The overbought market finally hit a wall on Tuesday with stocks selling off across the board. Now, before anyone gets too bearish, it must be noted that volume was lower than the sessions before. While this is not a technical distribution day for the overall stock market it sure did have the look of a technical distribution day. There are healthy pullbacks from overbought markets and there are unhealthy pullbacks from overbought markets. Today’s pullback did not look healthy as stocks sold off early and then sold off late to close weak across the board.
This pullback is coming is coming in market that is extremely overbought with the DJT the most overbought since its highs in 2014 based on one of my Stochastics settings. At the same time the RUT is the most overbought on one of my Stochastics readings since its 2015 highs. This extreme overbought readings are coming right at key major resistance levels for these two indexes. If you find yourself too aggressively long here, we suggest initiating some ITM Puts on IWM and IYT. If you are heavily cash, it is recommended to stick with this cash position for now. At most, you will want to hedge your long positions dollar for dollar.
There are still too many x-factors in this market to be sure that this reversal at the resistance is going to definitely lead to lower stock prices. If I had volume jump across the board in the overall market, ETFs, and leveraged ETFs I would be more than willing to absolutely pound this market right here on the short side. As it is, volume was too light to be sure that this is a real turn and not just a beginning of a consolidation of the recent move off the lows.
While I really want to believe that this is the start of a consolidation that will lead to another uptrend, I know that it is best to wait for definitive proof before exercising that hypothesis into reality. When I look at the action in OCLR, NPTN, and FN today it is very hard to believe that this pullback is going to be healthy. OCLR never should have gapped down like that with the previous uptrend it was under. FN and NPTN just show how quickly stocks are ready to take the express elevator down after a slow steady climb up a few stairs.
Then we have CRAY and HA pulling back following their wedging and v-shaped run-ups respectively. Sadly both of these stocks are pulling back quite harshly following their wedging and v-shaped moves. HA’s volume is even higher on this pullback than any of its up days since it broke out. CRAY’s pullback not only looks like a rollover of the wedging uptrend but its down day was more dramatic than any of its previous 13 days of trading. This is exactly what I was worried about when these stocks broke out from their very volatile patterns. It will take weeks to make these patterns symmetrical.
When you combine these leading stocks with the FANGs today, this market looks like it is ready to roll right over. This is why it is critical to raise your sell stops here. You do not want to see gains turn into losses in our current long positions. You also do not want to see current tiny losses turn into small but bigger than need be losses here. This continues to be an overall range bound market where there is no clear accumulation or distribution occurring since the February lows. Cash continues to be king of my end. It is unfortunate today’s reversal was not met with across the board heavier volume in the indexes and ETFs but it is what it is. Many traders are losing money on an EOD basis. At least we have that going for us.
The only plays that continue to work are the daytrades. We hammered the point home to watch for morning breakdowns in the stocks in bold last night on our short list that were oil related. We listed them again in our pre-market watch list. Small priced oil stocks all had wonderful profitable early morning sell offs and if this market continues to weaken there is sure to be more to come. In fact, it looks like the Gold/Metal related stocks had quite a significant reversal today. We shall see if there is any further follow-through of that on the downside.
Stay positive and remember to keep those time frames extremely short with tight stops. I will see you in the chat room on Wednesday. Make sure you focus on those names in our pre-market watchlist during the first hour of trading. This is the only place I know where significant alpha can be realized with clearly defined risk levels right now. The EOD trend following game remains on hold for now. Aloha.
