One of the worst possible setups for the general market is when a market rallies back to its old highs, sets up for a breakout, and then fails. That pattern officially played itself out over the last two weeks, following Friday’s breakdown on above average volume. Due to this key reversal, our market operation models did a quick about face from BUY to NEUTRAL to an outright SELL signal this past Wednesday. Making the switch to a SELL signal on our end more impressive was that this switch was an across the board SELL signal for my models despite the Nasdaq and Nasdaq 100 still trading above their 50 day moving averages. A very rare event, indeed.
This reversal off the highs has been more painful to us personally than any previous reversal in the past 3 years. This is due to the large amount of buy signals we received following the October lows. While we have been able to leave a lot of names that we bought early in the rally with gains, we have seen those gains come in much further from their highs than we would have liked. On top of that, we received a lot of buy signals right before the market reversed and we have begun pairing back many of these names. The good news is that we raised our stops before this week and continued to raise them all week allowing us to leave with either gains, small gains, or very tiny losses.
One of the biggest hints that this market might have some problems with a potential breakout two weeks ago was the lagging momentum in our momentum oscillators that we track. None of the four momentum oscillators that we follow on every index showcased an intermediate term set of higher highs and higher lows. When you take that into consideration with the lack of volume on the upside following a heavier volume sell off, once again, in hindsight it is no surprise we failed. Do I regret taking so many long positions and getting fully invested along the way? Negative. If I don’t take any of those signals due to none of them being perfect and the market does breakout to new highs without me you can be sure the damage psychologically would have been much greater. It’s easier on our end to take a signal, have it fail, and cut our losses extremely quickly rather than to pass on a signal and watch it run into the heavens without us.
2015 has turned into a disappointing year following the drawdowns we have suffered from our account highs about three weeks ago. However, considering the extremely volatile and choppy sloppy nature of this tape, 2015 has been borderline successful for us at Big Wave Trading. The most unfortunate item to all this chop and slop this year is that we have probably worked the hardest we have ever worked at trying to extract profits from this market on an EOD basis. A lot of work with little profits to show is unfortunate but it is what it is. You can only do so much with a tape that traded the way it traded this year. The market put in a lot of work to go nowhere this year. It’s been quite impressive.
The biggest hint all year long that something just wasn’t right with this market is that for the first time in I do believe my entire trading career I did not receive one single technical daily/weekly pattern setup that I would consider “near-perfect” or “perfect.” 2013 and 2014 did not have any “perfect” setups but there were some “near-perfect” setups and there were a lot of stocks that qualified in both my CANSLIM and Perfect Speculator quality scans. 2015 had quite a few stocks that were both CANSLIM and Perfect Speculator quality but the market’s lack of an uptrend caused these to not run like they have in years past. Another reason that these “perfect” and “near-perfect” patterns have not been able to setup is that we still have not had a 20% correction across the board since 2008. It’s hard to get “perfect” setups without real corrections. Even 15% corrections will do. We have not seen one of those since 2011.
So, obviously, in hindsight, it is no surprise to see us reversing here. Volume has been lame on the rallies, our momentum oscillators have been lagging, extremely bullish technical patterns have been lagging, the Advance/Decline line has been lagging, the Russell 2000 has been lagging, interest rates are set to rise soon in the USA, and the world economic situation is rapidly deteriorating with Oil hitting new lows by the day. Despite this, we still have quite a few long positions in names that are still holding above their most recent support levels. This is where our final stops are on all of our remaining positions. This will allow us to leave the early long names from October-mid November with gains and leave with tiny losses on long names from late November-December. We also have our hedge in UVXY but sadly our maximum size that we should have on at this point was not completely filled and our initial long signal was kept smaller than it normally would have been due to a previous whipsaw the day before. The lesson of that whipsaw has been learned. The next time we increase the size. Not decrease.
Basically our play right now is a heavy amount of cash. Cash is definitely king here for new investors. It is too late to establish a large short position but if the market does bounce on lower volume into resistance and we see a heavier volume reversal we will not hesitate to increase our short position against the overall market. If the market starts to stabilize then obviously we will monitor the market for new long signals. However, considering all the damage that has just been done on top of the damage from August and all the rolling over in small-caps and breadth it is probably going to be a while before this market can establish any kind of solid foundation to build a rally on. If recent history is any guide to the future, expect more chop and slop with a few fakeouts here and there. Have a great rest of your weekend and great luck to everyone during the upcoming trading week. Aloha.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – SIGNAL DATE
PAYC long – +116% – 10/30/14
UVXY long – +50% – 12/2/15
MEET long – +50% – 10/9/15
HCKT long – +43% – 6/18/15
EPAM long – +27% – 4/2/15
