The Big Wave Trading Portfolio remains under the strongest SELL signal triggered since 2012 as stocks continued to sell off the previous week on very heavy volume. There is nothing pressuring the model whatsoever on this SELL signal as of now.
Friday went just about how I expected it to go and that is, so far, good confirmation that we are on the right side of this trade for now. It is obvious that anything can happen and with the market very oversold on a few momentum indicators it should come as no surprise to anyone if the market bounces around or even moves up over the next week or two. I don’t expect it to shake me out of my core short positions, based on the overwhelming evidence on my end, but anything is possible when you are held hostage by a reckless Central Bank that is hell bound on destroying the middle class and poor all for the sake of the 5%. Disgusting on so many levels but it is what it is.
What is more important to me is what happens at the key resistance levels and moving averages that now overhang on all of the indexes. How the market moves into, through, or off of these levels and to what extent the volume is on these moves will determine our course of action in the upcoming weeks leading up to the summer where the market historically doesn’t do jack.
The index most likely for a strong bounce is the Russell 2000 which is very close to touching its 200 day moving average. The only problem with expecting a strong bounce here is that the price decline velocity towards this moving average is quite steep. This suggest any bounce should fail somewhere around resistance levels around the 50 and 100 day moving averages. If the 50 crosses below the 100 before price touches these lines then the odds increase that the index will fail. So keep an eye out on these levels. The key to this analysis is to not get shaken out of your short positions if the rally comes with zero new leadership and lame volume.
The Nasdaq ripped right through the 50 and 100 day moving average and this time there was no bounce off the 100 day moving average for the Nasdaq for the first time since 2012. The Nasdaq has had a recent history of either retaking the 50 day moving average right after breaking below it or bouncing off the 100 DMA following a 50 DMA break and then retaking it. This time around it was just more selling and the selling came on very heavy volume confirmed in all ETFs that track the index. The next logical stop should be the 200 day moving average. So keep an eye on that line in the sand for an oversold bounce.
The DJIA and SP500, despite trading below their 50 and 100 day moving averages, are still in technical uptrends when connecting uptrend lines across the recent 2013-2014 lows in their charts. The same can not be said for the Nasdaq and Russell 2000. The DJIA 50 DMA is trying to rollover the 100 DMA and this is the first time price has cracked these converging lines on strong volume and it appears there is no floor until the 200 DMA. This would make sense as the DJIA tries to play catch up with the technology/growth related indexes. With the 200 DMA still a decent drop away, if price does hit that line it should be expected that a bounce will attempt to play out.
The SP-500 is also quite far away from its 200 day moving average but its upper trend line connecting the June, October, and February lows resides well above this line so I would expect some sort of support or bounce attempt to establish there. If it does not, I would expect a move straight to the 200 day moving average to play out. The SP-500 has a history of cracking the 100 DMA and then retaking it quickly so if we do not see that this time around that trendline and 200 DMA should be expected.
The problem with buying stocks for the long-term, if these bounces do happen, is this: The market is selling off on huge volume across the board with leading stocks already having topped back in January on extremely strong volume to not return to new highs in March. A bounce here would have no new leadership and with defensive stocks leading the way would not have enough momentum to probably carry this market to a new high. On top of this, forgetting all about the reason why this market is even up here after six years–the Fed, sentiment is all wrong with bears coming in at 18% on the Investor’s Intelligence survey this week (even after the previous week’s sell off) which is at 1987 levels before the greatest one day crash in the history of the stock market. In other words, the crowd is extremely complacent.
This can be best seen in the VIX which is at levels below its June, October, January, and March highs despite the Nasdaq being at its February lows with leading stocks under complete distribution and no new leadership anywhere in sight. All other pullbacks in 2013 either had new leadership rotate in or kept the current crop of leading stocks. This time, indeed, it’s different. Aloha and have a wonderful upcoming week!!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
VIPS long – 277% – 7/17/13
HEES long – 213% – 9/4/12
AER long – 127% – 6/27/13
WDC long – 101% – 1/9/13
USCR long – 65% – 4/12/13
TPL long – 49% – 10/22/13
JBT long – 25% – 9/11/13
NOTES ABOUT TOP CURRENT HOLDINGS: The remaining long-term long positions are all near their final profit taking levels but are still above them and a full sell has not been triggered as of yet. Partial sell signals have been triggered on all of these stocks and thus the remaining positions are around 20-25% of the original trigger date signal. Our portfolios are currently positioned 45% short on margin, 40% cash, and 15% long.
