Can You Hear Me Now?

Random Thoughts

Not all signals will turn into the mother-of-all tops but all tops will have signals. This is why it pays to pay attention. In the Ps (S&P 500) we had a double top with the right side higher than the left. That gave those who were waiting for new highs the all-clear. The market then began to rollover and set up as a Bowtie sell signal, a second in recent times. The early bird may get the worm, but it’s the second mouse that gets the cheese—sometimes the second signal is the real deal.

Of course I didn’t know the market would implode. The signs were there though.

The Ps have now hit their first target of 1900—missing accomplished 😉 Seriously, this is the first line of support. The market is right at the 200-day moving average which corresponds with the August lows and, as one of my peeps pointed out in last week’s chart show, it is also right around the area of the prior breakout from the March/April/May range—good eye! It’ll be important for these levels to hold.

The Quack (Nasdaq) isn’t very pretty. It took out its August lows with vigor and it went on to slice right though its 200-day moving average like butter. For those keeping score, the last time the Quack dropped below its 200 was in 2012.

The Rusty (IWM) has now officially taken out the bottom of its 1-year wide-and-loose trading range. The problem here is that this action creates a mountain of overhead resistance for the index to overcome.

The sector action was abysmal. Rather than bore you, just look no further than the Semis if you want to get an idea of the carnage. They lost nearly 5 ½% of their value. This is the biggest drop in years.

The market is now severely oversold. The next question is, how do you define oversold? I just eyeball it. You can use your favorite indicators but for me, I just like to eyeball it. Like Justice Potter, I know it when I see it. Now, just because a market is oversold doesn’t mean that you want to rush out and buy it. As I preach, severely oversold can often became super duper oversold. Of course, if you short it, then it’ll bounce. This is the darned if you do and darned if you don’t aspect of an oversold market.

So what do we do? If you’ve been following the bouncing ball like me, going into Friday you probably had a few shorts on. Take partial profits as offered to lighten up and trail your stops lower just in case they continue to move in your favor. Avoid any new action here considered the aforementioned oversold condition. On the long side, honor your stops. Let the market weed out your portfolio via stops. Don’t be hero and watch them go to zero, let ‘em go, let ‘em go. Great, now that Frozen song is stuck in my head.

Best of luck with your trading today!

Dave