Market Report 2/29/16

Two weeks ago here I posted this chart:


Here’s how it looks today.


So the price cycled up as I expected and met the falling 50-day moving average. At the time I was visualizing a “W” pattern forming with the logical target around 1950 and the intersection with the moving average.

This is the big battle line right now – the area of the sma50 and over / under at 1950.

On the chart above I drew a couple possible scenarios. At this critical juncture it is impossible to know which way “they” are going to take it. By “they” I mean the invisible hand of market forces. I’ll admit right now I have no idea which way it goes from here. But the price action going forward – as we leave February and get into March – will give a good clue on which scenario to expect.

Basically I see one of two things likely happening.

1) A run up towards the underside of the falling 100-day and 200-day moving averages over the next couple weeks leading up to the March Fed meeting. A rally to SPX 2000-2020 might give them cover to raise rates again.

2) Next week see weak price action overall, as we transition to a new month, and it takes a direction consistent with the red arrows I drew on the chart above. The market is overbought in the short-term and it’s risky to jump in here right after a significant 2-week rally.

There’s always a third option, that the market chops around this week in a wide range with the over / under being 1950.

Two week ago was more of a significant inflection point and I stated what I thought would be the likely outcome on the chart at the top – and that’s what happened. At this juncture I don’t have a good read on what happens next and just need to see how the price action manifests going forward, and follow the lead.

No worries though, when we reach the next significant inflection point I’m sure I’ll spot it. However for some reason, lately I have heard and read so much talk of a market crash that the only suggestion I can give if the market suddenly does ever crash – all bets are off below 1800. Make no mistake there are plenty of “bad things” out there that could trigger a big sell-off at any time. (European banks, Brexit, rate hike, war, etc.)

I pointed out the bigger picture on the Monthly chart in early January There’s a good possibility we are in a bear market and all the signs point down longer-term. As I’ve been saying, the market must make a new high to negate the “rounding top” pattern on the weekly and monthly charts.

Until that happens I’m leaning cautious. But the funny thing is that I almost expect a rally first, before things turn ugly again. It won’t surprise me at all to see them take this market up to that 2000-2020 area to inflict maximum pain on the shorts and everyone skeptical of the rally rethinking their stance. There are still a lot of skeptics and people thinking “it’s not safe until the market breaks over 1950” that the near-term rally we just saw, might have enough inertia to carry further.

I showed this path this rally might take on the live show and called it the “pain trade”. The pain trade is where the market continues to rally and sucks everyone back in, and then it reverses and drops fast and hard. I can envision that happening but it’s impossible to quantify it or provide an exact timeline.

With that said, I’ll assume the market behaves normally this week with plenty of individual stocks making big moves. The price action day to day has been erratic and “today’s winners are tomorrow losers” and vice versa. Individual stocks are crazy volatile right now. Between the earnings moves and inherently high percentage ATR in many stocks, everything just seems really risky right now.

The recent rally from the low 1800’s to 1950 bailed me out of a few mistakes that I’m glad to put in the rear view mirror. I had to hold TNA through two entire cycles because the day we should have been selling I was still working on the email alert system. What’s worse is that it finally came up to breakeven so I set a stop, which got nicked for a small loss. PAYC the same thing. But the good news is that I’m out with minimal damage and now the future is full of possibilities.

I still have XIV open and I’m going to find something to offset it, but hold on for a bit as I think the VIX can still go lower, especially in that near-term rally manifests.

The price of oil and the SPX are the most highly correlated they’ve been in 30-years and the current narrative is that oil drives the stock market. We actually see them move in tandem all the time on the intraday charts. One day the correlation will begin to widen and hopefully break – I can’t wait.

Oil is up roughly +30% off the lows in a couple weeks. Let that sink in for a moment.

The gold and silver mining stocks have been the sector with the most action the past couple weeks, but they are very extended. Some basic materials too.

The overall environment is just “manic”. That’s the best way I can describe it. It’s doesn’t really feel like a healthy environment, it feels more like a bear market rally. The majority of stocks are under declining 200-day moving averages and there’s already been so much damage done that won’t be easily repaired.

Bear market rallies are typically +7-10% up and make traders feel like everything is ok again. If this thing does rally all the way back up to the underside of the 200-day or the underside of the 10/20 sma cross on the monthly chart, the ‘buy everything’ mentality will likely be back. That’s when it might make sense to think about positioning short. You want to short or go long at extremes – we just had an extreme low, now we are in “no mans land” here at 1950. Right in the middle of the range and it could go either way.

Nevertheless I’m in the position now to get some new trades going. As far as stocks we only have LGF open and it still looks good. I have other charts I like and I’m anxious to find a couple setups we can play this week. All in all it was a rocky start to the year but the most recent trades and the market rally provided cover and if you just add up the percentages of the closed trades they’re up +8% on the year. LGF will be important but the next few trades will really be important.

So I want to choose wisely…

All in all we are just two months into the year and as we all know 2016 started off as the worst year in stock market history. So I actually think I managed to escape that relatively unscathed. Going forward I’m not going to make the mistake of letting a trade get away – so every new one will have a stop. The stops may start off wide and then I can raise them. As you know I’m adamant about having to use stops, it’s just that I don’t like hard stops in the first 5-minutes of the trading day. This presents a dilemma because it adds subjectivity to the trade, but that’s the nature of the business and sometimes we have to use judgement based on what we see happening on the charts.

I’m confident from here on out there are plenty of great trades that lie ahead no matter what the market does.

Join me this week for the live shows and we go over stocks that have constructive chart patterns. And always log in frequently to check the status on open and new trades, posted right at the top of the home page.