Now’s The Time To Listen

Random Thoughts

Trend transitions are tricky. Sometimes what appears to be a new trend emerging turns out to be just a correction in a longer-term trend. The problem is, you never know if this one is going to be the “big one, Elizabeth.” Therefore, all signals must be taken seriously.

Recently, the Ps (S&P 500) signaled and triggered a Bowtie sell signal (watch this Youtube on Bowties to get up to speed). The market then slid over 7% in 7-days. That’s a pretty serious sell off and it sure did seem like the “big one,” at least several days in.

If you had longs on from the previous uptrend, then most, if not all should have stopped out. Never forget, he who fights and runs away lives to fight another day. Longevity is key.

The market came back big. I can promise you that it won’t always do that. Again, you must take the right steps to stay in the game. Those who threw caution to the wind were rewarded. Remember though, the market is often a bad teacher.

So where does this leave us?

Too much time is often spent obsessing over the indices. True, you can’t completely ignore them but sometimes it’s a market of stocks vs. a stock market. Before we get into that further, let’s do the obligatory obsessing over the indices.

First the Ps. They sold off but then recovered to end only slightly in the minus column. As mentioned above, they have recently recouped all of their losses from the aforementioned Bowtie sell signal. The problem is that this has them very overbought. It also puts them just below some overhead supply. Going off of this alone, it’s a dangerous time to buy. As a trend guy, I’d rather wait out the next few percent to see if they can make it back to new highs—and stay there. Show me.

Next, the Quack (Nasdaq). It’s basically, the same as the Ps-overbought and just below some overhead supply. “V” shaped recoveries at high levels are very hard to sustain. By the time the market gets all the way back to new highs, it’s already overbought. Overbought can always become overbought. However, it’s much harder to run a race just after you ran a race.

And last but not least is the Rusty (IWM). The Rusty has recently fallen out of its 1-year wide-and-loose base and has subsequently recovered to push back into that base. A market can always do whatever it wants to do but based on the chart, it sure looks like it is going to have a hard time getting though all of that overhead supply. Remember, anyone who has bought during the range might be looking to get out at breakeven.

When I look to most stocks and most sectors, I see that most are still in downtrends. However, one-by-one there are some areas that have been improving as of late. It has taken me many years to learn to believe in what I see and not in what I believe.

Drugs and especially Biotech are at new highs. On a related note, there are pockets of strength within the Health Service and Medical stocks.

REITS are doing well. They are not the most exciting stocks in the world but they are making new highs nonetheless.

Speaking of sleepy stocks, Utilities have generally be doing well as of late.

Selected Transports have also been doing well.

For the most part though, the sector action still looks questionable at best. Again, most remain in downtrends or have pulled back sharply back to overhead supply.

It’s times like these where you really should listen to your database. And, right now, I’m not seeing any new meaningful longs just yet (other than some speculative IPOs). I’m still seeing some shorts but I’m starting to see fewer setups here since a) many have already triggered and b) as the market pulls back in both time and price, more setups are taken off the radar.

So what do we do? Again, listen to your database. Based on this, continue to look to establish/re-establish a short or two. As usual, wait for entries. On the long side, focus on the aforementioned stronger areas but wait for setups. Since they are just making new highs, you’re not going to see many setups just yet with a pullback based methodology. At the risk of preaching, let the ebb and flow control your portfolio. If you get stopped out, then you are stopped out. Waiting for entries will help to keep you out of new trouble. If you don’t get new triggers and your existing stocks stop out, then you could actually end up flat. And, that’s not a bad thing, especially given current conditions.

Best of luck with your trading today!

Dave