The Big Wave Trading Portfolio has been anticipating for weeks that something was wrong with the most recent attempted rally in the overall stock market. On Thursday these problems were confirmed with a huge sell off on extremely large volume with many leading stocks suffering obvious technical damage. Due to this, on Thursday as all of our major market direction models switched simultaneously to SELL. This SELL signal was one of the strongest signals received since the summer of 2011.
We did not just receive SELL signals in our major market indexes but we received them in the Bank, Semiconductor, Biotechnology, Solar, Transportation, Home Building, and many other leading sectors. The selling on Thursday was not a normal pullback and the fact that I see so many new traders embracing this pullback as a must buy, especially with sentiment still very bullish, should concern bulls.
If you did not read our commentary this previous week we recommend reading what we posted on Monday-Wednesday leading into that sell off on Thursday. The warning signs were there before the sell off and the cracks that confirmed the warnings signs in the A/D line and the High Yield credit vehicles finally hit. On top of this, we did not get an immediate rebound which many traders swore to their mothers and their other favorite mythical entities was going to happen (especially when futures were higher after-hours) on Friday.
The truth is we have no idea if this is the start of a real sell off, part of a normal pullback that will take us just to the 200 DMA, or a bottom. You must have a game plan for all conditions and weigh your odds one way or the other based on historical backtesting of previous price/volume action. When this is combined with a strong grasp of how the market works with the Fed, you can get a best case idea of the probability that one situation will happen over another. At this point, it appears some selling is in order. Will we get it? I don’t know. I still have some long positions trending higher with no problems but most of my current holdings were eliminated the past week due to significant price pattern breakdowns. That is not overall bullish.
I go with the odds. Odds suggest that this is the start of something more sinister than the other pullbacks. We saw a ton of accumulation in 2013. We have seen none in 2014. When the first downtrend started earlier this year it began with a heavy round of churning action. This most recent break was preceded by weeks of churning action after yet another low volume rally. A test of the 200 DMA is the minimum we should expect here.
That being said, I got a few long signals on Friday and two are actionable. So it is what it is. Still a mixed market, for now. However, the beginning of some severe cracks are showing so while we do have some new long positions the chances of them working is slim which is why they will remain very small. On top of that, outside of our inverse leveraged ETFs, short positions, and Put contracts, none of our recent longs the past 2-3 weeks have worked. 2-for-14.
That is right. 12 out of 14 recent long positions over the past three weeks ended unprofitable. We either took a tiny loss or watched our small gains reverse and hit our breakeven sell stops (we never let a winner turn into a loser. Ever!) on the other 12. But guess what? The inverse Leveraged ETF positions have made up for the losses with their gains and if the market continues lower will really pay off compared to those original losses in those short positions.
So why are we taking these two new longs? Because as soon as you drop your methodology, that is when you pay the price and it works extremely well. If I am wrong on these two new longs this weekend, I will simply cut my loss on positions that are extremely small relative to my overall account. This isn’t a bull market with leading stocks in leading sectors setting up in tight price consolidation patterns. Know your markets! If you were forced, for instance, to have to go 20% of your account capital per trade minimum. Then obviously you wouldn’t have taken a single long position while we were in that NEUTRAL condition as we churned the past three weeks.
While I went 2-for-14 on new long positions, you would have protected all of your capital. However, you would now not be positioned with our inverse leveraged ETFs and positions well for a potential sell off. So we will see if this was a smart or dumb decision by the end of this upcoming week.
OK. This upcoming week should be fun. Get ready for all the overly biased bulls and bears to spaz out everywhere in the message boards, chat rooms, user groups, and on twitter. It sure is nice being absolutely void of all emotions during times like this. It is, however, fun to watch….kind of. Thank you and aloha. Have a great upcoming week, once again!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE OUR SIGNAL DATE – DATE OF SIGNAL
VIPS long – 481% – 7/17/13
HEES long – 199% – 9/4/12
AER long – 151% – 6/27/13
WDC long – 129% – 1/9/13
TPL long – 102% – 10/22/13
USCR long – 85% – 4/12/13
