I’ll make this simple and quick in terms of outlook. As you know my thesis has been that this last part of the December rally was an opportunity to sell this market. Did the market go higher than I expected? Absolutely. Did it change my trading principles? No. I simply scaled into shorts using my process (to be finally published later today!) I don’t chase rallies till the end or short into a hole. Simple.
My premise has been that certain positions will get blown out for tax purposes and that stocks will not get sold for the same reason. Hence the sellers were absent and that provided a good opportunity to scale into shorts and to get into metals.
On Tuesday they gapped down $SLV and $GLD hard in premarket and I posted my trade plan of buying calls in $GDX and $SLV and to short the $DJIA. With relative strength in $GDX apparent on open it was a solid signal to jump in hard on these positions.
Now I’m heavily committed to the short side on indexes and on the long side in metals. Overnight we saw a #DAX gap up which I used to scale into my 2nd #DAX short position. #DAX has since reversed hard and the early action in equities and metals is indicating that the tax thesis may be right on the money (fingers crossed).
Yesterday on the @northmantrader handle I posted key January data over several years that clearly show that there is significant downside risk for the indexes and stocks over the next 2-3 weeks. In some years the downside comes right out of the gate, in some cases it takes a week or two before it hits hard. In others of course we keep going higher. However 9 out of the past 14 years saw some significant downside at some point during January. I outlined 35-100 $SPX handle downside moves. Knowing that these came from lower base levels you can imagine that similar sized moves on a % basis would be larger on a point basis today. The year 2000 here on the chart shows reality can change dramatically after a large up year (1999).
This does not mean that markets will drop straight from here, we may even go higher first for all I know, but my premise looks promising that we will see a principle move toward the monthly 5 EMAs. Why? Because that’s the market we have been in now for over a year. My principle goal for January is to see through a move toward these levels in the 1770-90 area on the $SPX. Bull markets don’t die on a dime, so I expect a sizable long opportunity in the same time frame, but the market’s action at the 5 EMA will be key.
It is my thesis that this uptrend will not continue forever and at some point this monthly upper Bollinger/5EMA dance will get broken. Could it happen in January? Sure, but I can’t bet on it. So this is the trend we have and that’s what I’m trading. I’ll post my exits as usual when they occur.
Lastly, metals. This chart on $SLV shows the key opportunity. If this descending trend line breaks to the upside watch out, we could see a very explosive move higher. For now we are seeing some initial bounce overnight. In reverse mode to stocks, tax loss selling has occurred and those short metals may be faced with a decision: Take profits on shorts now or watch them melt-away on a big bounce. We shall see.
Happy New Year!