Study The Market But Listen To This

Random Thoughts

The market had a decent day with gains of 1.33%, 1.69%, and 1.13% for the Ps, Quack, and Rusty respectively.

So, should we start kissing each other? No. So far the indices only appear to be pulling back. The Ps and Quack have a “Witch Hat” look to them. This is where a market in a downtrend has a sharp retrace back to prior pivot/minor resistance giving the appearance of a upside down witch hat (see “10 Best..” and come to the next chart show and I’ll walk you through it).

All of the major indices have recently formed Bowties down and unless the rally continues, that signal remains in effect. As I preach, not every Bowtie off of major highs will turn into the mother-of-all tops but every top will have a Bowtie or some other trend transitional pattern.

As I have been saying, the nature of the pullback will be important. If the pullback pulls all the way back to the prior highs then it’s no longer a pullback.

We have to take things one day at a time. And, right now, unfortunately, it still looks like the next leg will be down.

Most sectors also appear poised to make a new leg down. There are a few exceptions though. The bounce in in Drugs & Biotech was impressive. Biotech ended up around 4%. This is enough to put it a little over 4% from new highs. My point here is that one more big up day like Friday and it is back to the business of making new highs.On a similar vein, Drugs overall rallied over 2 ½%, putting them within 2% of their prior highs.

Speaking of veins, other than the Gold stocks, I’m still not seeing many meaningful setups on the long side. It was good to see the sector rally along with the overall market and not become a source of funds.

It’s always good to study the overall market to gain perspective but keep in mind that it’s more difficult to predict the direction of the overall market than individual stocks. Listening to the database is crucial. Right now, it is still producing a plethora of shorts and not many meaningful longs. I think it pays to listen.

This doesn’t mean that blindly short. Pick the best stocks to begin with and then make sure you wait for entries. Right now I’m seeing setups in previously strong areas that have recently turned down such as Manufacturing, Insurance, Financials, Defense, and Banks. I think it could be a case of the bigger they are, the harder they will fall.

So what do we do? Again, Gold still remains about the only thing that glitters for now. So, other than that, avoid the buy side. If the Drugs & Biotech can make new highs, then we’ll start considering new positions here. On the short side, focus on the aforementioned stocks that are rolling over from highs levels. No matter what you do, makes sure you wait for entries. If the pullback becomes something more than just that, this will help you avoid getting into any new trouble. And, of course, do that other stuff I always preach—take partial profits as offered/use and trail stops—on your existing positions. See last week’s (and many prior) lecture(s) on ebb & flow.

Best of luck with your trading today!

Dave