From the Trading Desk

Weekend Update: Rotate, Top, Or Chop?

To say the last six days have been an adventure in the stock market is an understatement. The DJIA, SPX, RUT, XLU, NYSE Advance/Decline line all hit new highs the past week, the DJT is nearing new highs, but the COMPQ and NDX look like they could be trying to top. What we are seeing here is either rotation out of the technology names into every other index or the COMPQ/NDX is the leading index and forecasting a possible seasonal summer top. Worst case scenario, for me, is that this is the start to a summer chop fest. Every scenario is possible so it is best to prepare for it all.

If we really want to psychoanalyze the price action the past week, it was actually bullish overall. Like I just said, most of the indexes hit new highs and it was only the Nasdaq and Nasdaq 100 that fell short. While both of these indexes tallied technical distribution days on Monday and Friday the bullish intraday reversals both sessions along with one on Thursday and a higher close than open on Monday definitely makes it look like these indexes could be hammering out bottoms near their 50 day moving averages. It’s too early to tell but it is noticeable on my end.

Now the worst case scenario would be for this to be the start of some nasty summer chop. This is worst case for me as it means that I could continue to receive an inordinate amount of long signals while at the same time receiving an inordinate amount of sell signals. All of these signals could also come with most stocks in my ports not triggering any actionable stop movements. I still have to take all the signals, even if I know half will fail. I just continue to take them knowing the odds are that the ones that do succeed will produce gains well above the total losses in the stocks that fail.

So it is possible that there might be an unusually large amount of work on my end that by the end of it all could lead to small losses. That’s trading folks. Sometimes I don’t have to work that hard, I get a few high quality signals, and the market produces large gains for me. Sometimes I get too many signals causing a lot of work on my end that ends with me locking in small losses by the end of it all. It is what it is. Hopefully it is not this time around.

Overall sentiment confirms this could be the case as it is very mixed. The IBD put/call ratio actually indicates that sentiment is bearish short-term with the ratio coming in at 1.00. 1.20 is extreme pessimism lately. It’s not there yet but it is close. On the other end is the NAAIM Exposure Index at 92.6% long, the VIX at 10.38, and the Investors Intelligence survey still showing 50% bulls to 18.6% bears. Then there are the two neutral readings. The CNN Fear&Greed index is at 50 (ranges from 0-100) and the AAII survey which is at 32.27% Bulls, 29.48% Bears, and 38.25% Neutral.

This kind of mixed data is why it is best to strictly follow a disciplined set of rules at all time. Currently my models are under operational BUY modes. This means when a long signal triggers I take it according to how many individual scans it showed up in and how it is setup technically in its overall stock pattern. If the stock is extended, I reduce size, i there is a long signal. If there is an extended long signal under an operational NEUTRAL mode I might or might not take it depending on other various factors. Under a SELL signal, extended stocks will not be taken.

Enjoy the rest of your weekend and I wish you all the best during the upcoming trading week. Remember, it is summer time. This is not the time to be swinging for the fences. Especially with the lack of macro and micro catalyst in the short-term. Trade safe. Aloha.

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