Market In Sheep Dip, So What Do You Do?

Cartoon by Gary Larson

Random Thoughts

There are various pieces of the technical analysis puzzle that occasionally come together. This provides a framework for a plausible trade. As I have been mentioning in the Ps (S&P 500), there is a double top followed by a second Bowtie off of all-time highs. At all-time highs, all buyers are happy. Unfortunately, when a market begins to tank, their gains begin to evaporate or worse, those who bought late in the game are not faced with a loss. The so called “fast money” are the last in and the first out. They give up fighting the longer-term uptrend and buy. When it tanks shortly thereafter, they run for the door. This is what starts the selloff. Pressure is then put on those who bought prior to the high.  An emerging trend pattern like the Bowtie helps to signal that a distribution may be in the works. This doesn’t mean that you rush out and sell. It does mean to watch for a trigger (aka an entry). In this case, the entry was when Friday’s low, and more conservatively, Thursday’s low were taken out. We now have a short-term “swing trade” type of setup wrapped within a bigger picture—double tops followed by a second Bowtie signal off of all-time highs.

You use classical technical analysis to frame the potential of what is developing and then you use a shorter-term signal as your trigger. So again, we have double tops followed by a Bowtie.

The 200-day moving average, circa 1900, would be the next level of support/inflection point. This corresponds with the August lows to make for plausible next target. In fact, back the chart out a bit and this looks like a chip shot.

Let’s look at the scoreboard.

The Ps sold off hard out of the aforementioned Bowtie pattern, losing over 1 ½% for the day. BTW, if you want to get up to speed on Bowties, check you my Youtube video. You’re welcome!

The Quack put in a similar performance—or lack thereof. The 200-day moving average, circa 4300, which also corresponds with the August lows looks like the next stop here.

The Rusty (IWM) looks like it is in “sheep dip.” It lost well over 1 ½%. This action has it breaking down below its massive wide-and-loose range. Anyone who has bought during that range is now faced with a loss. If it pops right back up, then there will be a collective sigh of relief/no harm done. Additional losses here would be concerning. This would likely force more and more players out.

The sector action is abysmal. Nearly all ended lower on Tuesday. Most have already rolled over like the overall market. Some are struggling to hold on to high levels but appear to be losing that battle—at least recently.

Wow Big Dave, you’re a bit of a Debbie Downer today, place “wamp wamp” muted trombone sound effect here.

Well, we’ve seen this unfolding for a while. It should come as no surprise. The market could have gone back up but it didn’t. We got the trigger so it suggests that we are headed lower, at least shorter-term. And, when you frame that shorter-term within the longer-term patterns it gets a little uglier.

Okay Chief Bear, so what do we do? Nothing. Well, (do) nothing out of the ordinary. Don’t rush out and sell on your longs. You might just have one or two that defy gravity. DO honor your stops on those positions. On the short side, I think it’s a little too late for the current cycle to establish new positions. Manage the ones you have. Focus mostly on managing your existing portfolio. If you have been following the bouncing ball with me, by now you should have positions on both sides of the market. Let the ebb and flow control your portfolio. If the market decides to weed some stocks out via hitting your stops, then sing the Frozen song and let ‘em go.

Best of luck with your trading today!

Dave