As we round out this trading day before the 3-day holiday (U.S.) weekend, I just wanted to share a few thoughts, observations & comments.
Regarding the equity markets, all major indices are trading slightly below the bottom of those 60-minute symmetrical triangle patterns. Regardless of whether they close on, back up inside, or even below those patterns today, with the recent surge in volatility and large opening gaps in either direction being the norm more so than the exception lately, chances are that when the U.S. markets open for trading on Tuesday morning, they will open substantially higher or lower from where ever they close today. Therefore, this might be a good time to consider the following advice from one of the greatest speculators of all time, Jesse Livermore: “If you can’t sleep at night because of your position, then sell down to the sleeping level.”
Just the other day I had communicated the current trading plan for my swing short positions via another one of my favorite Livermore quotes, in which he stated: “I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it.” To clarify how that quote, along with the video clip posted with it, applies to my current trading plan, I’ll be a little more specific.
For quite some time, I have pointed out numerous bearish developments, including, but not limited to: sentiment extremes, such as these & more, that rivaled or even exceeded those leading up to the start of the vicious 2007-2009 bear market, bearish breakdowns below primary bull market uptrend lines confirmed by numerous indicators, no different from those that have signed the end of similar bull markets in the past, and trend indicators with a history of accurately signaling intermediate-term trends rolling over from bullish to bearish, just to name a few.
Now that the bearish technical developments that have been building for quite some time have finally started to manifest in the form falling stock prices, the big question remains “was that enough?” As discussed in detail during in last week’s Long-term Sell Signals, Confirmed & Pending video, by nearly every metric that I follow, the U.S. stock market was solidly on a sell signal in both the short-term & intermediate-term time frames with several long-term sell signal triggered but before I could (and still can) say with a high degree of confidence that a new bear market is underway, I am waiting for the majority of my long-term trend indicators to confirm a change in the primary trend from bullish to bearish.
Surprisingly, most of the monthly L/T trend indicators that I covered are now trading in the red. However; #1) As those indicators are on a monthly chart, only month-end closing values matter. Any intra-month crosses above or below the bullish/bearish signal levels do not count. #2) Although some of the major diversified US equity indices are currently poised to print a confirmed weekly close from bullish into bearish territory today on the weekly trend indicators, several of the major US indices, including the S&P 500, Nasdaq 100 and Nasdaq Composite are not. Although those key indices are likely to follow the others that have triggered sell signals on weekly long-term trend indicators, should the market move any lower in the coming weeks, experience has taught me that trying to jump the gun on a sell signal can be very costly at times. It is not uncommon to see very sharp reversals in the markets when well-watch moving average pairs, trendlines, support levels, etc… are tested, even slightly breached, but fail to confirm (or hold) a breakdown or bearish crossover. I am referred to bounces off support (trendline or price support) as well as key moving average pair crossovers (aka- golden crosses & death crosses). Even more powerful than reversals off support or kisses of key moving average pair are whipsaw signals, i.e.- when these level give way or cross, only the see prices quickly reverse, undoing the buy or sell signal, resulting in a sharp move as traders scramble to undo or reverse their positions.
With that being said, factoring in all the recent developments as well as my current read on the tape, I do believe the R/R is skewed enough to the short side to warrant holding my core short positions, without hedging, over the weekend. Nothing crazy & I still have some dry powder to add, should we get additional evidence that the markets are headed much lower. My take-away from Livermore’s quote above is that although I was able to book some very nice profits by closing out the bulk of my swing shorts before on the morning of the big plunge on the 24th, and up nicely (on paper) after reloading on most of those positions over the last week (along with some new ones), I have the option right now to play it safe and book some nice gains once again or sit tight as the charts indicate that there is more profit potential, should the market take another leg down, than the loss potential if my analysis is wrong & we move back up above the upper most resistance levels highlighted in the recent videos.
The final and probably most important factor in my decision to risk giving back profits on a gap up by holding the swing positions overnight & especially over a 3-day weekend is this: If my read on the market is correct (a big IF, so once again, DOYDD), the next leg down, which could kick-off at anytime, is likely to be comprised of many large opening gaps down. I don’t chase a trade if the entry does not offer an attractive R/R and when/if the market starts sliding again by gapping down 2% or more, I am much less likely to open a new short position although I am much more comfortable with adding to a short position that is already profitable at that point. Unlike the practice adding to a losing position to lower one’s cost basis which is commonly used by novice traders and investors, many experienced traders will only add to a winning position, never average down on a losing position. While that is not a hard-rule for me (I will often strategically scale into a position at higher/lower prices if that was my original plan), I do believe in the benefits of adding to your positions as the market confirms that your analysis is correct.
On a final note, I still have numerous emails from the recent snafu that I have not yet had the time to reply to. Since posting that issue on Wednesday, I discovered that any replies sent directly to one of the email notifications from RSOTC also went into that un-monitored inbox. I plan to reply to all questions asap. Thank you for your understanding & patience in this matter & have a great weekend.
-Randy Phinney