Bulls make money, bears make money, but in this market, only tactical traders make money. For the last few weeks the SPX and DJIA have held up within a range giving the impression that the market has been relatively flat, but underneath the surface things have not looked so neat. The areas of the market that typically are regarded as risk-on have not only been risk-off, but pummeled when considering the speed of which they have fallen. Specifically, the biotech’s and growth momentum stocks; think GILD, PCLN, and NFLX. Perhaps there was some quarter end mark-up shenanigans taking place to account for the discrepancy between the story given by SPX and by the rest of the market. In the end that is not our concern. What is our concern is preserving our capital and not over-trading this chop.
For the first time in over a year the QQQ closed below the 20-week moving average. The IWM barely managed to stay above. These are signs of deterioration that should grab your attention. In 2013, traders were rewarded for taking risk anytime the market signaled trouble. That kind of complacency has likely led to negative returns on the year. Overall, the longer term trend is still bullish and so far this can be construed as consolidation on a bigger picture outlook; however, on a shorter time frame, the price action is signaling more weakness to come.
Next week begins the start of a new quarter and we may see some new money flow into the markets. There is also the possibility of either more China or European stimulus to be announced. These catalysts along with a relief bounce are scenarios that could lift the market. However, it will likely take a lot more than that to repair the technical damage done over the last few weeks. We are not yet oversold based on 20-day new lows and the short term trend is still pointing down. Thus, there is a good chance rally’s will continue to be sold into until we see more confirmation of a bottom. My focus for next will be on looking to short bounces in stocks now in a clear downtrend and going long sectors that are outperforming such as energy and semi-conductors. Important downside levels for SPX support and possible reversal zones are around 1834 and 1815 and 1800. Levels of resistance above are 1862, 1875, and all time highs at 1884.
Keep your eyes on U.S treasurey bonds (TLT). They tried to breakout last week and if we see confirmation that investors are flocking toward safer investments instruments, it is another signal of a risk-off environment.
I expect to see some pretty decent bounces next week from some oversold stocks, which will provide many great long and short opportunities on shorter time frames. For open interest with notes on the momentum stocks as well as stock trade ideas (long and short) with entries and exists or following my trades in real time please consider subscribing to my premium service here.