Thursday Thoughts – Wild Market Gyrations Continue


Wheeee!  That was exciting!

Fortunately, we were expecting the bounces yesterday morning and, even more fortunately, we expected them just to be bounces andmy opening call in our Live Member Chat Room was:

Looks like a bit of a bounce this morning and we'll see how far but the Dow is the laggard to the upside and, if we get over 24,350, you can play /YM bullish with tight stops as long as the VIX keeps going down (now 1,580) and the Dollar stays under 95 (now 94.75).

The Dow flew higher but we were already taking it off the table at 10:16 with a non-greedy exit:

Don't be greedy on /YM longs, of course, 150 points is a quick $750 per contract and you can get back in over 24,500 with tight stops below that line if you are worried about missing out.

Forutnately, we had laid out the likely bounce lines in Tuesday Morning's Report so our Members were prepared for AND NOT FOOLED BY the morning "rally".  My comment on Tuesday was:  

Notice how technically neat the S&P is behaving, bouncing right off the 50-day moving average at 2,716 and that's exactly down 2.5% from the high at 2,785 so we're right on the money with our 5% Rule™ and that means we'll watch for 14-point bounces to 2,730 (weak) and 2,744 (strong) though anything over our 2,728 line is a pretty bullish recovery for the moment.

Other bounce lines will be:

Dow 25,400 to 24,200 is 1,200 points (4.7%) and we'll call the bounces 250 points to 24,450 (weak) and 24,700 (strong)

Nasdaq 7,350 to 7,000 is 4.7% but really 350 was a 5% overshoot of 7,000 (and we're on the way to 6,500) but the Nas will bounce 75 points to 7,075 (weak) and 7,150 (strong) before taking another leg down.

Russell 1,720 to 1,660 was only a 3.5% drop so look for the least bounce here but 1,657.50 is the 2.5% line from 1,700 and the rest was on overshoot so let's call that the real range (42.5 poins) and round off to 9-point bounces to 1,666 (weak) and 1,685 (strong).  /TF failing at 1,666 would be a good sign to short the rest.

The VIX is at 16 and below 15 means shorting time is over and the Dollar, more importantly, has already fallend from 95 to 94 so 0.2 bounces to 94.20 (weak) and 94.40 (strong) but 94.20 has failed this morning and that helps the indexes stay bullish for the moment.

Image placeholder title

The S&P (/ES) Futures topped out at 2,747.50 (over the strong bounce line by 3.5), the Dow topped out at 24,575 (halfway between the weak and strong bounce), the Nasdaq hit 7,150 (strong bounce on the nose) and the Russell was also right between at 1,677.   We were not fooled because the VIX remained above 15 and the Dollar kept rising (now 94.92).

So, as planned, we got signals to re-short the S&P at our 2,744 line as well as the Nasdaq at 7,150 as the market stumbles along to our Nasdaq 6,500 goal (10% corrections all around) but of course it doesn't get there in a straight line, so we learn to play the bounces and recognize a good run for what it is and tale profits off the table – like this morning, where we're down another 100 on the Dow already – we just look for the next likely support and see how it plays out – probably at the 24,000 line.

From there we use our 5% Rule™ (it's not TA – it's just math!) to calculate the weak and strong bounces and then we're back to where we were Tuesday, watching to see how high the bounce can take us (while playing /YM long at 24,000 with tight stops below, of course).  May as well make money while we wait, right?  

On the other hand, if 24,000 fails along with 2,700 on the S&P (/ES) and 7,000 on the Nasdaq (/NQ)and 1,650 on the Russell (/TF) and the VIX is over 17 – then those are too many shorting lines to ignore and we go back to shorting the Nasdaq below the 7,000 line as we're still expecting 6,500 to be tested and that's a $10,000 per contract gain on a 500-point drop ($20 per point per contract).  I've been telling you this since 7,300 and that was $6,000 ago!  In fact,what I said just last Thursday was:

Yesterday, in our Live Trading Webinar, we discussed some of the many reasons we were not going to chase the indexes higher and, in fact, we took a short on the Nasdaq as it tested 7,330 and caught a nice dip back to 7,300 fora $600 per contract gainand this morning we'll look for a chance to short it again as it's up for no reason.

We're still not a believer in the "rally" until we see the NYSE get back over that 12,800 line and we're about 1% away from it now and it's very, very doubtful that we'll get there today, no matter how quiet the US investors are.

In fact, on the NYSE, we are wathing for a failure at 12,600 (the 200-dma), which would signal the very strong possibility of a leg down for the indexes.  We still have our long hedge on the Nasdaq and our 10 QQQ 2020 $220 calls from our June 12th Morning Report at $2,000 are already $2,550 for a 27.5% gain even though QQQ is only at $177.25, up $2.25 or 1.3% so we are getting the 20x leverage we expected on a move higher – just in case we're wrong and the index doubles before it drops 10%.

Image placeholder title

Still, that 6,500 target is very tempting with /NQ at 7,300 as it's down 800 points and that would pay $16,000 per contract on a correction– that puts the risk of playing here with tight stops above into perspective, right?  While US Investors may not be worried about the impact of Trump's Trade Policy, Fed Chairman Powell sure is,saying:

“Changes in trade policy could cause us to have to question the outlook,” Federal Reserve Chairman Jerome Powell said during a panel discussion at a European Central Bank conference in Sintra, Portugal. “For the first time, we’re hearing about decisions to postpone investment, postpone hiring.”

Remember – I can only tell you what is going to happen and how to make money trading it – the rest is up to you!

As I mentioned above, this is not technical trading that we're doing, we are Fundamentalists and yes, the TA that drives much of the market is A factor in what we look at but not THE factor that drives our decisions.  IF we see the market heading for a downturn THEN we do the math and look for where the TA sheeple will make the turn and THEN we can place our bets accordingly.  

Fundamentally, we are in a Trade War and the extent of the damage from that Trade War is unknown but it's not the only reason we're shorting – just the catalyst that drove our timing to jump on the shorts last Thursday and caused us to stick with them yesterday because, as I said in our morning report:

We will certainly bounce this morning on the news that Trump is pursuing a less-crazy policy than the one he said he would pursue but it's not good to have a President who doesn't mean what he says, nor is it good to have random trade policies and, anyway, we still have all the stuff that took the markets down BEFORE things got crazier so I'm not sure what we should be getting excited about.

We're just going to watch our bounce lines and see if there's enough technical energy left to get us back into bullish territory but, for me, I stand by my month-old prediction that we're going to be 10% off our highs and at Nasdaq 6,500 over the summer – and it's only June 27th so, be careful out there!

Certainly nothing Fundamental has happened to change my opinion over the past 24 hours….