Chris

Trendlines, Earnings, the Fed, and Staying Away from Predictions

The week ahead has some interesting features, so I wanted to discuss that but also through in the context of the current state of the stock market.
Our of the guiding principles of what we teach at Tradesight for the last decade has been that we try to keep people focused on shorter term market direction. It is definitely not a part of our strategy or focus to try to call highs and lows in the market. The market doesn't care what you think. In fact, that market doesn't care about you at all. It doesn't matter how many people think that the market needs to top and head lower. It only matters when it does head lower.
One of the differences between a trader that squeaks out a 10-20% annual return and a trader that makes between 50-150% a year is that one of them spends too much time looking for shifts in the macro picture and the other does not. It's that simple. Stocks continue higher long after most people think they can't. Market turn most often when no one thinks that they will. Until a market has actually turned, you better be ready to push in the prevailing direction.
We keep people focused primarily on the short term (intraday) market direction because it means that we have the force of other money behind us when we take a trade in that direction. Intermediate direction and longer term direction don't tell you what AAPL is going to do today, but they will tell you which direction AAPL is more likely to make bigger moves.
From that perspective, therefore, we still like to watch what the bigger picture of the market is telling us. The reality is that a good trader doesn't look for tops or shorts at what he/she thinks is a top. Do you see why? To look for the second, you have to have a guess at the first, not facts that demonstrate that it is occurring. The reality is that the easy money on the short side of the market occurs after the downtrend is IN PLACE, not on the first days off of the highs. And, even to the extent that the turning point can look extreme looking back, it still is higher risk to try to trade because a lot of days will have looked like it and not turned into it.
So let's consider some of the intermediate-term charts here on the daily of the indices just to be clear about what's happening.
The old saying is "As goes the Banks and Biotechs, so goes the market." If new science and general funding are strong, they lead the market higher. When they are out of favor, everything tends to suffer.
So consider the Banking sector, which hasn't come close to breaking any uptrend line:

However, take a look at Biotechs:

It isn't our job to have necessarily caught the decline of the last two days in the sector. But it will be more of our job to catch the bigger shorts as they occur later IF this trendline breaks, and if it does, that often leads the rest of the market.
You can also consider the S&P, which has held this uptrend for six months now and had an up day on Friday:

Nothing wrong there yet, although gold and oil and banks help hold up the S&P.
What about the NASDAQ 100?

Here's the first real sign of trouble as it has already broken the trend. That's an interesting tidbit because we saw that the Biotechs haven't yet, and neither have the Semiconductors, which look like this:

So the tech sector is leading the way down even though those two key components haven't broken yet.
Is oil in trouble? It isn't always related to stocks, but there is a similar uptrend to watch:

One sector that is starting to tell me that something is wrong is the small cap arena, as pictured by the Russell 2000 index:

This is usually a good time of year for Small Cap money because pre-April 15 IRA funds often go to little stocks where they are perceived to have more "bank for the buck." But clearly, that index has already broken.
With the NASDAQ and Russell 2000 through their uptrend lines and the Biotechs and SOX looking weak, we are getting actual signs of actual confirmation that a turn is occurring.
As this happens, I start to see less and less stocks appear in my long screens, but it typically takes a week or two before stocks start to appear in my short screens. The reason is that I screen for patterns where downtrends begin and then a support level is set and then after some basing, that support level threatens to break.
So this week is very interesting for a few reasons. First, we have a two-day Fed meeting, which usually means that things will be slow until Wednesday. Second, we have the three biggest days of earnings releases for the quarter on Tuesday through Thursday, which tends to make the market "gappy" and a little tougher on traders that aren't used to the environment, but also can represent turning points in the market as corporate conference calls give guidance for the quarter ahead.
But third, we have these trendline breaks occurring, which usually leads to a little less in good daily chart patterns for a bit, although it certain doesn't mean we'll have trouble finding intraday calls if the market breaks.
I would be cautious this week and make sure that the rest of these indices break their intermediate term uptrends before committing completely to the downside.
By the way, why do I say "intermediate-term" and not "long-term"? Simple. Back the S&P 500 chart out to start at the low in early 2009 and draw the trendline:

That isn't in danger or even close at this point. The 1200 level will be a factor there.
And finally, anyone remember this chart from almost two years ago of the S&P 500 monthly going back to 1970, when I said that the trendline need to hold or the economy would really come to a crashing halt?

Turns out, it did, in a big way. Long term trendlines are stronger and more important, and the reality is that from the longest term point of view, we're still in a massive uptrend. Just consider that next time you whine about the economy or start trying to convince yourself that things should be heading down. The thing to absolutely recognize is that the flip to a downtrend is starting to occur just now, and whether that turns into a two-week, two-month, or two-year downtrend once it is confirmed is also not ours to guess at.
Have a good weekend.

by Chris