It is no secret that the market had a horrendous week, so bad that I imagine even the retail investors were calling their managers asking what was going on.
We do not need to know what caused this pullback, nor do I really care. I don’t need to know and I don’t care because at the end of the day, it is about making money. The only way to make money is to be positioned correctly (of course), and knowing why something is someway does not make you a penny, if you are not positioned correctly.
So, where does this leave us? Well, if you are a know-it-all person, you may want to stop reading now because this post is about how much we don’t know and how little it matters. We do not know why the market sold off, we cannot tell you what to do with your investments, we don’t measure companies by how much money they make (or lose), we do not listen to Yellen or Goldman, we do not do anything of this. We listen to everyone that has a voice in the markets, every market participant. How? Through the study of price.
Below is a chart of $SPY (sp500 etf). Throughout the week we have been speaking of the lack of set ups from a swing perspective. For that matter, we have been talking about the lack of set ups for the entire month of July. There truly were no set ups that needed immediate attention, nothing that caught my eye so much that I felt I needed to buy the stock. Of course, this did not mean we had to sell-off, in fact the day before this pullback started we stated:
To us, this either means the market is in a distribution stage in the rally (sell-off comes next), or in a consolidation period in which many stocks just form bases to breakout from in the future.
Hindsight 20/20, it was the sell-off that occurred not the base continuation but we did not know at the time. All we knew was that we needed to take the set ups we were given and in this case, there were none so we moved to cash.
Going forward, $SPY stalled near the 100 day on Friday and is completely outside of the lower Bollinger Band (BB). From a tactical point of view, the best case scenario is a continued flush lower towards the 190.00 level before a bounce. This would set up the best risk to reward trade for a bounce trade. Whether this happens or not, again, no one knows. Of course, another scenario that could play is out is we bounce from these levels and the low is in (from Friday). If this is the case, the long set ups will come back within a few days and all will be back to ‘normal’ again.
Whatever the case, we will be prepared – taking our set ups as they are given to us and remaining disciplined in the implementation of our process.
A few more charts just for fun:
$IWM daily: Below all the major Moving Averages (not on the chart). The next major support level is near 108.00, the best risk to reward trade for a bounce is going to be a flush down to that level then a bounce from there. See weekly chart below.
$IWM weekly: A little more daunting of a chart. This is a weekly chart of $IWM in which an obvious long-term head and shoulders pattern is the process of confirming. A weekly close below 108.00 confirms this head and shoulders pattern and likely a more major top is in.
$KRE daily: The regional bank etf is coming into some very major support here stretching back all the way to August of last year. The weekly chart (below) does this pattern a lot more justice, but the long-term head and shoulders pattern that has formed is far from benign.
$KRE weekly: This is the most obvious long-term head and shoulders pattern I could find out of all the sector etfs. A weekly close below 37.00 confirms this pattern. Not a pretty chart by any means of the imagination.
$VXX daily: We have spent a lot of time Tweeting and blogging about this etf so we thought it was appropriate to share it again with you today. Lately we have been talking about the fact that the 21 ema had flattened out and it had begun to hold higher, this was 3 days ago. Now, it is extended and not as favorable for a long trade. Hands off for now, wait for it to set up again.
$XLF Daily: The major banks are testing a major trend line that has been supporting this sector for a very long time now. The more time a level is tested, the weaker it becomes so from a bullish perspective, you need to see this level be defended quickly or else the likelihood of a further breakdown increases.
$XLF weekly: Same idea and chart as above expect now you are able to see how vital it is for the market to hold this level. It has been tested all too frequently over the course of the past couple months. If it does not bounce quickly, we believe this level will be lost.
Have a great weekend everyone. Be sure to reach out to me if you have any questions or comments.