As we have been saying for weeks now, it appears the market is undergoing some churning action that historically leads to lower prices. Today was further confirmation of this and we had NYSE stocks break down everywhere in my important nightly scans. This is a big hint that either we are going to rotate into Nasdaq names (doesn’t look like that) now or it is time to finally try to test those 200 day moving averages and for the Russell 2000 to blow right through it.
Today’s action was quite bearish for the market in the short-term. Now, I know that TWTR is killing it after-hours but I want to remind everyone that this is just one stock. We already have a very weak Russell 2000, high yield credit continues to sell off, NYSE stocks that were leading the move higher are breaking down everywhere, and the crowd is still very bullish. So don’t lose sight of the forest by focusing on the single tree that is TWTR.
This weakness and very poor intraday action came with a huge surge in volume on the Nasdaq. This is a big negative with our already churning price action. While it is possible that the market could breakout and run 3% tomorrow (you need to be prepared for everything!) the odds are now greatly on the side of the bears establishing control. The reversal off the highs and the final two hours of trading was on extremely heavy volume compared to any volume we have seen on the upside.
The only thing that would be able to fix this damage would be an immediate reversal on even heavier volume. A lower volume reversal will still leave me in a cautious tone. If the market does reverse higher, I would greatly welcome it as it is always more profitable on the long side than the short side. However, I deal with reality and reality is clearly trying to forecast to me that something dark is on the horizon.
If the market does begin to pullback I believe at least a retest of the 200 DMA would be fair for our NYSE and Nasdaq related indexes. The Russell 2000 is so weak, however, that I am not sure how a market rally can really happen with this index so much weaker than the general market. On top of this, the NYSE Advance/Decline line did not confirm the most recent highs in the SP-500. A negative divergence in this index is never good. So there is yet another strike against this market.
The biggest strike however comes down to how your stocks are acting. On that note, it is a resounding “not well.” For the past 2-3 weeks we have constantly warned new investors about going long this market, especially ahead of earnings. We, on the other hand, take strong signals no matter what. For the most part they have paid off but for the past two weeks it has been nothing but misses outside of ETFs. This is your biggest clue that something is wrong. There is no other better market tell that its time to get out then when your new longs that have a high win/loss ratio start to all fail. It’s time to get out.
Tonight, due to this being the case, we have a lot of sells. Most of them we are leaving with either good gains, small gains, or very small losses. If you are going to trade in this market, you have to protect yourself. Since we are taking on added risk by going long stocks in this tape ahead of earnings we have been extremely fast at cutting losses. This has proved to be very effective as it has saved us from more than a few big losses.
This being said, we still have a lot of positions that are still in clear uptrends. If these stocks start failing, then we might have some real serious issues in the market. For now, it is still a mixed bag and that is evident by all the signals that still showed up in my long scans tonight. While not many are actionable there are enough gems to hold out some “hope” that there might be more upside soon for this market. Reality is telling me to not bet on it but if maybe we just pullback a little, back and fill, and then breakout higher we will have quite a few nice setups to work with.
Tonight, as you can see below, we have quite a few stocks in bold that gave solid signals. Most need to pullback to the pivot points of breakouts, consolidate, or are too close to earnings to take as a new long position. However, there are options, if you believe the market has seen its lows. There are a few markets that are no where near lows, are not pulling back, and are instead hitting new highs. China, Hong Kong, and South Korea all are moving higher on strong volume with many leading stocks from China looking great despite the poor past two days of intraday action.
This now leads us to our one new long position [SUBSCRIBERS ONLY].
However, thanks to the market’s price/volume action and the lack of success with new recent trades my position sizes are going to be reduced. [SUBSCRIBERS ONLY] If this trade does not work out right away, just like every single of the trades before it the past two weeks, we will cut our losses immediately. It doesn’t cost me much to know if I am wrong or not. Missing out on the recent signals in CAF and CHXX have cost me some decent gains. I’d rather be wrong and lose a little than miss out on a healthy chunk of profits.
The other position is an obvious hedge against this market breaking down immediately. If the hedge does not move higher (the overall market moves lower) immediately, we will, once again, lose very little if we are wrong.
Now one final reminder before I go. If you are a new trader and don’t understand why we are operating the way we are right now, then cash is where you want to be. If we had a small account or was forced to pay high commissions with our brokers (thus forcing us to take 20% account positions minimum per trade), we would not have had a single long signal for the past month. However, when you have capital and low commissions, you can trade like a hedge fund so you can produce some gains in a tough market environment. We’ve been spinning our wheels the past month but leading up to this past month it has been a very good 2014 (not great though) and that wouldn’t be possible unless we were trading as we are now. Swinging for the fences is not appropriate right now so don’t do it.
Thank you. Aloha.
