are we now, and where have we come from? Thats context, and something very important to traders and investors alike. With this in mind, we know the US equity markets have rallied (17) seventeen weeks straight without a respite or significant drawdown. In addition, we know equities reversed to a bullish trend during the week of October 1, 2019, ushering in gains of more than 16%. Prior to that reversal, the markets consolidated for 8 weeks, through August and September.
In the interim, we discussed the changes and considerations members needed to digest in each weekly video. You can check the youtube channel for those weekly thoughts.
In the most recent Opening Monologue, I said
- “We are extended and overbought.”
- “We will focus on fewer names as we are at ATH.”
- “HYG/JNK printing weekly dojis, potential pivot high, risk off”
- “NYMO/NAMO plateau, need to see breadth improving”
At the end of the Opening Monologue, I emphasized;
- “Bottom line, markets are extended, focus on fewer names.”
Considering the above, we received an email from a new member today that I’d like to share with everyone, as it makes a few important points. The members name is struck out to preserve their identity.
The question addressed an open trade on IWM. Click to enlarge.
Prior to Friday, the markets were trending for 17 weeks. Experience dictated taking swing profits off gradually, starting 2 weeks ago. Then the coronavirus hit the headlines midweek. Sentiment changed immediately. Several blog posts this week and last signaled reasons to be cautious and Thursday where we were taking a more defensive posture.
SPY – Respite or Exhaustion?
On Thursday, the coronavirus was all over the headlines, as such we were relieved to get a bounce at the 9ema on Thursday, which represented a (-1%) drawdown from Wednesday highs (332.95). Thankfully, that was followed by a gap up on Friday to sell more positions into strength. Friday’s low represented a (-1.68%) drawdown by comparison.
Our immediate thoughts in the trading room were, pay attention, this is a significant change in market behavior. And, to members we kept repeating, “do not trade like you have been trading the past 16 weeks.” This could be the start of a consolidation period or bearish descending pattern.
We marked up a chart of SPY, which covers thoughts for the week ahead.
- Friday’s bearish engulfing candle is the largest range day since late September. This price action resulted in a distribution day.
- Fibonacci levels @ 23.6% = (-3.51%) drawdown
- The bullish 50d would be near that zone in a week or two
- Red shading delineates where 23.6% Fibonacci, 50d and recent base converge. This is a likely target if weakness persists.
- Cycles (bottom panel) and indicators are mixed.
Absent a new catalyst, the most likely deduction renders a market neutral/bearish mindset.
Caveat: In order to get full on bearish, price action needs to drop below the 21d. Crude oil and junk bonds are signaling that might happen. Stay alert.
Finally, if you find yourself with bad entries that are under water or worse, if you are stuck in a few swing positions, remember the markets are at all time highs. SPY is only down (-1.68%) at its worst level. We adjusted our long exposure for this very reason. Fewer positions are affected now. We can live with a little short-term weakness.
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Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Trades and or positions listed and taken from the watchlist are my own and should not be considered “advice” to enter any particular position or asset.
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.
Live broadcasts are educational in their content. Proper risk management is considered on every trade or asset mentioned.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.
As always, the use of technical and fundamental analysis is encouraged in order to fine-tune entry and exit points to average seasonal trends.
These mentions are stocks that we may or may not decide to trade as outlined in the watchlist. Always use a stop.