FYI: Just added the promised article on Trading Psychology to the website. I think you may find it helpful.
Friday was interesting in so far we got the basic set-up I had been outlining as scenario #2 last week. A push to new highs that gets rejected. Friday certainly qualified with a surprise drubbing of tech and MoMo leaders that lasted all day. It wasn’t a catastrophe for longs by any stretch, but it sent a signal that fits in with the pattern I have been looking for, a new high followed by a lower weekly close. Check on both. So one could certainly make the case that cracks are appearing in this ever more tired looking bull market that looks ready to test its lower trend line in the days/weeks to come.
Coupled with weak seasonality bears are set up well for a push down this week, however I also see a tactical long play opening up and so I want to outline both this morning.
First on the bearish side:
$DJIA weekly. Exact same set-up as in 2011, lower weekly high with weakening RSI and MACD. Proximate cause of sell-off back then: Ending of QE. What’s happening now? Tapering.
$QQQ weekly: Lower highs & weakening with plenty of downside on break of trend line.
Trannies weekly: Looks to be a fake break-out that got rejected hard. Large MACD divergence that never confirmed the highs.
$VIX: Every day that passes the $VIX, per pattern, gets closer to another spike run into the 20s. An actual break of a major market trend line opens the $VIX up to a move into mid 20s or even 30s.
The bullish argument:
Yup, same old same old: POMO. Weak seasonality is magically augmented by very large POMO operations on Wednesday and Thursday. Bottom line if we reach short term oversold conditions by Tuesday we may already be back in bounce mode as we head into quarter end and the mark-up monkeys may be coming out.
April seasonality. Generally very positive. Hence being short into April is often not a very good idea. However we have some precedence that suggest April can be nasty. Year 2000 and 2012 are good examples.
Trade Plan: Another good week to be tactical. A break of 1860 $SPX should bring us to gap fill to the $184/185 $SPY area. If this happens just prior to large POMO a long play into week’s end may be a positive risk/reward set-up. Any close below the gap fill and we may see the market target the 50MA and ultimate gap fill in the $177 area. With yet another gap up this morning I’m inclined to get some $SPY puts.