Going Hannibal Lecter Style

I am still going Dr. Lecter style, being restrained from going all-in long on this market.  For those pressing their shorts the past few days, the frustration of seeing this market hold up incredibly well must be beyond belief at this point. Personally, I am enjoying wins in my top two positions today: $DPZ and $EPAY.  I wish I had taken my own advice and bought the high-flying $COIN, which was one of my top setups for the week that I posted on Sunday night.

As stated in previous posts, I am still holding a very high cash position–north of 50%.  We are still in earnings season, and I still have my suspicions about today’s action.  I am concerned that today could be a mere dead cat bounce before we head lower the rest of the week.  I would have liked to have seen more definitive action today, but it appears that we are drifting in front of $AAPL earnings tonight.  Times like these test the true discipline of a trader.  You have to be able to watch the action closely without making any trades, which is exactly what I will be doing the rest of today.

The $SPX closed up 0.45% to finish at 1197, as the action under the surface today appeared to be much weaker than the broad indices.  Many individual issues sold off pretty hard in the morning, only to see a slight recovery by the closing bell.   As the chart below shows, there are decent arguments for both bulls and bears to make.

On the one hand, we successfully tested the 20 day m.a. around 1183.  On the other hand, we closed just below the trend line of the rally since February.  If we fail at the 20 day tomorrow, then I expect the correction to deepen fairly quickly as we likely head back to the 1150 area. If, however, we show solid strength tomorrow, I will look for longs.  I believe the setups we are seeing right now offer no distinct edge to either bulls or bears.  Situations like these are precisely where traders make mistakes.  So, I am willing to sit on my heavy cash position and see how things develop in the next day or two.

With that said, I would give the bears the slight edge here.  Some key charts are indicating bearish patterns.  The financial sector is one example.  See the chart below.

The materials sector is also showing weakness, which points to a decrease in risk appetite as well.

However, to keep a big picture perspective, many charts are still healthy. It’s just that they look to pull back in the short term. The semis are a good example of that idea.

We have some more big earnings reports ahead of us, notably $AAPL.  You should be focusing exclusively on the reaction to the earnings, as opposed to the numbers themselves.  A good example of that idea was $IBM tonight, which reported an earnings beat after the bell.  Yet, the stock was down 2% after hours.  I think that reaction, if it carries over into the trading session tomorrow, indicates that an awful lot of optimism has been baked into the cake in the short term.

It is important to be open minded and nimble as a trader. Both of those skill sets will come into play tomorrow and Wednesday, as the market should tip its hand which way it wants to go in the short term.

“Yo, what’s up, bros? ABSOLUTELY, we gonna lock in some bullish call spread ponytail profits today. This market is ballin’ brah. But I’m battlin’! I’m battlin’ hard just like I do at the Jerzey shore every summer. True dat.”

The market has had multiple chances to fall off of the cliff today. Internals have been weaker than the broad averages all day long. As I am writing now, I see more green across my screens.  However, the Nasdaq is the noticeable weak link.  I would use today’s close as a good indicator of how the market performs the rest of this week.

Keep in mind that we successfully tested the $SPX 20 day moving average today at 1183.  So, the positive reaction we had to that reference point is obviously bullish so far. If we slip down near the close below today’s low, I will likely look for some short exposure. On further strength, however, I’ll look for long setups.

The early part of this week should tip you off as to whether we are going to have a deeper correction, or just another shallow pullback that will be aggressively bought. You can still have skin in the game on the long side, despite my belief that you should have a healthy cash position at this point. Below, please find my top setups for this upcoming week. I have included only a few for now.  Keep in mind that despite a bullish individual chart, if the market corrects then most stocks will go out with the bath water.  Feel free to pick and choose which ones best suit your style.  Also, remember that even the highest probability setups can fail, so please use stop losses to manage risk.

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Trading Vid

I made a video analyzing a long term chart of the $SPY. I hope you guys find it worthwhile.