The Market Is Set Up To Resume Its Slide-An Observation, Not A Prediction

Random Thoughts

You can only predict the short-term when it comes to markets. If things pan out, you can then stick with the position as long as it moves in your favor via trailing stops. You take partial profits just in case the longer-term trend doesn’t materialize. This is my mantra that I often preach in my writings and videos.

The above led a client to ask if I truly thought that I could predict all the short-term moves. Of course not. As I preach, each day brings a new clue. If the market is generally going up, then it will likely to continue to go up. Conversely, if it is generally going down, then it will likely continue to go down. And, if it is alternating between up and down, then it is choppy and will likely continue to be choppy–i.e. trade sideways.

There are times when things set up. This is where short-term predictions come into play. These short-term predictions are framed within bigger picture technical analysis. I suppose prediction is a bad word. It suggests exactly what will happen. And, no one does. It does give us a framework.

Take the Ps (S&P 500) for instance. Bigger picture they have had made a double top. The right top is slightly higher than the left which is actually a good thing—from a technical perspective (see last week’s chart show). This suggests that some—let’s call hem the “Johnny-come-latelies” were drawn in when the prior peak was exceeded. The market then slid and is now beginning to pull back. This action sets up a First Thrust and a Bowtie. Since the market is coming off of all-time highs, the most amount of people are likely on the wrong side of the market. The “Johnny-come-latelies” aka the fast and last money, will likely be the first out. This could exacerbate the sell off as those who brought prior to the top began seeing their gains evaporate, or worse, turn into a loss.

Now, just because the market has formed a big picture double top and a First Thrust & Bowtie setup doesn’t mean that it will start headed lower. However, if it does, when it takes out (i.e. trades below) Friday’s low the setup would trigger. This would suggest that the market is in trouble, especially when you consider the aforementioned players who are on the wrong side of the market.

So, I’m not necessarily predicting but rather proposing an If/Then scenario. Thursday’s low is an inflection point. If it doesn’t trigger and the market goes on to make new highs then we have dodged a bullet. If it does trigger, then you are ready. Of course, you’ll a stop in mind just in case. Right?

The Quack (Nasdaq) has formed a similar pattern.

The Rusty (IWM) bounced but so far it appears to be just that—a bounce. This action has it finding support at the bottom of its longer-term wide-and-loose base. I wouldn’t be a hero and bottom fish here. The short to intermediate-term trend remains down.

So what do we do? Considering the above, make sure you really really like a setup on the long side. On the short side, focus on those stocks that are coming off of high levels. The bigger they are, the harder they will likely fall. Now might be a good time to brush up on emerging trend setups such as the aforementioned First Thrust/Bowties and also more specific techniques such as The Go Go No Mo strategy. All of this plus more is free under Education. You’re welcome! Join my Youtube channel while you are there for even more stuff. Regardless of what you do, make sure you wait for an entry and again, use a stop just in case.

Best of luck with your trading today!

Dave