After both Powell’s comments last week, as well as the Trump truce with China at the G20 Summit over the weekend, the market was ever so close to breaking through one of the last areas of key resistance in the S&P futures at 2815.
Yesterday, we saw a high volume gap up on news – one that could have continued, however, the market saw profit taking and selling at a major retracement level. Now, the selling wasn’t severe, it was more in line with traders taking profits after a solid gap higher. Yesterday’s price action left us with a doji on the daily charts.
What does all that ‘trader talk’ mean…?
Indecision — it could go either way.
Well, today investors showed us which way that was…
Apparently, the Fed walking back his comments and President Trump and President Xi’s agreement weren’t enough to see a continuation move after the gap up. Now, that isn’t to say all hope is lost for a bullish rally. It’s normal to give back overnight gains after news.
However, typically it’s more of an ‘equal and opposite’ reaction. 200 points up, then 200 down. That’s more normal. But, what we’re seeing here is the S&P, Nasdaq, and Dow all down 2.5% or more. That’s conviction selling.
What’s getting hit the worst?
Well, definitely financials. XLF is currently down 4%. My short in WFC is working out nicely as a result. (Which if you wanted to get in on that… easy, join me in the room.)
But I hate to leave ya hangin’… so is there another play here amidst all this selling?
Well, the consolidation in JPM and MS look like they will break lower. I’ve been betting on a break lower in WFC for several weeks, but with positive Fed news last week financials popped and I thought it may not come through. Well, today’s price action is telling us that this is more of a ‘sell the news’ type of event, and the short pop we saw last week in financials quickly sold.
Now financials are continuing the downtrend they have seen a lot of this year.
Tech isn’t faring much better, with XLK down almost 3% after a failure at the 200 simple moving average. Tech has been climbing an uphill battle, with FAANG weighing ever so heavy on the market.
I still like NFLX and FB to the short side. I thought AMZN had a slight chance of breaking through resistance, but that hasn’t happened, and it continues its downtrend along with AAPL. Even the darling, MSFT, is taking a 2% hit. I generally look to MSFT to tell me what the Nasdaq is doing. When relative strength players such as MSFT can’t keep it together, that doesn’t give me a lot of hope.
I still think MSFT belongs in FAANG more than anyone else, and here’s why.
Now I’ve also been watching industrials as well as the transportation stocks for a rally after positive China news. With a pretty clear failure at resistance in both sectors, that isn’t positive for the bulls at all. If we see continued selling in XLI and IYT, my slight hopes for a Santa rally will be diminished.
Even Santa sometimes can’t save the day.
I mean look at this chart in IYT…
The bright side?
Now, just because we’re seeing selling today doesn’t mean we can’t rally again Thursday into payroll numbers Friday. Honestly, as of October this market condition has just changed.
I talked about it briefly on Boom Bust a few weeks ago (which you can watch here.)
Traders need to be on their toes… either trading short term and getting used to violent back and forth movement or sticking with the trend, which is down, and learning to hold through major heat on rallies higher. Like yesterday when the market gapped up 2% and I was mostly short (fun). Plus, there’s ALWAYS the potential for a face ripping, short covering rally after a down move like today.
That’s life as a trend follower. Even if the trend is primarily down, you WILL have up days, especially due to news related events. You either have to accept that, and hold your positions based on key levels (which is what I did), or learn how to trade the market both up and down on a short term basis as I said before.
You roll with the punches after all.
This is life as a trader…
And I love it.
P.S. If you want to trend follow but find yourself lacking the mental stamina to stay in for the long haul, consider checking out John and I’s class on Trader Psychology.