MARKET MOOD: RED
I consider the market mood to be in a ‘red’ condition this week. Below is the criteria for a ‘red’ condition. When any of these conditions appear, the best condition I’ll assign is red.
Initial buys are less than 50/50
Trade ideas are less then 50/50
Mostly ‘B’ and ‘C’ setups
New Highs fewer vs New Lows expanding
Indexes are choppy and have some red flags
I was on vacation at Disney World with my family all last week so there were no new buys for me. However, last week’s trade ideas list was largely decimated and many of the trades I exited before leaving for Florida pulled in hard. This alone would shift me into a red condition, but that’s not all.
Heading into the week there are only a handful of setups worth considering straight off the bat. No ‘A’ setups. Only B’s and C’s. In a ‘red’ condition I wouldn’t consider any trade that is less than a B for 2 major reasons.
1. A grade of C indicates there are some major warning flags to consider.
2. The position size of a C trade is only 0.5% to start. Under a red condition this gets cut to 1/4 and makes it not worth it for me.
On top of this, the character of the New Highs vs New Lows list has changed on both the NYSE and NASDAQ. The NYSE hit 531 new highs on Monday. The most we’ve seen since 2010! Its an ominous sign as shortly thereafter the NYSE skidded nearly -20%.
New lows on the NASDAQ picked up and began outpacing the number of new highs. For the first time in a long time, new lows hit the high double digits, touching the 50s and 60s. Again, more reason for a red condition…
Finally, the indexes themselves are choppy and sideways. Overall the conditions are up on the monthly, sideways on the weekly, and sideways on the daily. If you drill down and take a closer look at the dailys, there are a few layers of major support nearby on each of the indexes. Yes there is room to pull back and pull back sharply (which is why heading into next week the action list is net short), but given the long term major support zones and monthly charts still in tact, a sharp pullback has the potential to be met with buyers.
The red condition has me playing light. 3 trades on the action list under this red condition has me risking a total of 0.75% of capital. I plan on being quick with each of these trades. The shorts (ETSY and TTD) will likely be held 1-2 weeks. If the long idea triggers (FOXF) given these conditions it will likely be 1-3 weeks.
Giving thought to market conditions, trade grade, potential duration, and sizing sets expectations for the trade. We’re prepared and when we’re prepared, we can be confident.
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/YuV3KUk5/
WEEKLY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/ZPosZII9/
DAILY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/epmRbQPr/
(on the lower right is the image of stocks hitting new highs vs new lows on the NASDAQ & NYSE)
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