While indexes and key sectors have been falling, there hasn’t been true capitulation in the market. This is what we generally need to hit and maintain lows on a downward move like this. However, in this case, it has been a somewhat volatile but steadier decline than anything.
Today, that is changing, as the Nasdaq broke its lows set last August and is down another -1.93% as of this writing.
Capitulation usually comes relatively soon after major lows are broken, but selling has to pick up steam and truly flush buyers out of even the top stocks. I’m seeing signs of that this week, as selling picks up in the Magnificent 7 and top relative-strength winners, alongside the relative weakness spaces.
Relative Weakness Shorts
As I’ve discussed, I’ve been short IGV, the software ETF, due to the relative weakness in the space. Typically, when the market starts pulling back, it makes the most sense to focus on sectors and industry groups that were already weak to the downside. Check out the IGV rally into resistance that failed and the squeeze fired short, as it falls another -3.55% today.
Using the Phoenix Finder, you can see which IGV tickers started falling first as the ETF shifted lower. The tickers that shifted from green to red fell first, offering the best entries.
Check out this image below to watch the video, and to learn more about my trade update and management!
Today, I’m taking profits on my IGV short after it hits the first target, though that doesn’t mean the downside is over.
Semiconductor Weakness
The biggest sign that the downside isn’t over yet comes from sectors that previously had relative strength. SMH, the semiconductor ETF I follow, has shifted to the downside amid a recent bearish trend shift and is making new lows as of today. This break is significant and a further sign of the downside to come.
When you can’t buy relative-strength names because they are selling off hard as well, it tells me to keep focusing on downside until we get that capitulation low.
I normally don’t short relative-strength spaces, but in this case, with major trend shifts, there is downside to be had as selling continues.
High Put/Call Ratio
Ultimately, there will be a short squeeze rally off the lows, likely when positive news hits. However, we just aren’t there yet. The indexes would need to gap up by at least 2% and hold, with follow-through the next day. Until then…I will look for some quick, downside moves.
