A Monthly Look

Regardless of the timeframe you choose to trade/invest, I feel it is important to know the trends on all major timeframes. Studying the Monthly bars at the end of a month is very helpful for seeing the bigger picture. So much gets made of the short-term action, day-to-day activity is actionable but you can lose perspective of the larger trends by focusing in too closely.

This week I want to zoom out and take a look at the monthly charts after one of the weakest starts to a year in stock market history.

SP500

To lead off, there is much talk of this current environment being a "Bear market". Granted many stocks are in large declines and most classify a bear market as a decline of -20% off the highs. But for me a bear market means a long-term and persistent downtrend. 

What we have seen over the past year is a sideways market that has recently begun to trend lower. From my view the stock market remains in a corrective pattern, but still in the context of a long-term uptrend. It could certainly devolve into a larger decline and bear market but as long as the SP500 remains above the 1,500 breakout level, I am of the opinion that secular bull market remains intact. 

I am a trend trader and being that the market has been sideways to lower for over a year my accounts are positioned defensively. However the long-term view of the market tells me to be prepared for another lasting a strong rally once this downtrend runs its course. 

Taking a zoomed in view of the monthly bars the SP500 has closed below the 20 month MA. This is a line I use to determine a positive trend vs a negative trend. Currently this chart suggests a weakening market and one to be cautious of in the intermediate term. 

NASDAQ Composite

The COMP also closed below its 20 MMA but is in a slightly better position than the SP500. Only because the NASDAQ did not violate its low from Oct 2014 like the SP500 did this month. The trend is still sideways for the NASDAQ and remains tenative at best. 

Russell 2000

The Russell 2000 small cap index is the weakest of the major US markets. Not only did the Russell violate its Oct '14 low but despite a late month bounce, it closed January below the low of Oct. 

There is a very clear topping formation in the small caps and a definite lower high and lower low in place. Of all the major indices the Russell looks like the best bet to continue its decline and test the 2013 breakout near 850. 

Oil (USO)

Oil is in a bear market. This is what a bear market means to me. It's been persistently lower, declining over the course a year+ and lost more than 75% of its value. 

If you follow me on social media you'll know that I have recently been quite bullish on the short-term outlook for Crude Oil. The monthly chart shows a very interesting signal that at least a temporary low may be in place. The oil ETF USO that tracks the return of the oil markets saw its highest monthly volume ever this month. This amount of volume has occurred after an 80% decline in oil prices since July of 2014 and saw buyers return, rallying prices more than 15% off its low in the last two weeks. 

I'm not calling a permanent low for oil as I simply don't know and can't know if it's happened. But I believe that the recent action we have seen is suggestive of a major change in the direction of oil for the near future. I'm also a believer that oil will remain in a "lower for longer" scenario. Meaning while Crude prices may not exceed their current lows, they will likely stay depressed long enough for the oil stocks to continue to see major losses over the next year or more. 

That's my working thesis and I'm certainly open to be proven wrong. But the signs are in place for this scenario to play out. 

XLE

 

Here is a scenario that could be under formation (granted its way way early to call this likely). This would fit with my above theory of a low being set for the price of oil AND a lower for longer move that would begin to cripple many marginal oil producers. 

The XLE put in a tremendous rally to end January and did so right at a major support level. It's not unfathomable to think that prices could rally back but then top out again and resume lower. As always, keep an open mind to all possible outcomes and follow the price action. 

XLF

  Financials have been the hardest hit sector in 2016. The monthly chart is clearly rolling over and there is really no support until about $17. This can and has been a major drag on sentiment and markets overall. 

TLT

After years of a supposedly "rising rates environment" the Fed finally increases rates but income generating assets hardly budge and are now rallying. This is why it pays to follow price action and not opinions of what economists and pundits say will play out in the future. 

The trend in Treasury Bonds remains higher highs and higher lows. News from the BOJ this past Friday announcing negative interest rates will no doubt continue to support US bond prices.  

XLU

Following along with Bond prices, Utilities remain strong and are setting up to resume their long-term uptrend. The strong move through the 20 MMA in January suggests the recent correction has run its course. 

+Entering AEP

Our Lg-Cap Portfolio is reentering AEP after being shaken out in the decline of 2015. The recent correction appears to be nothing more than a breakout throwback and is now resuming higher.

+Entering PCG

I feel I traded both of these names poorly the last time around. While I identified the large base breakouts, I failed to capitalize on the sudden rise AND also sold prior to the base failing its breakout. What I got caught doing was crossing timeframes. I liked this setup on a multi-year thesis, but then stopped out based on a weekly timeframe when the long-term setup was still valid. 

Ideally with a monthly chart I want to be a holder as long as price is above the rising 20 month MA. That's basically how we will manage these positions going forward due to the long-term nature of these setups. 

I will place my stops in conjunction with the long-term moving average and weekly support areas. For AEP we will use $56.60 which is the weekly swing low and rising 20 month MA. For PCG we will use $51 which is just below the weekly support and the 20 month MA. 

The risk/reward sets up very well for these positions. Both project base targets much higher than current prices. AEP has a measured target near $75 and PCG could easily go to the high $60's as well. In both cases we are risking around $4 for potentially $10-20 profit objectives. Also it should be mentioned that they both offer annual dividend yields of 3.5%. That's hard to get in today's low rate environment. 

UUP

Im still in the camp that the Dollar remains strong and the monthly chart suggests the same. It appears likely that the right side of this multi-year base is near completion and a breakout could be imminent. A clean move above 26-26.50 would confirm this setup. 

FB

FB broke to all-time highs this week on a strong earnings report. The monthly chart remains in a strong uptrend and we can now trail stops to the weekly swing point at $94.97. 

GE

GE pulled back with the market but managed to hold its prior breakout level very nicely. I remain constructive on this name long-term and a resumption to new highs would allow us to trail stops up to the new potential swing low at $28. 

LMT

LMT came very close to hitting our stops this week but managed to hold on. The monthly chart still shows a rising trend solid price action. 

I would emphasize keeping an eye on monthly charts as part of your usual analysis. Often taking a step back allows you to see the forrest for the trees and not just being overly focused on the color of the leaves. I hope you find adding this to your regular routine beneficial. 

Thanks for reading 

-ZT

Cool It

One of my kids' favorite books tells of a young, elementary school classroom hamster who over the summer has the chance to move to the country and plant his own vegetable garden. With the help of his new friend, a local bunny rabbit, they plant beans, lettuce, pumpkins, etc. The hamster can't wait for the plants to grow big, lush and delicious vegetables. Unfortunately he doesn't realize that growing a garden takes time, work and patience. He thought you plant the seeds, water the dirt and vegetables shoot out of the ground. When he comes to the realization that it's not an instant process he becomes very frustrated and emotional. His rabbit friend, having more experience in this area, tells him to COOL IT! Eventually with patience the garden grows, the vegetables are delicious and the hard work pays off.

I've been asked by many normal, passive investors over the last couple weeks about what they should do with their 401k's in light of this recent market volatility. There is notable fear present in market participants as many are remembering the dramatic effects of the 2008 Financial Crisis. 

What I've been telling them is to COOL IT! You're not always going to make money in the market. Something passive investors have not experienced over the past seven years is a stagnant or declining monthly statement balance. They have gotten comfortable with the concept of putting money in and it becoming worth more instantly. The market goes up, so my balances should continue to go up too, right?  This is easy!

The majority of millennials haven't been investing longer than 5-years. Either they were getting out of college during the recession or they have been paying off student loans with their extra savings. Now that they are working jobs that offer retirement savings they have become part of the passive investing class. They put money in every month and fortunately the market has cooperated nicely. The experience they have with savings and investing is that it always just goes up. But the moment they realize that prices can also go down, and do so rapidly, they get very nervous and want to sell. 

Investing is a process, just like a garden. It takes time and hard work. The results of this hard work will show themselves over time, but they will not happen instantly. There will be hiccups along the way; asset prices will fluctuate. 

Process matters more than short-term outcome. To be a successful investor you need to have a plan for how you will deal with certain scenarios that come along, because believe me, they will. These plans need to be decided outside the markets and especially not when your emotions are high due to near-term volatility in stock prices. 

One of the most important concepts an investor/trader needs to understand is their investing timeframe. This means both how active they will be with their investments and how long they have until they will need to use the money they have invested. If you have more than 10 years before you retire or need access to your funds, you should embrace short-term market volatility as it allows you to continue to purchase shares at lower prices. If you claim to be a long-term investor when markets are going higher, be a long-term investor when markets are going lower as well. Stick to the plan. 

If you choose to be more active with your investments then you will need market experience, rules, and a strict discipline to stick to your plan. Active investing is not easy and requires a lot of time to become functional. Managing your money isn't as simple as hearing about someone selling their shares and you deciding to also. If investing was as easy as selling when you "feel nervous" and then just getting back in when you "feel confident" then everyone would be rich. The market is a master of triggering your emotions at precisely the wrong time. It's designed to make you feel a certain way and make you react emotionally. Think about it this way, more money is dedicated to gaining profit out of the financial markets than any other avenue of venture. To think someone with no experience managing money or taking no time to understand market dynamics can just flip back and forth in their 401k's and be right every time, well you've got a rude awakening coming. 

If you want active management then you will need a plan for how you will respond to changes in the market. The basic conditions being that you want to be more aggressive when odds are in your favor and more defensive when they are not. You will need rules and guidelines that are tested to work over time that will alert you to how defensive or aggressive you need to be. These need to be direct reactions to market signals, not knee-jerk reactions to emotions or tips. 

With that in mind let's take a look at a couple longer-term guidelines I follow in determining my own active positioning. 

-SP500 positive or negative sloping 20 Week Moving Average

 When this indicator is positive my open risk will double on new trades or position adds. When it is negative my risk is cut in half.

Currently this indicator is in a decline and therefore suggests caution and smaller position sizes on new entries. Risk is elevated 

-SP500 weekly trend of higher highs/higher lows

When this indicator is positive the uptrend is intact and odds favor Long trades. When the indicator is negative odds favor defensive posture and Short trades are higher odds.

The trend suggests a new decline is potentially beginning. A higher high and higher low will be needed to reverse this. A reversal of trend will take time to establish. 

-SP500 position relative to the 20 Month Moving Average 

This indicator tends to protect against severe declining markets and position for strong rising markets.

As with any indicator, the results are not perfect. But generally following monthly closes above or below this moving average tend to keep you positioned for strong markets and avoid damage from severe corrections.

With one week to go until the close of the month of January, a Sell signal is likely to trigger from this long-term indicator. 

The important takeaway from this is that corrections and market fluctuations happen and are part of the normal cycle. Human emotions tend to be influenced by market gyrations. Unless you have a rock solid plan AND can execute that plan consistently your returns will suffer as your decisions will be based on emotional reactions and not market tested rules.

The current setup for stocks is that lower prices are likely. This doesn't mean we are going to crash like 2008 and we may have even seen the lows with this week's decline. All we can do is stick to our predetermined plans. Mine include taking action when certain criteria are triggered by the market. If your plan was to invest in your 401k for the next 10-20 years, then why are you reacting to a couple months worth of market gyration? That doesn't sound like sticking to the plan to me.

My best advice is to always stick to your plan and when you think about changing that plan after viewing your monthly statement...COOL IT! Your long-term goals will not be made or ruined by the next 6-months of market action. 

Thanks for reading
-ZT

Why I'm Bullish on Crude Oil (In the Short-term)

I discussed being bullish on Crude Oil today on my social media stream and it opened up quite a discussion. I mean, how does a trend trader become bullish on an asset one day after it set a multi-year low? Seems odd right? I agree this is not my normal trade, but I try to observe trends on all timeframes and am an open-minded market participant that tries to remain objective to the evidence in front of me. So here we go...

I emphasize that this is a short-term trade. I don't expect oil to recover to $60/barrel in the near future. But by my estimation it doesn't have to for there to be a very strong risk/reward trade. First I want to start with my immediate reasoning for opening a Long Crude Oil position this morning (1/21).

USO 30 minute bars

The short-term trend is looking constructive. The downtrend line that has been in place for all of 2016 was broken today and held on a mid-day consolidation. Price was also able to hold above the 50 SMA on the 30-min chart. We also saw a higher low established after the early morning pullback at the open today.

Zooming in on the same chart, this morning's action was quite bullish in my opinion. After a strong rally to end the day yesterday, oil gapped lower at the open today. The gap was filled within the first hour of trading and despite an attempt to roll the market over after the gap fill, buyers came in and cleared both the gap level and yesterday's high on the largest trading volume we've seen in more than 4-months.

This was my entry signal following yesterday's late day reversal. The surge of buying suggested yesterday's reversal rally was more than just Shorts taking profits and that a substantial upside move may actually be in process.

Looking at my indicators going back to the beginning of the year we can see rotation coming into USO on the short-term charts as it broke its relative downtrend vs. the SP500. The MACD line is now > 0 and will need to hold in that position to maintain the uptrend momentum. So far so good.

The risk management of this trade is easy. With today's rally and confirmation of yesterday's reversal, we can use the low at 7.92 as our stop going forward. Basically if oil makes a lower low from here we will be done. No questions asked, no justifying holding a losing trade.

Apart from the short-term execution of this trade, the greater evidence lies in the longer-term charts and price action I've observed over the past year.

USO Daily chart

Looking at the daily chart the first thing I see is a classic two bar reversal setup. On 1/20 oil gapped lower after an 11-day -30% decline, but closed near the highs of the day creating a "hammer" candle. Today's trading engulfed the body of yesterday's hammer and closed above the gap resistance from 1/19. This to me shows exhaustion and is likely to lead to a reversal of some kind.

The other thing I notice is the dramatic increase in trading volume that has occurred over the last two weeks. The 50-day average trading volume going back the last 2-years has been between 20-35 million shares traded daily. 6 of the last 8 trading days have seen more than 80 million shares traded while price declined substantially. Heavy selling doesn't necessarily mark lows in a downtrend, but a capitulation of worn out bulls does tend to occur near major turning points.

The more telling volume move I've noticed is on the weekly chart of USO

This is the volume trend of USO going back to 2007. As you can see last week saw the largest weekly volume EVER and 150 million more shares traded than the next closest weekly total.

This spike in weekly volume has occurred after an 18-month and -80% decline in the price of oil. 

3x Inverse Crude Oil ETF (DWTI) sees uptrend reversal and potential blow-off move

 I often find it helpful to look at a chart from the opposite perspective. If I want to go Long Crude, what does the inverse of that chart look like? Seeing the position of DWTI causes me to be more confident in taking a Long trade here.

The time to be a buyer of DWTI or to short Crude was near the $150 area. This particular vehicle traded more than 200% higher in less than 2 months. The last two trading days suggest a substantial trend reversal is in motion. This is basically the exact opposite of what we are seeing in the USO. Here we had a parabolic rally from the beginning of January (+150% in 12 trading days) that then gapped higher and closed near the lows of the session on 1/20. This can be a signal of exhaustion of a rally and is called a "shooting star" formation. This single candle needs confirmation to be a viable trade signal and today we saw a bearish engulfing candle emerge and close below the prior gap from 1/19. This is a highly bearish indication, especially following such a strong rally in a short period of time. The setup suggested by DWTI is that a Long Oil trade is now a viable and high probability option.


A question I was asked by several traders today was how can oil have a bottom if companies haven't been going bankrupt yet? Where is the real pain, the blood in the streets? My answer to this is oil companies are hurting currently and many have high debt levels. But the fall in the price of Crude has been relatively fast. WTI was trading at $55/barrel in mid-October. I've been told that even most marginal oil players can break even near the $50-$60/barrel price. OPEC I've been told can operate profitably at under $10/barrel. We have seen a decline of nearly 50% in just over 3-months. This is likely not enough time for the price to impact credit obligations just yet.

Where I believe the trouble lies for oil company bankruptcies is in the "lower for longer" scenario. If the more fringe oil producers can't make money below $50/barrel, then the longer prices stay below that level the more issues they will have. 

As I stated above I don't think we see $60/barrel prices in the near future. But the price of Crude could bounce around between the 20's-40's for an extended period of time. It is also my belief that the time to short the commodity itself has come to an ending point or is very close. From this point forward, should the price of oil remain below $40/barrel, shorting the high debt oil companies could still be a very viable strategy.

For this immediate trade I'm looking for a recovery to near the $35/barrel price. That would be just under 20% from the current closing price on 1/21 and would setup a move in USO to the $10 area. Granted this is not my normal strategy to trade for mean reversion, but I do take short-term swing trades from time to time. I usually don't share those trades on social media simply due to their rapid changes being on such a fast timeframe. This particular trade I felt like sharing as so many have been obsessively following the price of oil. I hope this thought process helps you understand how I build and construct a trade in a different manner than my normal long-term trend strategies.

There are many ways to make money in the markets. The most important concept to understand is whatever method you choose to follow be sure to always manage risk first. If you know your exit point and size your positions appropriately you will come out ahead regardless of the particular entry strategy you use. 

Thanks for reading
-ZT 

Gap Hunt

It was another ugly week for the markets. The SP500 declined -2.2% and is now back at the range lows. The setup from previous tests of the key support near 1860-1870 has been to rally sharply. Will we see this again? I think its likely that we get some kind of relief rally, how long it lasts is another story.

We have seen the SP500 decline 8% in two weeks to start the year. Its been a pretty brutal move and most regular investors were not prepared in any way for what has occurred. I'd like to say it will get better from here, but I honestly don't know if it will.

Something I watch for is the behavior of market moves. When there is selling this strong and this relentless, it's concerning. Another behavioral trait that is prevalent right now is the market's ability to seek out gap areas and fill them. We've seen three very sharp moves over the course of the last 4-months. Each move left many open gaps from the prior day's closing and next day's open. In range bound markets, gaps tend to be trade-to targets. Lets take a look at this behavior we've seen recently:

 The first decline in August left five unfilled gaps on the way down. As you can see the October recovery appears to be nothing more than targeted gap filling. The day following the high gap fill marked the top of the rally and we have dropped 240 points from there. Its worth noting that this Friday's decline filled the final gap from 8/25/15.

 The October rally also left five unfilled gaps on the way up. Those gaps have all been filled with the recent correction.

Now we look at the current decline which by my count has six unfilled gaps above. If the pattern is to remain the same we could expect a recovery to fill these open spaces. This gap fill campaign doesn't have to occur right away, it could take months or more to accomplish. But the recent trend has been to reverse and fill gaps within the range. If the lows hold near 1870ish, the range remains intact and a move back to the upper boundary is the next logical direction.

Something I watch for with gap behavior is "how" the gaps are filled. There can be strong risk/reward trades to be had when a gap is filled and then price doesn't reverse, but then breaks through the gap area. This creates a shift in sentiment and the moves can be powerful.

The opposite is also true if once a gap is filled and price cannot overcome the gap level, a reversal is most commonly the outcome. We saw this in both early October as the lower gaps were not overcome to the downside and price rallied, then also in early November when the upper gaps were not broken with higher prices and the subsequent decline played out.

What I will be watching for is confirmation of this tendency either through and below this 8/25 gap area or a reversal back through the open gap at 1922.

Key world markets are suggesting downside is not over 

While the SP500 remains in a trading range and at long-term support levels, many of the other major market indices remain in downtrends and below key support.

Russell 2000 Small Cap Index

The Russell 2000 Small Cap index has declined 20% in the last 7 weeks and is 30% off its highs from last summer. This is a risk-off indication as money managers are seeking more defensive investments.

Emerging Markets (EEM)

Emerging markets have been a total mess for more than 6 years. After a perfect technical throwback into multi-year support at $36, EEM has rolled back over to lows not seen since 2009.

Shanghai Composite (SSEC)

China has been the focus of the media for most of this volatility. The Shanghai index broke significant support this week after emerging from a bearish wedge pattern last week. This still looks like lower prices ahead and that will likely keep pressure on global market sentiment.

Japan Nikkei

The Nikkei is in a confirmed weekly downtrend and is clearly rolling over. A bounce is likely soon, but for now we have lower lows and lower highs.

FTSE London

The FTSE is another ugly chart suggesting more volatile and lower prices. On any rallies 6,500 should be a very formidable resistance. 

Crude Oil

Oil is probably the number one drag on sentiment and global confidence. It continues to make lower lows and everyone seems to think they can predict the bottom. We've been hearing "the lows are in" for over a year now and yet it continues lower. It pays not to try to be the hero. There will be fantastic opportunities to make money in the oil space in the future, but there is no reason to be the first one in. 

LG-Cap Portfolio Exits GOOGL, LOW and COST

Exiting GOOGL

Google followed through to the downside this week and looks to need some rest and consolidation. While the uptrend is still intact longer-term, its time for us to step aside with a nearly break even trade and wait for a better risk/reward.

Exiting LOW

Lowe's showed a second consecutive distribution week and closed below our confirmed swing low at $70. Relatively speaking LOW is still in fine shape, but it appears to need more time in this range before its ready to move on. We will step aside and await the next signal.

This should be a name we keep on watchlists. The horizontal base remains one of the better consolidations in the Large-Cap space.

Exiting COST

COST gave up its breakout and swing low this week. I still like this longer-term but its current posture is not too encouraging. The attempted rally to regain the 20 WMA failed strongly this week and again closed lower. This may need some time to rebuild support.

With these three exits this week our Lg-Cap Portfolio is now Long UUP, LMT, GE, and FB. We hold 80% cash and will need to see healthy price action and setups before we can redeploy our capital.

Something I found interesting as a side note is how my Growth Portfolios held up quite well this week in terms of exit signals. I only lost two names AMZN and CALD. That leaves NFLX, MKTX, COR, CUBE, TSN, FB, AMWD, ULTA and PBH. Those accounts remain 30% invested and 70% Cash, which surprises me some considering how vulnerable even the safest of Large-Cap stocks have been recently. We stick with leaders as long as they are viable and hey maybe the market turns here at support...Who knows? All we know is a few stocks are still holding up and could emerge as substantial winners in the event of a recovery.

Always keep and open mind and thank you for reading.

-ZT

Welcome to 2016

Anyone expecting a change in the calendar would bring a different market than the one we had in 2015 was sorely mistaken. Granted the turn of the New Year can bring about some changes, but in terms of market trends and price action it matters not.

The SP500 declined -6% to open 2016, the worst first week to a year in the history of the stock market. That's saying something considering the Dow Jones Industrial Average has been around since the late 1800's; we saw more than 100 years of history made this week. If you have been following along and heeding my advice, you likely did not suffer this same fate. For months I have been preaching patience and high cash balances. This still remains the case. Granted the market is oversold on a short-term basis, so we may get a reprieve from the waterfall selling we saw this week, but its still no sure thing.

It's my opinion based on the current price action that the broad market continues to be in a large trading range. The boundaries of which at 2130-1870 will tell us if this will continue or if something is about to change. The story individual stocks are telling is we will see resolution of this range lower. I'm sure you have been inundated with stats discussing the average move of most stocks in the SP500 during 2015, most are locked in substantial downtrends and continue to point to lower prices.

As we saw following Friday's Jobs Report, any and all rallies continue to be sold. This is very typical as price moves from one end of a range to another. It seems relentless at the time and participants become heavily biased in which ever direction price is moving. This sentiment has been on display for much of the last 6-months. Investors became very Bearish in late August, flipped Bullish by early November, and are now back to low levels of Bullish participants. I have two things to note on this topic:

1. Sentiment in Ranges tends to be Bullish near the highs and Bearish near the lows.

AND

2. Sentiment follows price, not the other way around.

In this business only price pays. If the market goes against us we lose and if it goes with us we win. If you get too involved in year-end predictions, historical sentiment and seasonality, and everything else "you think you know", you will be focusing your attention on all the things that don't matter as to whether or not you make money. Rather than listening to elaborate theories about where the stock market will be a year from now or how stocks are "cheap" here, focus on the one thing we all share equally in real time: Price. The market will tell you what its general intentions are, and it pays to listen.

We've seen for months that this market is not healthy or moving in any sort of discernible trend. This has caused us to take a more defensive posture with our portfolios and kept us out of any real trouble.

SP500 Weekly

    The trend is definitely weak. Either its flat or transitioning lower depending on your method of determining trend. Something that can help determine where the overall trend in the market is leaning is to watch the Weekly MACD. When its > 0 the trend is said to still be positive and up-sloping. When MACD < 0 it is suggestive of a downtrend. What we have seen recently with regards to momentum and MACD is that the October rally was nothing more than a counter-trend bounce and this week's move is the beginning of a new trend lower.

Conclusion: The best possible scenario is we are in a wide and noisy trading range. Worst case scenario we are beginning a new trend lower. Either way this is not a market to be doing very much; a heavy cash balance is typically the best way to handle uncertainty like this.

Our Lg-Cap Portfolio only declined -1% this week vs -6% for the SP500, mainly due to our high cash position and Short American Express, which we closed this week. We did receive stops on AIG as well. This leaves us currently with 70% Cash and Long $UUP, $COST, $LMT, $FB, $GOOGL, $GE, $LOW.

Exit Short AXP

 Make no mistake, this remains in a firm long-term downtrend. My exit has nothing to do with the trend in the stock. I owned Jan 67.50 Puts which will expire this coming week. The fact that we got this huge move (AXP dropped 10% this week) in front of the expiration was a nice gift that we will gladly take. Shorting stock should be treated a little differently than being Long. When shorting, especially with options, its often best to close positions after strong moves to the downside. The likelihood of the decline continuing are still high, but due to our timing with the options contracts taking this week's gains was worth doing.

We may revisit this name again down the road, but its had quite a waterfall move and will likely base at some point soon. We gained +300% on the capital invested on our Put options and that made up for the rest of our Portfolio's losses this week.

Exit AIG

 This was an easy exit for our strategy. The stock failed the key swing point at $59 strongly and its time to step aside.

UUP

 UUP is our largest long position at almost 7% of our total capital. The setup remains strong and this week made new Relative highs vs SP500. Soon we can trail stops to just under the current consolidation at 25.30, but we will need a higher high to do so.

COST

Costco came within cents of hitting our stops. For now we will give it a week to see what it can muster.

LMT

Lockheed held up relatively well this week and remains comfortably above key swing lows. Stops are set at the prior breakout level. Above that area this is still a fine hold.

FB

FB took a hit this week and looks to be in fairly rough shape. We are giving this a ton of room as we simply have no swing point to trail stops to. I was looking for a weekly close above $108 to trail stops, but we never got that print. Long-term this trend is not invalidated until the prior breakout fails and I expect buyers to step in at some point to defend this substantial winner from 2015.

GOOGL

Google could be in a similar boat as Facebook except that it did make a couple higher weekly highs through this recent consolidation. Our stops are placed at the earnings gap support from 10/23. The case could be made for giving this a wider stop, but I am happy keeping this one tighter considering the potential "failed breakout" in motion from 12/29.

GE

GE simply has no support on the weekly chart to suggest trailing stops. Unfortunately we might just have to watch this backslide to our original stop level. But with a rally this relentless, I expect many missed the initial move and will be looking to step in at some point soon. Where that level will be I do not know. But until we have some identifiable support to work with, we've just got to let this one play out longer-term.

LOW

Lowe's took a turn for the worse this week and is just 1.5% above our stop level. I was asked on social media a couple weeks ago why I didn't have my stops at $74. My response was that the $74 swing low, while appealing, had not been confirmed as a viable swing low because we had not seen price make a higher high following the recent low. This week's move came right through that level and stopped out anyone overeager to place that stop. Now that may prove to be a shrewd move on those traders behalf should the stock continue to sink. But for my strategy and timeframe the trend will not be invalidated until the confirmed swing low at $70 is taken out on a weekly basis.


An important takeaway from this week's action is to know that violent moves do happen in the market and if you are not properly prepared to manage risk, risk will become a reality for you. During corrective periods the weaker names will be cleared out first. Those left standing are the true market leaders and will respond strongly when price balances back out.

The fact is no one knows if this devolves into a full blown bear market or if we just rip right back to the highs. All we can do is honor our stops, hold the strongest names and let the market determine how we are to position going forward. What this market is saying to me is that holding high cash balances continues to be a prudent move, while also sticking with the strongest names as long as we reasonably can.

Thanks for reading
-ZT