Every week we see that markets are near highs. We read and hear that we “are due for a correction,” that there are bearish divergences based on endless indicators, that we are in a bubble that can’t sustain itself. And yet, we look at the indices and nothing looks ominous. Yes the QQQ‘s and IWM have had a bit of a correction recently, but nothing to really cry home about. Everything seems just merry on the surface.
Simple Explanation: I have a very simple explanation for what is likely taking place in the overall market. The relentless bid we have seen is proof that we are in a very strong market environment (whether it’s due solely to the Fed or other factors is irrelevant to this conversation). In such an environment, corrections take place through time and not price; meaning they tend to be rangebound and rotational. Instead of having 10, 15 or 20% corrections in the indices, individual stocks and sectors that have outperformed will take on the burden of those corrections passing the baton to another sector to outperform. In such an environment breadth will be weak and bearish divergences will exist. Whether or not this continues or the divergences finally weigh strong enough to pull the overall market into a correction remains to be seen; however, until price follows the bearish indicators, shorting has only been successful on select stocks and when done quickly.
Strategy for this week: Although I like to trade index options for short term trades when I see a good risk/reward set-up based on strong resistance and support levels, the narrow ranges leave me sticking to individual stocks for now. The path of least resistance is still to the downside. Selling rallies in stocks, specifially the momentum, highly liquid stocks that have been underperforming recently is currently the approach that makes the most sense. However, in order to remain open minded about further upside rallies and a new bullish trend, I have outlined a list of things I will be looking for that would shift my views:
- Momentum stocks gaining lasting momentum. Many of the high flyers have moved off their lows this such as FB, NFLX, GOOGL, TSLA, and PCLN, but not by much. The move up last week should be viewed as an oversold bounce until proven otherwise. Seeing follow through next week will be important.
- Stocks that rally upon delivering good earnings instead of selling-off unlike what we have recently seen. Some examples from last week include LNKD and YELP. The former failed to rally and the latter wasn’t able to hold onto gains from its initial rally.
- Bonds (TLT) coming back down. On Friday, even after hearing about the drop in unemployment, bonds made a high not seen since June of 2013. If bonds continue to rally, risk off continuities to be the story.
- The QQQ getting back above its 50-day moving average.
- The IWM getting above its 50-day moving average or at the least continuing to rally next week.
- An increase in the amount of SPX components making 20-day highs.
- Seeing downside follow through of the utility sector versus the consumer discretionary sector.
- And finally, seeing signs of accumulation through price and volume acceleration.
Minus those stated above, I will continue to view the market with a more defensive approach.
Levels to watch on SPX on the upside are all time highs at 1897 and on the downside are 1872, 1850, 1834, and 1814.
If you are looking for real time option trades, risk management, and idea generation check out a subscription. Despite the choppy and challenging market environment, we are doing well :-).
Simple Explanation for the Current Market
Every week we see that markets are near highs. We read and hear that we “are due for a correction,” that there are bearish divergences based on endless indicators, that we are in a bubble that can’t sustain itself. And yet, we look at the indices and nothing looks ominous. Yes the QQQ‘s and IWM have had a bit of a correction recently, but nothing to really cry home about. Everything seems just merry on the surface.
Simple Explanation: I have a very simple explanation for what is likely taking place in the overall market. The relentless bid we have seen is proof that we are in a very strong market environment (whether it’s due solely to the Fed or other factors is irrelevant to this conversation). In such an environment, corrections take place through time and not price; meaning they tend to be rangebound and rotational. Instead of having 10, 15 or 20% corrections in the indices, individual stocks and sectors that have outperformed will take on the burden of those corrections passing the baton to another sector to outperform. In such an environment breadth will be weak and bearish divergences will exist. Whether or not this continues or the divergences finally weigh strong enough to pull the overall market into a correction remains to be seen; however, until price follows the bearish indicators, shorting has only been successful on select stocks and when done quickly.
Strategy for this week: Although I like to trade index options for short term trades when I see a good risk/reward set-up based on strong resistance and support levels, the narrow ranges leave me sticking to individual stocks for now. The path of least resistance is still to the downside. Selling rallies in stocks, specifially the momentum, highly liquid stocks that have been underperforming recently is currently the approach that makes the most sense. However, in order to remain open minded about further upside rallies and a new bullish trend, I have outlined a list of things I will be looking for that would shift my views:
Minus those stated above, I will continue to view the market with a more defensive approach.
Levels to watch on SPX on the upside are all time highs at 1897 and on the downside are 1872, 1850, 1834, and 1814.
If you are looking for real time option trades, risk management, and idea generation check out a subscription. Despite the choppy and challenging market environment, we are doing well :-).
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