Timing is everything. This statement is true of so many things in life but its especially true when we’re talking about trading.
One of the things that has not only helped my trading performance, but has also helped create a stronger sense of being in line with the market is attempting to think from it’s perspective not just my own. Not thinking what I want, or trying to predict where its going to next, or trying to get ahead of it. Rather, I’m attempting to get into the market’s rhythm and allow it to lead. It’s kind of like this. Picture yourself dancing with an 800lb guerilla. Who’s going to be the one doing the leading? Like it or not, its going to be the guerilla! Better for us to get into it’s rhythm if we want to dance with it! The market is the same.
I share this analogy because it’s one of the things that has kept me mostly on the sidelines the past couple of weeks and has kept me from shorting.
The market has been in a choppy sideways trend for about a month and a half now. Taking a look at the weekly and daily charts, you can see a ton of whipsaw, wide and loose price bars, false breakouts and rapid price reversals. Why is this happening? From a technical perspective (looking at the charts of the major indexes across monthly, weekly, and daily timeframes) it is caught between major levels of support and resistance. The long term bias on the monthly charts is up which is why the market has continued to grind higher.
Additionally, remember that over the past year, the indexes are up over +100% from the March lows! That’s both incredible and completely abnormal! Seeing the indexes rally that hard and now finally taking a bit of breather should be expected. Is it taking a breather or is it getting ready to roll over?
There’s signs that will help us figure out if the market is getting ready to roll over or if its just taking a breath. The first is the trends on the major indexes across timeframes. We spoke about that and from this perspective so far, there’s several layers of long term support which it would have to get through in order to start a new long-term downtrend.
When we switch gears and look at the number of stocks making new highs vs new lows, we’ve yet to see any significant expansion in the number of new lows being made. An expansion in the number of stocks making new lows has accompanied every major downtrend over the last decade. Until the number of stocks hitting new 52 week lows starts to creep up it’ll be difficult for the market to roll over.
Finally, before we render any kind of a verdict, the way to get inside the market’s head is to see what kind of stocks are setting up (if any). What groups? What kinds of setups? What stage are they? Are they of high quality? Are they plentiful? What’s the story they’re telling?
Well, this week there’s only 2 stocks on the focus list and personally I’m not interested in trading either right now. The 2 stocks are NWS and HONE. It’s not that they’re necessarily bad, its just that they’re not great. They’re just okay. Both scored in the low 6s on the Trade Gauntlet. There’s only 2 stocks out of 300+ making it to the focus list… This is the kind of time I prefer to simply sit and wait. Still monitor the market but still sitting and waiting.
One idea I may try is selling the 205 puts on IWM. This is a newer strategy for me and one I’ve seldom had the opportunity to use. But in sideways markets that are grinding higher, its an ideal time. I explain the strategy pretty thoroughly in today’s DEEP DIVE video. Please watch it and if you have questions, please post them inside the Trader’s Mindchat Room.
Have a great trading week and I’ll see you in the room!
Checkout the charts of the indexes below for a closer look at the action.
MONTHLY CHARTS (indexes) Overcall Direction = Up: https://www.tradingview.com/x/SIkccOqJ/?aff_id=15325&offer_id=10
WEEKLY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/jD4EfuIi/?aff_id=15325&offer_id=10
DAILY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/TpoP0R6k/?aff_id=15325&offer_id=10
(on the lower right is the image of stocks hitting new highs vs new lows on the NASDAQ & NYSE)
Deep Dive Video