The Technical Case For A Bottom

Netflix collapses BUT it still holds 2014 lows

I closed out my short position in after-hours trading because I did not want to deal with what I assumed would be a rush of buying and short-covering at market open. Sure enough, the opportunity now is in the high volume bounce from lows (note the high volume BEFORE earnings – someone “knew” something). First, NFLX is so far below its lower-Bollinger® Band (BB) that I fully expect it to tag the lower-BB before resuming any downward momentum. I flipped in and out of a long position on Friday with that expectation in mind (still kicking myself that I did not move fast enough on Thursday to do the same). The next opportunity is that IF NFLX somehow manages to make a fresh post-earnings low, the move will be a resounding confirmation of a new bearish run for NFLX. I continue to stay on high alert on NFLX.

There are no absolute cases for bottoms in these individual stocks, just encouraging signs. They are each making valiant attempts to bounce from bottoms which could be tell-tale signs to confirm the battle that will now unfold between 200DMA resistance and recent lows for the S&P 500 and the NASDAQ. For tech, AAPL needs to hold its trading range. For industrials, CAT needs to hold the 2011 low. If the market manages to plunge into a new oversold period that takes out the current lows in the indices, we will then know that “this time is indeed different.” As always, I take this one step at a time.

The final element of bottom-fishing is the market’s reaction to bad news. As I noted in the last T2108 Update, the market abruptly moved from caring about nothing to caring about everything. Most investors and traders may have missed it, but a major washout of negative sentiment may have occurred well before the market opened on Thursday, October 16th.

It turns out that Putin was NOT threatening to lob nuclear weapons. Instead, he made a thinly veiled threat referencing the dangers of nuclear powers saber-rattling over Ukraine. Moreover, this was the SECOND time Putin made such references. Putin made it clear to the world that Russia will not be bowed by attempts to isolate it. I am not sure who still pays attention to Zero Hedge besides Kass, permabears, “apocalypsists”, and various fear-mongerers, but I feel for anyone who panicked at that headline or similar ones and joined the stampede in thin pre-market trading. They got an extreme case of whiplash by the close when the S&P 500 ended the day flat after some gyrations. Even Kass bought into that panic as he made clear later in the day with his recount of his fast-trigger day-trading. His reference to half-regret for selling too early was from a position he put on accepting shares from a panicking market.

Anyone following the oversold indicators would have known the extreme danger of selling short into a further extreme in sentiment. They should have also known that selling into a panic rarely produces satisfactory results. However, I am honestly not even sure whether futures really “collapsed.” When I look at currency markets, I see absolutely no evidence of a market in panic. (A reminder of why it is useful to have multiple technical signals that can confirm each other). Anyway, whatever happened, I like this little example of market sentiment in action. I hope my regular readers will never make trading or investing decisions to satisfy any urges to panic. Heck, please NEVER panic if you can help it!

I conclude with a summary of trading strategies for my three trading archetypes:

The conservative “wait and see” trade
Conservative traders should continue to stay happily on the sidelines. T2108 has emerged from oversold conditions, but the indices are too close to important 200DMA resistance to make trades/investments worth the risk. Wait now for a confirmed close ABOVE the 200DMAs.

The growling bear trade
Stubborn bears who have held through all the oversold churn can still sit on their hands. If they followed the oversold trading rules, they can be even more patient having already taken a bunch of profits during the oversold period. Even though I think a sustainable bottom is in place, the bears still hold the upper-hand on sentiment and on the technicals. Buyers and bulls still have a LOT of repair work to accomplish.

The aggressive trade
Again, I fall mainly in this camp even as I use the logic of the growling bear to justify the hedges. The aggressive trader follows the T2108 rules to be a strict contrarian against extremes in fear and complacency. This is the fear stage. I bought during the oversold churn and the emergence from oversold conditions gave me an opportunity to finally take some profits on ProShares Ultra S&P500 (ARCA:SSO) call options. Given the extensive length of the oversold period, I switched to SSO shares for my “hold.” This last oversold period was much longer than usual, so I had to part with a large fistful of SSO calls that expired worthless. Only profits from hedges and the successes from the first two oversold periods eased my pain on those!

This last difficult oversold period does not change my strategy one bit because I am focused on the overall history of T2108 behavior. I am holding the SSO shares in the expectation that the market will “eventually” resume a run-up toward overbought conditions. This could of course change if the market makes fresh lows. In the shorter-term, I am still holding onto some put options on UVXY.

Jim Cramer of TheStreet.com and CNBC fame provided a great trading analogy in his fantasy football predictions for this weekend: go contrary to the grain – don’t give up on star fantasy football players just as they are about to perform.

Daily T2108 vs the S&P 500