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Another Failed Short Squeeze

Hey 5-Star Trader,

Last Friday, the indexes ripped higher – giving bulls hope that it was finally time to ‘buy the dip.’ Let me first tell you that using the phrase ‘buy the dip’ in a bear market is incredibly dangerous, as, in all reality, this is not in any way shape, or form a ‘dip.’ In the Nasdaq in particular, this is a bearish, downtrend, in a bear market. The S&P has managed to remain ‘only’ in a correction, and as of this writing is ‘only’ down 18% from all-time highs, but make no mistake, this market is a bear market, and must be traded as such.

If you’re not sure which direction the overall trend is headed, checking out the Phoenix Finder will set you straight. Here is a screenshot of the daily chart of my Phoenix Turbo, using my ‘Big Picture’ grid.

Click the image to enlarge.

Here is a screenshot of the Phoenix Turbo, which demonstrates the percent in which key sectors and indexes are at in relation to their all-time highs. The red squares next to each sector indicate confirmed downtrends on the daily charts. As you can see, every sector, minus energy (XLE), healthcare (XLV), and the semiconductors (SMH) are in confirmed downtrends. However, I’d argue with the semiconductors that the pop this week has only given us a great spot to enter on the short side. 

So, how am I trading it?

I’m sticking with the downside in this market, as even the intraday short squeezes (on two separate occasions we have seen the Nasdaq up 4% on the day) have almost immediately failed. However, I will say that it’s been difficult to short the market as the slow bleed we have experienced throughout May has consistently left us at lows, which doesn’t give traders great entries. 

But, in great news, due to the rally, the index experienced last week, finally, we have some good opportunities to the downside. I am sticking with the downside here not just because of the trend, but because there are just too many macro pressures (Fed, inflation, earnings) on top of a bearish trend and a bear market in the Nasdaq. 

Currently, the QQQ is sitting on support at $295. My next target to the downside is the next level of resistance, which is $285. After that, if we break May lows, that is where I would expect selling to pick up. 

Check out the Daily Chart of the QQQ’s below:

Click the image to enlarge.

I always trade one decision at a time and evaluate price action when it gets to my target zones. If it breaks, then that is where I look for a flush. If it holds, then I look for a potential short squeeze bounce (especially with a high put/call, like it is now). 

As we have discussed with the Nasdaq leaders, these are always the tell – and right now, Advanced Micro Devices (AMD), Nvidia (NVDA), Tesla (TSLA), Microsoft (MSFT), and Apple (AAPL) are all telling us there is more downside ahead. The best bet here is trading them to May lows, and after that, upon a break of May lows, looking for the next area of downside support. 

Do you know what I think is most dangerous about this downtrend?

What we haven’t experienced in this market is capitulation. Investors are still hopeful. They are still (sort of) buying dips. Not in the same way as they were during the bull market, but I still see investors trying to ‘buy the dip.’ What they have to understand is there is a significant difference between a ‘dip’ in a bullish trend, and trying to buy in a bear market. The market is an equal opportunity dream killer and the second you think the upside is safe (like yesterday when AMD was up almost 10%) is generally when buyers get caught in a bear market rally. 

As long as investors are hopeful, we won’t see capitulation. We will finally see capitulation when everyone throws in the towel. Only then can the market really start to correct higher, and we are not close to this juncture – yet. This is why I say the lack of capitulation here is dangerous. How much lower can we fall? The Nasdaq has already fallen 30%. If that isn’t enough, what is? 

So, how can we trade it? More aggressive traders can short the semiconductors, are they are the most volatile and rallied directly into resistance (giving traders better entry points on a short) but I will warn you those also rally against you HARD on up days. More conservative traders can stick with using the QQQ’s or the SPY’s to follow the trend lower. 

I never thought I’d say it but I actually think it’s time to start shorting even MSFT, TSLA, and AAPL. They have all broken zones we talked about a few weeks ago, are in downtrends, and even they can’t even hold up. Most of the ARKK names have been shorted to the ground and unfortunately, this is the spot where liquidity is right now. I normally never short relative strength winners but I think it’s time. Just be careful because short squeeze rallies are not fun to be on the wrong side of. This means first and foremost, control your risk!

I also continue shorting weak tickers on earnings and looking at tickers post-earnings to short on rallies. I also like the housing sector as a continued short, particularly HD post-earnings. 

I am not going to sell the core tech stocks in my long-term portfolio (TSLA, MSFT, AAPL, NVDA, AMD) despite the bear market, however, I have bought some inverse Nasdaq shares (SQQQ’s) to help with a bit of the downward action there. Buying the inverse semiconductor ETF (SOXS) if you have a lot of semiconductor exposure and you want to hold onto your semis. You can also sell covered calls on your stock to help with the pain.

Daily Chart of the Inverse Semiconductor ETF – SOXS

Click the image to enlarge.

Investors are unfortunately used to the Fed coming in and saving us, but I believe that Jerome Powell made it pretty clear yesterday that the Fed is not blinking an eye at a Nasdaq bear market. Biden’s methods of trying to ‘fix’ inflation, including taxing corporations, I believe will only make the current situation worse. Walmart (WMT) & Target (TGT) have already noted the significant impact high costs have had on them, and can you imagine how much worse it would be with higher taxes? What about the new gas stimulus checks, basic income programs, etc the government is working on? Those attempts at helping will only make inflation worse. 

The Moral of the Story is: Don’t fight the Fed. I don’t know when the selling will abate but I can’t imagine it’s before either:

  1. Inflation comes down or 
  2. the Fed backs off, likely a combination of both. 

Neither of which are happening yet. 

Disclosures:

TSLA, MSFT, AAPL, NVDA – own long term shares

AMD – hold long term shares + selling covered calls

SQQQ – own this

SOXS – own this 

-Danielle =)

Do you want to learn how to jump on big moves before they happen? Join me for a FREE webinar where I’ll show you how to follow trends and find relative strength. Happening on Wednesday, May 25th, 2022 at 7 PM Central, register HERE.

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