Take things one day at a time. That goes for life and that goes for markets. On Monday we had a bounce but on Tuesday the market, especially the Ps (S&P 500) turned right back down.
Let’s dissect this further.
The Ps sold off fairly hard, losing nearly 1% of their value. This action gives back all of Monday’s gains and then some. It also triggers a First Thrust sell signal. A Bowtie down will likely form soon. Not all transitional (emerging trend) patterns will turn into the mother-of-all tops but all major tops will have a transitional pattern. It pays to pay attention. What’s interesting is that the last couple of signals didn’t work. So, the market is due.
Speaking of prior signals, over the last 5 years or so, every time the market began to roll over, it has come right back. This action has hurt the performance of those who have correctly taken evasive action during these events. On the flip side, it has rewarded the buy and hope (hold) crowd. As I preach, the market can be a bad teacher. Buy and hold works until it don’t.
I suppose my point is that one of these times, the market won’t come right back. Longer-term, doing the right thing is the thing to do. You don’t want to lose over half of your account like the average fund manager did back in ’07-’08.
Some have pointed out that the Fed has propped this market up all along. As my buddy Rob Hanna (of https://quantifiableedges.com/) said at an American Association Of Professional Technical Analysts (AAPTA) meeting: “The Fed’s influence has been like a drug.” At first it takes just a little bit to get the market moving. Unfortunately, in more recent times it has taken more and more, reaching a point of diminishing returns.
I guess my point is one of these times the market will not come back. When the market begins to sell off you have to honor your stops and you should begin looking to profit on the short side—or, at the least, be willing to sit it out.
Let’s look at the other action.
The Quack (Nasdaq) lost nearly ¾%. It remains near the bottom of its shorter-term sideways range. It has lost momentum and could be on the cusp of forming a Bowtie down.
The Rusty (IWM) only lost ¼%. So far, it remains in a downtrend. It has recently formed a First Thrust (07/14/14) and Bowtie (07/24/14) down.
The sector action was weak as you would expect. Those in downtrends remain in downtrends and those that have recently rolled over still look poised to continue their rollovers, much like the Ps themselves.
So what do we do? As I preach, don’t go crazy bearish. Don’t label yourself. When you do that you end up “painting yourself in a corner.” Again, take things one day at a time. And, right now, it’s not looking so great. Therefore, continue to look to add on the short side. No need to bail out on all of your longs. That’s what stops are for. Should the market tank, the stops will take you out. They will also keep you in if your stocks defy gravity or if the market decides to stabilize and/or go back up. I’m seeing setups on the short side mostly in the Energies and Semis, so start there. As usual, just make sure you wait for entries.
Best of luck with your trading today!
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