Thinking About Buying? Ask Yourself This One Question

Random Thoughts

The market bounced a bit on Tuesday. So far, it appears to be just that, a bounce. The short-term slide remains in place.

For those keeping score, the Ps have formed a bearish Bowtie down after just making all-time highs. Not every one of these patterns will turn into a major top but every major top will have one of these transitional patterns. So, it pays to pay attention.

The Quack hasn’t quite Bowtied yet. Although stronger than the Ps longer-term, it too looks questionable shorter-term.

The Rusty has formed a Bowtie down after all-time highs. What’s interesting here is the “angle of attack” against its 50-day moving average. I’ll walk you through this Thursday’s chart show.

When the moving averages turn down sharply into the 50-day moving average it suggests that the tide has turned.

Although this scores as a bearish signal, this doesn’t mean you need to run out and sell the farm. Let things play out with any leftover longs. We actually had one go up nearly 30% yesterday. This doesn’t always happen (if it did you’d never see my fat ass again), but as you can see, it pays to stay the course for when it does. The signal does mean that you should be very selective on new longs. Ask yourself, can this stock really defy gravity? If not, then pass. It also means that you should be considering some shorts.

Based on the magnitude of the slide, most sectors have taken on the appearance of the market itself—sharp thrust down followed by a bounce.

Even stronger areas such as Drugs & Biotech have taken on micro versions of this pattern.

About all that still glitters out there is Gold. The stocks here appear to be in the process of putting in a major bottom. Once again, notice I used the word “process.”

Selected Uranium might also be trying to bottom out longer-term.

So what do we do? Again, make sure you really really like a potential long before going after it. For the most part, focus on areas that can trade contra to the overall market. I think the market is a little too oversold to establish new shorts. Therefore, just start making your list here. I like the previous high fliers that are just beginning to break down from high levels. I think the bigger they are, the harder they will fall.

Futures are weak pre-market.

Best of luck with your trading today!

Dave