Market threw quite the curve ball today. To some people's perspective, these days are what gives technical analysis a bad name. Wait - you were wary but long and expecting down, then bullish, now bearish but holding most positions?
Yes that is about right! If you are very large institution then I agree this might seem like flip-flopping, if it takes weeks to build a position. But I am not an institution and go from leveraged long to flat to short all very easily. Flexibility is a feature, not a bug!
Aside: if some company reported earnings that were under expectations, would fundamental analysts revise forecasts? Probably! Same with technical analysis. Sometimes there is whipsaw; sometimes there are trends. Our job is to catch the best trends and try not to get whipsawed too much. But trying to avoid whipsaw entirely is not going to happen.
In the last several weeks, I have gone on and on about the importance of Dow YR1. This is because many key turns over the past 10+ years have happened on these levels. In fact the history goes back much further than this, but if you aren't convinced by these examples then there is not really any point in going further.
So, as DIA / INDU approached YR1 levels I expected a sell-off but it didn't happen. Then the level cleared. I put bearishness on hold and purposely held SPY longs instead of QQQ, thinking mean reversion & re-balancing more likely especially into the end of this month. Yesterday the Dow YR1 in addition to 3 other yearly levels on USA main indexes all looked like support and I made a bullish conclusion. Today that was all undone. Should I stick to bullish guns? No way! Again - a feature, not a bug.
Of course it is a big frustrating to go leveraged long only to see market tank the next day, but consider: I'm out of tech positions from 6/20. 2 longs were XLF which were still up on the day handsomely. I nailed two counter-trend mean reversion moves this week with SMH short (-2.25% today btw) and USO long from 6/26 which are both delivering. So where was the pain today in the portfolio? 2 units IWM, but I specified a tight stop so that was cut early for minimum of damage; and EEM, which had been hedged via FXI shorts from lats week, so not too big a deal, slap them on again based on the FXI YR1 so that was also triggered early. Actually, I was rather comfortable today!
Out of IWM early and EEM hedged meant back to 80% net long. Then what? As usual let's try to assess with a method and not emotion:
-s
DIA back under YR1! Key top scenario back in play just based on this.
QQQ back under YR2!
VTI back under YR1!
3 yearly levels looking bearish. There are other major level rejections as well on other indexes: EFA, FXI, and others.
+s
4 / 5 USA mains above all pivots
VIX below all pivots, XIV above all pivots
TLT YP rejection
But I'll be honest and say there is a lot of TBD:
VIX stayed under all pivots, but 2nd big lift rom Q2S1 and massive engulfing bar
XIV went as low as YR2 but made a massive rebound
SPY big drop, but above all pivots and rising D50
the list goes on
Going out on a limb here, but I think best idea is to do nothing. If VIX had stayed above its Q2P, I would be thinking much differently.
Portfolio is 6 SPY, will hold above the YR1 / JunP combo; 2 XLF, doing fine; 2 EEM, hedged via FXI shorts; 1 USO long, 1 SMH short both up nicely. I may cut the counter-trend moves tomorrow.
For now, and thanks for reading this longer post, I'll repeat from 6/27: "Here is the key point: While Wall St is going gaga over bullish second half forecasts, we are on the verge of a real deal Dow YR1 rejection. If that happens, top for many weeks, months or even the year could be in. Watch."
SPY, DIA, QQQ, VTI, XLF, FXI, USO, SMH, VIX and XIV below.
