Last week we saw nasty price action with the S&P 500 (ES) down 2% and the Nasdaq (NQ) down 3%, driving the overall market lower into the weekend.
If we look at the put call ratio (PCALL), it is showing a reading that most traders are positioned short right now. The market is extended, so there could be short-term bounces coming.
The major thing to keep in mind is the monthly squeeze in the indexes that fired to the upside is now over, having lost momentum and structure. For the first time since this squeeze, the ES closed below the 8 exponential moving average (EMA), which typically will push price down to the monthly 21 EMA.
The key in this environment is to play the ebbs and flows of the market where the path of least resistance is – to the downside.
Sign Up for my FREE Webinar this Wednesday, Jan 26 at 7 p.m. Central as we discuss how to stay profitable in this downtrend.
After a two-year run of support, the market is signaling a shift.
From top to bottom, trend, structure, and momentum in the markets continue to turn bearish. Here’s a look at what we’re seeing as the environment shifts…
MONTHLY CHARTS
The SPY and QQQ fired monthly squeezes to the upside back in early 2020. Those squeezes were responsible for the trend and momentum that we experienced up until recently.
As these squeezes show a loss of momentum, recent closes under the monthly 8 exponential moving average (EMA) open the door for a potential flush down to the monthly 21 EMA. Meaning the market could have plenty more downside to come.
QQQ Monthly Chart
WEEKLY CHARTS
Ever since April 2020, the 21 EMA on the weekly chart has been a major level of support for this trend in both the SPY and QQQ. With Friday’s close, both indexes find themselves heading into the weekend trading under what has been critical support throughout the entirety of this trend.
QQQ Weekly Chart
With a loss of momentum and now structure on these bigger time frames, we are led to believe the path of least resistance will be to the downside. Now, much like when trading the upside, we want to pick our spots wisely with good entries. With that being said, next week we will be looking to short any bounces in the market.
One of our major focuses for new shorts is the IWM, which we closed a profitable short on Friday morning in the Compounding Growth Mastery. We initiated the short on Jan. 10 and closed the position on our move into our $200 target for 85%+ return on risk.
This short was so nice, we’re looking to do it twice.
IWM Daily Chart
In the weekend video on Sunday, we’ll be covering these shifts in the market in detail, along with looking at the results of our short setup scans.
The key to remaining profitable as a trader is to stay on the right side of the market. Until things change, our opinion is that the path of least resistance will be lower!
If you haven’t already seen my recent webinar on my 2022 Game Plan discussing win rates, limiting losses, and finding clean setups, watch the free replay here.
The market has been very vulnerable and weak as we’re trading in a “short-the-pop” type of environment.
The last two weeks the market has sold off after negative comments from the Federal Reserve, as the S&P 500 (ES) hit the weekly mean and dived straight down for a complete rollover on Thursday.
When the structure changes like this, we need to be ready to “short the pops” and not just buy the dip like so many of us are conditioned to do. We’re seeing a downtrend as the ES broke below the weekly mean and broke inside of the Ichimoku Cloud, so every pop now becomes a short opportunity.
We will see a green day eventually, but as of now the market is vulnerable and that is what matters most. We will lay out major inflection points to mark on your charts, so we can gauge future market moves.
Let’s preface the shortened upcoming week as the market is chopping in a volatile manner. We’ll review some important upcoming earnings events, specifically with Netflix (NFLX) kicking off big technology earnings on Thursday.
We’re building upon our inflection points, focusing on the reversion to the weekly 21 exponential moving average (EMA) for the S&P 500 (ES).
Here is our focused list:
GOOGL — Be patient as it is stuck underneath the daily Ichimoku Cloud. Once GOOGL breaks through the Cloud bottom at $2,820, then we can look for a reversion to the daily mean around $2,850.
NVDA — We could play this name in both directions, since it had a nice close above the weekly mean on Friday. This inflection point could be a great dip buy, but it all depends on what big technology and the overall market can do. If NVDA can rally off the weekly mean, then look for it to head to the daily mean at $285.
We’re doing things differently for Sunday’s prep list, as we’re running our scans before the market closes on Friday. We’re looking for setups with solid structure and momentum to add to our watchlist. We’ll show the most important things to incorporate into your weekend watchlist building – because structure is the name of the game in this market.
Many of us traders have gotten into the habit of having a bias for our favorite stocks. Think about stocks in big technology and semiconductors like FB, AAPL, TSLA, NFLX, NVDA, and AMD. These stocks have served us well over the last few years, but it’s important to keep our focus on what is setting up best in the current market.
The major reason for this is if you look at the monthly chart of the QQQ, it has spent the last two years firing a monthly squeeze to the upside. This becomes our biggest source of non-stop momentum, so when we do see this squeeze to the upside we want to focus on those big technology stocks that have wind on their backs.
However, in the current market where the tech winds have died down we’re more focused on structure.
The stock doesn’t matter, the setup does.
So let’s fire up the scans together to find good setups that fit the bill.
Uptrends are easy to trade, downtrends are easy to trade, but choppy “transition periods” can be difficult. Right now, that’s what this current environment is feeling like, as the monthly squeeze that provided us with so much momentum over the last two years has lost energy.
The key to remaining profitable during these choppy transitions is to seek balance in your trades with a few longs and a few shorts. Once the trend is clearer, the focus should revert back to placing trades only in the direction of trend. In the meantime, keep it simple and look to get long the best setups possible, and short the ugly ones.
In terms of ugly, we initiated a short position on the IWM this week. Unlike the SPY, QQQ, and Dow Jones, the IWM is seeing a loss of structure on the weekly chart with momentum very much bearish. Looking at the chart of the weekly squeeze below, note the lack of positively stacked exponential moving averages (EMAs), mixed with a close under -1 average true range (ATR), and bearish histograms/10x bars across the board. While the small caps have been very much trapped in consolidation, this shift of momentum and loss of structure suggests the energy may be fixing to get released to the downside.
Our initial target is a move down into $200, and we will look to add to our current position on any oversold bounce into the daily 21 EMA. For this trade, we are risking 1 to make 2 with a slightly in-the-money (ITM) call credit spread.
IWM Weekly Chart
In terms of setups that still have bullish trend, structure, and momentum characteristics, one of our favorites at the moment is MP, which we have a February expiration long position in the Compounding Growth Mastery. LCID, AZO, GILD, QCOM, and LITE are also on the watchlist and all have the criteria we need to justify a long position.
MP Daily Chart
LCID Daily Chart
AZO Daily Chart
Heading into next week, we’ll be looking for more clarity out of the indexes in regards to what the path of least resistance will be in the markets moving forward. If the path is “chop”, we’ll continue to short the pigs and get long the charts that continue to look poised for higher prices.
In Sunday’s watchlist video, we have a small “homework” assignment for all of you, so keep an eye out for that!
We’re continuing our neutral bias and laying out critical inflection points that can guide us moving forward. Over the last few weeks, we laid out a key level for the S&P 500 (ES) at $4,743, broke it, and saw the recent pullback.
On the weekly chart, the ES pulled back to the weekly 21 exponential moving average (EMA) and bounced off this marker.
On the daily chart, the ES gained support and ripped off the Ichimoku Cloud top.
Overall, we are in neutral territory since the recent drop was due to comments from the Federal Open Market Committee (FOMC). The next meeting will be Wednesday, Jan. 26, at 2 p.m. Eastern which could be the next catalyst for a push higher… or another pullback.
Heading into the next FOMC meeting, one zone we’re watching is the top of the daily Ichimoku Cloud near $4,600 to $4,620. If the ES treads above this range, we shouldn’t see too much danger to the downside. If it starts to break this Cloud range, we could see a drop to the $4,500 psychological level at the bottom of the Cloud.
Remember we’re here to set the tone, define key levels, and use inflection points to lay out a road map for the weeks ahead.
In today’s video, we’ll lay out a road map and analyze what could occur in the week ahead. Last week the Federal Reserve event caused a decent selloff and began this drop in the S&P 500 (ES). Regardless of the news, we want to lay out inflection points to guide us on which direction we should be focusing on.
Our biggest focus this week is on the daily Ichimoku Cloud. It’s printing a Cloud top near the $4,600 range for the next two weeks. If the ES continues to trade near these ranges, we could see it rally back up, similar to the last time the ES bounced off the daily Ichimoku Cloud.
There are two catalysts that could impact the overall market this week – Federal Reserve Chairman Jerome Powell will be speaking Tuesday morning and the Core CPI numbers will be released Wednesday morning.
In today’s video, we’ll dive into our major focal points for the overall market that will help gauge the market’s next moves.
Last week we saw cash rotating out of big technology, specifically the QQQ, into energy, the industrials, and the financials. This little bit of rotation has left the QQQ trading at key support, with a daily squeeze that could potentially fire to the downside.
On the weekly chart, the 21 exponential moving average (EMA) has been the key level of support throughout this entire push, and last week the QQQ closed below it…
If the QQQ loses this level of support at the weekly 21 EMA, we could see a nasty drop.
Keep in mind that we don’t need to trade big technology and big semiconductors, unless of course the structure is there. Instead, let’s see what names do well with rises in interest rates.
What an “interesting” week here for Wall Street. The Federal Reserve minutes released on Wednesday caused nasty panic selling across the board, with technology taking the brunt of it.
The weekly QQQ chart has spent the last six weeks trading in a wide, volatile range. It pushed down to the bottom-end, and as soon as it looked like the bears had control, the QQQ ripped right back to the upside.
QQQ Weekly Chart
At the close on Friday, the QQQ held support at the bottom of the range, which points toward the potential of yet another violent (for bears) bounce back to the upside. We won’t know more until Monday, but make sure to not “marry your ideas” here. If that big level of support ends up breaking, it could certainly see technology, and the market, trading lower.
Our major focus at the moment is on managing open positions as opposed to aggressively looking for new exposure. There continues to be solid structure within the semiconductors (SMH). As far as big technology goes, AAPL remains king-of-the-hill in terms of trend, structure, and momentum properties.
As goes the market, goes the stocks. Tech stocks are so heavily weighted in our market indexes that a break of support for that group could lead to downside in other groups. Our suggestion for now is to respect the importance of the QQQ and patiently wait for confirmation of its next move before jumping into new long positions.
We’ll cover a handful of interesting setups and charts in Sunday’s video and see if our scan results can offer any clues as to where the next round of opportunity could be.
