What goes up…

Must come down…

In my trading, I typically focus on the hot flying stocks and sectors that are outperforming the market and moving with exponential gains. Why? Because in the options market, identifying greater than expected moves is how we make our money.

The problem with that, however, is recognizing that sometimes, what goes up, must come down. What can take months to climb, can take days to fall.

The sectors we’ve been focusing on throughout 2019, and much of 2018, have been technology, consumer discretionary, and communications — however, it’s those three that took the biggest beating throughout May.

What’s that mean (and why’s it important for us as traders)…

When this happens, it’s important to look for key areas of support and watch to see if the sectors are pausing at this area. Typically, if a sector or industry group is fundamentally strong, after a pullback or market correction, it’ll gain back its strength.

Sometimes, however, (like healthcare did earlier this year), that correction ends up being the death of the beautiful bullish trend, and it’s not a ‘buy the dip’ situation any longer.

Where’s that point?

My Pullback/Correction Zones where I look for support are as follows:

  • 50 SMA and/or 200 SMA on the Daily Chart — I typically like to see stocks hold the 50 simple period moving average on the daily chart, but in this instance, I’m finding many down at the 200 simple period moving average. A break and close below the 200 SMA is a critical failing to me, and I don’t want to consider the ticker for a buy at that point. XLK and XLY are barely hanging onto the 200 SMA as of now.
  • Symmetry from Prior Moves — Analyzing previous corrections and the point value in which the chart has fallen before, and then traded higher afterwards, is critical in my trading. You have to think of symmetry like you’re looking at the personality of the chart. Every chart’s different, but the same chart will experience symmetrical moves AND you can use those moves for buy entries.
  • Key Psychological Values — For whatever reason, big round numbers can often mean support and resistance. For example, $7,000 was a key number that — until today — has been holding in the NQ. Once these numbers break to the downside, you tend to see a flush. The same goes for key numbers like $2750, $2,800, $2,850 in the S&P. When the market trades lower, into key zones, and it breaks… it usually equals a flush.
  • Key Lows/Highs — When the market’s falling, and it takes out ‘a key low,’ that also usually means more selling. In the current case, the key lows were the May lows. Why? They were the most recent lows, that hit, held, and traded higher. When the market breaks a key low, it’s lacking the strength to hold at that area of support, which also means lower prices.

Applying This to the Market

In this current correction, we’ve seen the 50 SMAs on the daily charts of the Nasdaq, S&P, Dow, and Russell break, and after last week, the 200 SMA has broken on these charts as well. Several key S&P sectors are barely holding onto their 200 SMAs, and with the current political climate… they could easily break.

With today’s swing, we’ve also broken majority of the symmetrical pullbacks from last fall. Not only that, but key psychological values of $2775 in the S&P, $7,000 in the Nasdaq, and $1,700 in Amazon have all broken. Additionally, the May lows were taken out.

What Does All of This Mean?

The market’s significantly weakening, and it’s going to require a significant catalyst to push it higher. When it does, it’ll likely result in a face ripping, short squeeze, but I’d suspect that this move higher will be short lived.

So… How Do You Trade It?

I’ve been sticking with market leaders to the long side, as these are typically the ones to hold up (even in downwards price action). However, the destruction of the FAANG stocks today came a little out of left field. Up until now, over the course of the last 6 weeks, they’ve remained strong. This market can’t rally higher without the top weighted products and market leaders moving higher, and thus far, they’re still rolling over and dying.

Shorts in the market are best served to be prepared for a face ripping short squeeze, but ride the downfall until momentum runs out. Longs in the market have to focus on distinct, stock picking and only on the honey badger names that move regardless of what the market’s doing, or stocks that aren’t as sensitive to trade war news (more on this later).

Right now, I’m jumping on a plane to NYC, and waiting patiently for a catalyst to start off a move higher that I can trade that direction. I’ll be live on Cheddar from the floor of the NYSE tomorrow, at 8:10am CT, right at market open. You can watch live here.

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