There is not much to say that we have not been saying in our commentary for the past month. The leadership, breadth, and price action has been hinting that there were problems in this market since the August sell off and it became more clear following the December reversal that something was wrong with our overall market. Following the price action last week, the hints became reality as stocks cratered on heavy volume. Going into the week the Big Wave Trading operational models were on an across-the-board SELL signal and following the past week we remain under an across the board SELL signal.
A lot of traders expect the market to bounce as we are in “oversold” territory. Unfortunately for the buy-the-dip crowd, in bear markets dips can get deeper and stocks can get cheaper. We have entered into a market environment where selling the rallies instead of buying the dips is now the higher odd trade. The complete breakdown in the Biotech, Small-cap, and Transportation stocks along with the terrible breadth in Advancers/Decliners and New Highs/New Lows suggest that a lot of time is going to be needed before any kind of meaningful trending rally will be able to manifest itself.
If the market does continue to sell off into the new week, we will be looking for a panic type of situation to get long the market at extremely oversold levels. Right now, while the market is oversold on the very short-term, it is not oversold on the intermediate or long-term time frames that we track on four key oscillators (MACD, TSV, RSI, and Stochastics). On top of this, the VIX does not indicate to us any real level of fear out there. Until we see a significant spike in the VIX along with extreme oversold levels, we are not going to be quick to call for any stock market bounce here.
At the same time, if we do see a rally attempt start this week then we will obviously be on the look out for a Follow-Through day anywhere from the 4th-7th day of the rally attempt. If we can get a FTD on huge volume with some clear leadership in innovative stocks then we will be glad to move into new long positions. That being said, the setups out there in high quality liquid names is completely absent. The few stocks that are holding up are defensive related in nature and/or are extremely illiquid small-caps. Tiny illiquid small caps that hold up well during poor markets sometimes turn into powerful trending names during uptrending markets. However, until you are actually in an uptrend in the overall market, trying to play these names is asking for serious trouble.
Right now, the best position for most new investors is cash. Cash has been king since the overall market reversed off its late November/early December highs. We have been preaching cash for a few weeks now and we will continue to do so until our technical patterns start to clean up. As it is right now, there is a ton of damage in individual stocks with some serious ugly patterns out there. On top of this, the FANG stocks that were holding this whole market up now appear to be topping out on heavy volume and are starting to roll over below their key 50 day moving averages. Until we see some sign of support in these names, preferably accompanied with higher volume, we will remain cautious on the short and intermediate term.
We wish you the best during the upcoming trading week. We have our game plan and contingency plans set and will act accordingly to whatever the market presents. Make sure that you do too. Now is not the time to be trading by the seat of one’s pants. Once again, have a great upcoming week. Aloha.
Top Current Holdings – Percent Gain Since Signal Date – Signal Date
MEET long – 126% – 10/9/15
UVXY long – 61% – 12/2/15
AGRO long – 27% – 10/23/15
NVRO long – 25% – 11/17/15
