The Big Wave Trading Portfolio model is under a major SELL signal on all market indexes. The model switched from SELL to NEUTRAL back to SELL this week as the insane volatility of the tape and the strong support at 2014 lows appeared to signal in a potential bounce in the Russell 2000. However, by Thursday it was clear this market was in trouble and on Friday it was confirmed with all but one leading horseman (AAPL) cracking.
What makes this most recent pullback troubling is that my individual stock scans look like they did during the July 2011 pullback. And to be honest some of these NYSE oil names and Small-Caps look like they did in 2008. The sell offs below key support lines on such extremely heavy volume was observed across almost every leading stock in every sector in the overall market. This is a much different tone compared to all prior sell offs from 2012-2014.
What makes this even more concerning is that bulls increased last week on the AAII survey and bears are still at 1987 lows on the II survey. So if you are looking for sentiment to get extreme so that we can have a tradeable bounce we are not there yet. While the VIX is finally starting to show signs of fear, it is only starting to breakout above that downtrend line connecting the recent highs going back to June 2012. This is indicative of a total trend change and not an extreme reading of fear overall. The put/call ratio does shows fear out there trading above 1.2 but still for a longer term bottom to form you are going to want to see more fear in the above sentiment readings.
With all of these broken technical patterns in so many once leading stocks, you can be sure it is going to take a while to repair this damage. Even if we do find a floor in the short-term and begin to move higher, it is going to be nearly impossible to just V-ramp straight higher following the extremely huge distribution we just saw last week. The volume on Friday alone should be a huge red flag to anyone trying to buy a bounce that they need to wait for an up day and then a subsequent Follow-Through Day before re-entering a market with this much technical damage.
If I just had one potential leading industry group (not Food/Beverage stocks!) holding up I wouldn’t be as concerned with the current tape. As it is, I just went through 6,000 charts of stocks trading at least 50,000 shares daily volume on average and I can tell you it is an absolute cesspool of technical patterns. The few stocks that were holding up in decent patterns like the six horseman (NFLX FB TWTR AAPL GPRO TSLA), are now reversing following the selling on Friday. In fact, we got an add signal to our Biotech hedge on Friday. With FB, NFLX, TSLA, TWTR, and GPRO now showing some troublesome price action, it just leaves AAPL holding what is left of this tape up.
To be brutally honest, I am not sure how this market is even up here around the 200 day moving averages on all the other indexes outside of the Russell 2000. When I scan the market of individual stocks it is just ugly, ugly, ugly, followed by more ugly. It could be indicative of a short-term bottom but there is no way, with the damage in these charts, a bounce will hold here without further QE intervention. These charts are broken on huge volume. Big fast breakdowns in a tape under wholesale distribution is not a tape I suggest traders try to dip buy. Caveat emptor.
We are basically cash with about 25% of our accounts short in leveraged index derivatives. I have made mention to subscribers the past week that if this was pre-2008 I would be sure that this market was done and about to fall completely out of bed. However, since 2008 and QE1, you would be a fool to simply follow your price signals and blindly walk away. You simply do not know if they are going to announce more QE or not. While every indication is that they will not, you can not risk another round of surprise QE y shorting into these extremely short-term oversold conditions. As it is, if we do not crash here in the upcoming week, it is going to at least be extremely choppy and a market we are only interested in daytrading.
We daytrade story stocks, contract winners, earnings winners/losers, and pump&dumps intraday. We know where to focus on what we are doing. Daytrading is a risky methodology but continues to be safer compared to EOD Trend Following signals that continue to have whip-saw track records. If it wasn’t for Sell Stops, we would have churned our account a bit more than we should have leading into this sell off. On top of that, a lot of our hedges (now short positions) got some unlucky fills that then led to us getting stopped out that then led to us getting re-add signals. It’s unfortunate but it is what it is in this market where QE is still in effect. at the end of October, QE will be finished. Maybe then we can rely on our EOD signals a bit more.
As we have been saying for one month now, cash is king. We have made this a point for a full month now to all subscribers and those that read this column on the weekend. There is no excuse for anyone that reads this column to have been caught on the wrong side of this market sell off. It is unfortunate I can not trust my gut anymore and could not bank on index Put positions the way I wanted to but I realize what I am up against. The world Central Banks are very tough to trade against.
I’ll always err on the side of caution when it comes to the short side, when the signals are not crystal clear. The July/August 2011 was clear and worked immediately with great fills on our EOD orders. This breakdown was not nearly as clear from nearly as clear or clean and there was a fakeout breakout right before the rollover. If you study the technical setup of the first day of the July 2011 breakdown and compare it to the September 25, 2014 breakdown you will see clear technical differences. Those differences, along with poor fills, is the difference between being 100% short right now and 25% short/75% cash currently (technically 5% long, 70% cash, 25% short–those longs have Sell Stops and are close to triggering).
Great luck during the upcoming week. Try not to be too quick to BTFD this time around, remember cash is a position, and if you are looking to go short this market here you are probably too late. We are oversold on the short-term you know. It doesn’t mean we can’t get more oversold but now it is just basically gambling on an EOD basis. It doesn’t normally pay to chase performance.
Thank you. Aloha from the beautiful island of Maui.
Top Current Holdings – Date of Signal – Percent Gain Since Signal
VIPS – 403% – 7/17/13
OVAS – 36% – 8/8/14
SRTY – 33% – 8/27/14
VDSI – 26% – 8/4/14
RENT – 26% – 9/24/14
