Some Q & A From The Trading Room

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Some Q & A From The Trading Room

Here are a few questions from members in the trading room this morning that help to sum up my current thoughts on the market along with some expanded comments on the recent post regarding the extreme sentiment readings that were posted back in January just before the sharp correction:

Q: The SPY closed later in yesterday’s session at the support/resistance zone, still feel confident that this is the area to load for long? Thanks.

A: Just to clarify the term “load”, if you mean in the sense “load up heavy” or “load the boat” with longs, then no. In fact, I’m still leaning to a little more downside before the next leg up & as I’ve been going through the chart of the top stocks in QQQ & SPY, I’m not liking what I see on several of them. I’ll share those charts soon but bottom line: I’m holding off on adding back any long exposure right now but may do so if SPY approached that support zone that comes in around 268.50- 266.50.

Q: (next two questions edited to condense) Referring to you 2-28-18 market analysis (today) I have a general question. Let’s say that events play out the way you have suggested and at some future point in time we do break the old highs and then break down. Maybe big time, maybe not, maybe a slow grind sideways for a long bit. First of all, it seem to me – that scenario will almost certainly be telegraphed in advance by a spike in the put/call ratio (which is faster than all the sentiment ratios) in the same way that the last drop was. You did indeed alert everyone at the time and I understand that it needs to be an extreme measurement or it is fairly meaningless. (It looks like a glance at the put call ratio needs to be part of one’s daily routine (and I don’t know yet how to call that up). So, what does that mean? Does it mean simply to avoid going long anything and instead simply look to short – because if the SPY and QQQ are heading south, that means that everything is heading south with the exception of a few outliers like possibly AOBC as an example. The converse is, of course – if one wants to go long then we wait for that same put/call ratio to be spiking/signaling downward. All of which would lead one to conclude that most, really most of being in the market is a matter of waiting and that times to go long or short come along just once in awhile…maybe only a few times a year at most. A metaphor might be that certain winds prevail at a certain time of the year in certain parts of the world and have been taken advantage of by sailing ships for centuries – and there are times when you just stay put.

A:  No, you don't have to wait for the P/C ratio or any other of the contrarian sentiment indicators to reach extreme highs or lows for sell or buy signals on the market. In fact, many tradable tops & bottoms come without extremes in sentiment.

Basically, those extremes are fairly rare & when you do get them, they are not exact timing indicators as extreme bullishness or bearishness can become "more extreme" or stay at extremes for an extended period of time. In years past, I've also posted charts & discussed how there is often a lag-time between the bullish & bearish extremes & when those extreme sentiment readings finally manifest in the form of a trend reversal (i.e.- the top or bottom in the market can come weeks & even months after the extreme readings begin to abate). With that being said, as rare as those extreme reading are, they are definitely worth keeping an eye as they are often precursors to some of the sharpest & most powerful rallies & correction in the stock market.

I still think there will be a second wave of selling & possibly the end to the 2009-2018? bull market following the recent extremes that I posted last month. From this point, I doubt that we'll see bullish sentiment exceed or even match the levels that were hit in January. Those readings came after one of the strongest & longest advances with some of the lowest pullbacks along the way in history starting with US elections in Nov '16, culminating with a near-vertical advance in January.

After the shot across the bow that we had off the Jan highs, which was a much needed reality check for those that forget the invariable lesson of mean reversions in the market & the fact that the one-sided trades (too many bulls vs. bears, as everyone is long with no one left to buy) almost always ends with a bang, as it did with the Jan 26th- Feb 9th correction which may or may not have fully runs its course already. The Nasdaq 100 fell just shy of it's previous all-time highs from Jan 26th on Monday but the S&P 500 & Dow Industrials had only retraced about 70% of the recent correction on Monday before reversing so until & unless all of those major large cap indices take out their January highs, it is still to early to say with the highest degree of confidence that the correction that started following the Jan 26th highs is over.

Q:Part two of the question – let’s say its all unfolding as it might and the SPY and QQQ are dropping, perhaps presaged by divergences – the RSI and MACD, etc. – well, the SPY and QQQ are indexes and not tradable – what does one short? Is one to have a watch list for possible shorts in the same way as possible longs? Finally – different topic – I have to share this – I saw The Matrix not so long ago and as the movie ended a sentence came out of my mouth – “The Bots are hunting your Stops” and I think my paranoia is well founded. Thank you for what you do.

A:  I think you are referring to my reply to a question from another member the other day about the different between the S&p 500 Index, SPY & the /ES (S&P 500 emini futures). That reply was just going over the technicalities how one can't actually buy or sell an index, rather they must use a proxy, such as an ETF (SPY), options or futures contracts (/ES or the "Big" SPX contract... normally used by institutions with a lot of $$).

The proxies for trading the worlds largest indices, such as the S&P 500, Nasdaq 100, Dow Jones Industrials, etc... are so liquid and efficient that you are essentially mirroring the performance of the actual index (minus commissions & the very negligible fund operating fees). Yes, we can & most certainly will have short trade ideas to take advantage of the dips in the market just like we have longs to benefit from the rips. We've already closed out 6 official short trades so far in 2018, with 4 of the 6 profitable & as I've typically used a R/R of 3:1 or better in the past, a 67% win ratio (with the winners accounting for larger gains, on average than the losers) is very good. Also keep in mind that for every official trade ideas that is posted on the front page for both Gold & Silver members, I probably post a dozen or more unofficial trade ideas both in the trading room as well as the front page, often in videos in which I highlight my favorite trade setups in a sector that I am bullish or bearish on. You can view the Completed Short Trade Ideas by clicking here or using the menu bar at the top of the site. Note: If a trade that appears under one of the Completed Trade categories because it has hit one or more profit targets but is still an Active Trade (such as SOXX currently), only subscribers will be able to view the string of posts related to that trade when they click on the ticker symbol at the top of the page.

Regard the quote from the Matrix, yes, I am very well aware the bots (referring to programmed trading running highly sophisticated algorithms) are constantly sniffing out opportunities, including identifying clusters of stops in which to make a stop-raid by briefly taking prices down for stops on longs or spiking a stock up to run a seemingly logically placed stop on a highly shorted stock. These big firms have the capital to move a stock & in some cases, the entire market, and by doing so, they run the stops, profiting from the position they took to cause the stop-raid, quickly reversing the position afterwards to then profit from the ensuing reversal.

When determining my profit targets & stops, I do my best to think as a nefarious robot would so that my stops are placed just out a range of where the majority of trader might have placed them based on a well-defined support or resistance level or maybe a key Fibonacci retracement level or projection. Ditto for my profit targets, always set slightly below (for longs) the actual resistance level at which the charts indicate the stock or ETF is likely to reverse.

More often than not, my exits prove very timely but as I recently commented on, I've seen an marked increase in very slight & brief stop-raids as well as trades that reversed just shy of what I though (based on past experience) was a well-placed sell limit order to close a long. The XLE Active Long Trade is a good example of that. We hit the first price target for very quick (less than 4 hours after entry) gain of 4% with the trade then consolidating around T1 as I expected. After the consolidation period, the stock steadily climbed toward the final target, T2 at 69,92 (set below the bottom of the resistance zone that starts at 70.10) but XLE stopped a mere 2 cents shy of that level, reversing at 69.90 although the trade is still above the stop & still profitable.


2018-03-01T10:41:40+00:00Mar 1, 2018 10:35am|Categories: Equity Market Analysis, Trading Tips|Tags: , , , , |1 Comment

One Comment

  1. sur non March 1, 2018 4:47 pm at 4:47 pm

    Thank you, Randy.


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