Market Report 1/25/16

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Market Report for Week of January 25th, 2016.

Last week I ended the report with this statement.

We’re getting close to an interim low and it may not be pretty, but we are going to put in a bottom and rally. I’ll be ready for it and I’ll know when I see it. There will come a point when the “recent low” holds and once everyone else thinks they see it, there will be a rush to buy beaten-down stocks.

It’s very likely Last Wednesday marked a “capitulation low” and the market is set to rebound here. We are positioned for that going into the week.

SPX_D_1242016_SC2

The RSI, MACD and Stochastics are all lined up perfectly for a nice rebound in the short-term.

The main debate now is how far it carries and for how long. Most traders think there’s going to be a “right shoulder” that forms on the larger daily timeframe and I tend to agree. The big question is where the high of that shoulder ends up. It could be 1980-2020 if it were to manifest in a symmetrical pattern. Chances are it won’t be a perfect pattern but it should be easier to see this time next week.

I posted the following chart in the Chart Feed but want to include it here as it shows the perfect change in trend setup on the 60-minute chart using the 17/43 indicator along with a trendline break.

SPX_60min_1222016

The good news here is that we are very likely about to get a near-term cycle up and a bit of a “relief rally”. There’s a decent chance that it carries a bit further than I have marked on the chart above, but those are good initial targets. It almost certainly won’t be a straight line up either.

If the rally gains steam there will be short covering and also new shorts trying to get in early that are likely to have to cover. I wouldn’t be surprised to see this next rally take it up to the falling 50-day moving average if it gets some real momentum going.

Keep in mind that 14-day ATR on the SPX is 45 points so expect to see a lot of intraday volatility. I would expect that ATR to start dropping as we go, which is a sign that a short-term low is in.

On the monthly timeframe nothing has changed. The market is still in big trouble looking further out (unless it can make a new high). I can’t stress how important it is to “know your timeframe” when discussing the market. I see a rally in the near-term and perhaps it will even get to the point where everyone has the “buy everything” mentality again. But as I pointed out two weeks ago the monthly chart shows real technical damage.

So the likely scenario is a right shoulder forms over the next couple (several) weeks and perhaps it carries further than one would imagine. Then it starts to roll back over and the low we saw Wednesday eventually breaks and things turn ugly. This is sort of what I envision happening a bit further down the road.

However it will be important to keep an open mind as it could manifest a bit differently. For instance the market could rally up and then trade sideways for a period of time. There’s no use in trying to guess how it will look as we can just trade what we see happening on the charts.

The good thing is that we are going into this week with good positioning. I started a trade in TNA last week as a way to play this rebound without knowing which stocks or sectors will lead. Since we are just two days off the “capitulation low” it’s hard to tell just yet what sectors lead the charge. So I thought TNA made sense. PAYC is over the entry price and it won’t take much to get it to the target. XIV pulled back further than I expected but the VIX can drop fast and significantly so I think we’ll be fine there. These three open positions in aggregate are good positioning here in my opinion and I’ll be looking to add more as we see things unfold.

It won’t surprise me to see some huge rebounds in energy shares but I’m reluctant to take swing trades in the sector. Oil is so volatile day to day now and these stocks have huge percent ranges day to day. They are fine for daytrading but holding overnight can be risky.

We are headed into the thick of earnings season too so that will be a factor going forward. Also this week on Wednesday we get the Fed announcement. Obviously they aren’t going to make any moves this time around but the language will be important. My guess is that the recent “turmoil” will lead them to adopt a move “dovish” stance, which could fuel any rally even more.

Quite frankly I’m more concerned about what happens in the next week or two than worrying about the longer-term charts at this point. I want to take advantage of the rally while still keeping the bigger picture in mind at the point where everyone else thinks the market is out of the woods and turns all bullish again.

I think there will be some good opportunities for swing trades and i want to “get while the getting is good”.

This is going to be an exciting week and I hope you can join me for the morning shows. Be aware that the big intraday ranges that we’ve been seeing are probably going to stick around for a bit and that there will likely be significant ups and downs in the context of a move higher. As long as last Wednesdays low holds there will plenty of trading opportunities.

See you on the shows!

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