Even If You Didn’t Know Anything About Technical Analysis

Random Thoughts

If you weren’t well versed in technical analysis, you could simply look at today’s close and then look back in time. In the Ps (S&P 500), they are just about where they were back in June. So, on a net net basis, there hasn’t been any forward progress here in 4-months. Using the same sort of analysis on the Quack (Nasdaq), you can go back 3-months. The Rusty (IWM) remains the worst. It hasn’t made any forward progress in nearly a year. So at the least, I think it is safe to say that the market has lost momentum.

Now, let’s look at more recent action and get a little deeper into technical analysis.

The Ps gapped open but they soon found their high and began to sell off in an almost classical Opening Gap Reversal situation (OGRe—See Education for more on trading gaps). This was pretty cool because it was within the context of a Bowtie (see this YouTube for more on Bowties) from all-time highs. Further, the Bowtie is also coming off of double tops—see recent columns, the archives are in the sidebar on my website.

The Quack also had an opening gap reversal within a Bowtie—in this case from 14-year highs.

The Rusty lapped higher (a gap that doesn’t exceed the prior days high) but then also reversed and sold off hard, losing nearly 1% on the day. This action has it approaching the bottom of its 1-year trading range.

Most sectors look like the market itself. They have either recently hit new highs and are rolling over like the Ps and Quack or they are already in downtrends like the Rusty. There are a few pockets of strength in individual defensive issues but this isn’t enough for me to get excited.

So what do we do? I’m not a big fan of hedging. Essentially, if you do it properly then you don’t make any money. The hedge goes up and the stocks go down or vice versa. Furthermore,  it’s very hard to do it “properly.” I’m a directional player. I take the good with bad and don’t try to play both ends against the middle. This doesn’t mean that I won’t have positions on both sides of the market. Right now I have both longs and shorts working. I have stops on both and initial profit targets (IPT) for those positions that have not hit the IPT yet. Now, without attempting to hedge, now is the time to look to get some short side exposure. I’m not big fan of trading indices because they tend to be very efficient (i.e. choppy).  However, they can be used for brief periods while looking for shorts in individual issues. And, right now, with the Ps set up as a Bowtie down, you might look for a trade here. Last Friday’s low, circa 192 in the SPY would make for a good trigger point (or maybe slightly lower for the less aggressive to help avoid a false move).

Best of luck with your trading today!

Dave
P.S. Subscribe to my YouTube channel because it is awesome–if I say so myself. There’s over 1,000 videos there now and I have some really cool stuff in the planning phase including me revealing a vintage market directional finder that I recently acquired. Initial testing has been incredible. I can’t wait to share it with you.