Stocks were absolutely gutted on Friday, following a nasty sell off on Thursday, on extremely large volume. The back-to-back sell offs look extremely similar to another period of time when we sold off hard on huge volume near recent all-time highs right before the weekend. I believe that year was 1987. Now I am definitely not saying that we are going to have a panic stricken sell off/crash on Monday. However, the similarities are extremely similar on so many levels that it is hard for me to ignore the possibility.
While the selling on Thursday and Friday turned quite extreme, helping the VIX record its largest weekly increase ever, it did not have the feel of an outright panic. If the Investors Intelligence survey comes out next week with bears topping the bulls, then I will take into consideration that it might have been panic selling. However, I didn’t see much panic in the financial media in any form. In fact I saw nothing but “buy the dip” comments on most major financial outlets. On top of that a VIX at 30 is semi-fearful but it is no where near history’s ultimate fear levels of 2008 when the VIX almost hit 90 or in 1987 when the VIX almost hit 175!
So to say that the selling is definitely over following the Thursday and Friday bloodbath is to say the least at least a little premature. The biggest tell that I have that there is probably more selling to come is the fact that there are a lot of big-cap high quality names just started to come off their 52-week highs that are no where near their 52-week lows. Now that these big-cap names are joining the small-cap names in the selling things could continue to get ugly or at least be very volatile for a significant period of time. Stocks like FB, AMZN, NFLX, and PCLN have a long way to possibly fall.
However, let’s say that the sell off on Thursday and Friday was it. Even if that is the case, there is real significant structural damage across the board in every sector. Even the recent defensive industries that were starting to lead that indicated a change in the market’s atmosphere got hit on Friday. Homebuilders appear to be staging a fakeout breakout. All in all the damage is broad and the technical damage is extremely bad. There are very very few technical patterns out there that have what I look for in a powerful technical price pattern. It’s extremely ugly. Best case scenario, for this market, is that it is extremely volatile, choppy, and trendless for days to weeks to months to come.
The kind of vicious and quick damage that was done to technical patterns this past week simply can not be healed quickly. It is almost impossible. It is going to take time to heal the damage that has been done. This being said, I am still tracking 20 long positions that are still either trending above their 50 day moving averages and/or are trending above their most recent key support levels. I must say, considering the selling on Thursday and Friday, that is extremely impressive. While it is possible that the market will turn and help make these the new leaders, it is more probable that they are the last holdouts and will eventually succumb to the selling pressure of the overall market.
Getting back to the overall market. One of the biggest tells on my end that the market still has the potential to go much lower is my momentum oscillators. While extreme short-term oscillators that most follow are oversold, my personal daily and weekly oscillators that I track do not show any of the major market indexes that we track either in extreme oversold conditions or in oversold conditions with the momentum oscillator lines turning higher. On the daily charts, the oscillators I track, in all the indexes, while in oversold levels are no where near extreme oversold levels seen in previous declines. On the weekly charts, most of these oscillators are not even oversold and in fact have only begun rolling over from overbought conditions.
While the indexes could turn higher in price first, before the oscillators turn higher, any move probably will not be sustainable on the short-term. Like I mentioned earlier, the damage is just too severe. There is no way that a bounce here has any chance of turning into the start of a major uptrend, without any major volatility first, until these momentum oscillators are in confirmation with price. The overhead resistance is going to be so severe here that almost any bounce on the short-term is going to be perceived by trapped longs as areas to get out. Breakeven is now the name of the game for most amateur stock market investors. The odds they will get out breakeven are extremely low.
For over a month now, we have been warning readers that something is wrong with the uptrend. We have had many long-term winning positions treat us very well in 2015 but the recent longs were simply stopping out before producing any gains way too often. There was a lot of churning the past two months and with the market resolving itself lower it is clear that its going to be a while before we get any strong long signals. A month ago when we were still receiving good looking signals no one could have known which direction the market was going to resolve itself ahead of time. The only thing you could have done was have a game plan going into the trade and stops on the books to protect yourself from losses.
The sell off the past two days has driven home the importance of using stops in a market that is seriously very illiquid underneath the bid/ask. A lot of traders thought that some of the stops I was using were too tight as we saw a lot of leading stocks hit my stops and reverse higher in 2015. This was mainly due to the overall condition of the overall market but it is something that happens. I will always take being stopped out of a good trade due to improper price action over not having stops on the books and possibly suffering some of the losses that occurred on Thursday and Friday.
As you can see below, a lot of our long term winning positions following Thursday and Friday have hit their final stops. That is why you know longer see the names on our top holdings list. We have taken our profits as final support levels have been cracked. If we would not have used hard stops on some of the names and instead waited until the EOD on Thursday or Friday we would have seen even more of our hard earned gains evaporated as many of the names finished well below our final sell stop levels.
At the same time you will still notice that we are still long a few names. That is because, as I said earlier, they are still trending higher. However, some, like TREE, have cracked hard and its final sell stop levels are just below the LOD of the gap up following earnings. Why don’t we just sell now? If the market is finished selling off and the we do race higher and TREE goes on to hit all-time highs I will regret missing the potential gains more than I will regret losing a little bit of profit off the highs. Trading on emotions is not something that we do at Big Wave Trading. We have hard time tested rules that we obey methodically.
That is why days like Thursday and Friday are just another day for us and our system. If you felt your heart pounding or your adrenaline flowing on Thursday or Friday, you are doing something wrong. Start doing something right and come join us by first taking a free trial. As an added bonus, take a look at our Thursday video lesson which included our recommendation to go long TVIX (+33%+).
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
ANAC long – 277% – 1/20/15
SKX long – 133% – 1/26/15
PAYC long – 117% – 10/30/14
TREE long – 80% – 6/2/15
DXCM long – 65% – 12/3/14
ADPT long – 55% – 5/18/15
FIX long – 51% – 3/11/15
ABMD long – 42% – 7/10/15
AMSG long – 40% – 2/26/15
SERV long – 39% – 11/7/14
AVOL long – 36% – 4/21/15
AYI long – 29% – 1/23/15
AMZN long – 28% – 2/25/15
