So You Want To Be a Bull?

There has been a lot made of the recent bounce in the markets. The SP500 has rallied some 6% off the lows of last Thursday and has emboldened many to call the low for the year. The SP500 has defended support and squeezed some shorts. It has also coerced nervous, sidelined Bulls fearing missing out on any upside moves.

Active fund managers are holding large Cash positions and we are seeing sentiment extremes surpassing the 2003 or 2009 bear market lows:

Chart courtesy of @RyanDetrick

So the gist is investors are scared, active managers are highly defensive and the market has rallied sharply, quickly. Does any of this mean the lows are set? No it does not. Could the lows be in already? Sure they could. But how are you suppose to figure out what to listen to and how to position?

I'm gonna make this really easy for you: FB, AMZN, and GOOGL. This is all you need to focus on in the coming week to know if we are going to experience follow-through to the upside or if lower lows are coming next. 

These 3 stocks were among the true market leaders last year. Yet in 2016 they've been dumped and have led to the downside. These are your typical "risk-on", bull market growth stocks. For any lasting rally to stick we need to see money rotate into the more risk sensitive and offensive stocks. 

We interact with the markets in a series of "If/Then" propositions. If A happens, then we do this. If B happens, then we do that. Looking at the structure of these three on the short-term timeframes will tell us everything we need to know about the coming market direction.

FB 30 Minute Bars

IF: Facebook gaps higher and through $105 resistance, THEN: I will Buy FB for a trade with stops below $103.

IF: Facebook gaps lower and through $103 support, THEN: I will Sell/Short FB for a trade with stops above $105.


GOOGL

The same goes for GOOGL. For bullish bets I'm looking for a gap above the recent tight trading range from Friday. Clearing $723 gets me Long with stops below the swing low at $714.

If GOOGL gaps lower and through support at $714, then I will Sell GOOGL with stops above the consolidation at $723

AMZN

I'll swing Long AMZN with a breakout above the neckline resistance at $540.

SP500 

When I talk about "structure" I'm looking for momentum to hold a positive range, clearly defined swing highs and lows (resistance/support), followed by tight price action near a critical swing point.

The structure of the three stocks above and the SP500 resemble each other. They sit at an inflection point and we don't know which way they will break. If I'm putting my money down I want to be positioned in the leading issues. If the market is going to breakout, these stocks will do so harder and faster than the broad index. 

With leading stocks you get the clearest picture of what's happening due to their heightened sensitivity to general market movements. If this market is going to move higher out of this base formation, participants are going to bid up higher beta stocks with better growth prospects. Likewise if the market is going to resume its longer-term trend lower, any remaining "hopeful" investors are going to continue to dump higher risk, higher valuation issues.

This is what I mean when I say if you want to know how to position going forward all you have to do is react to whatever direction these three stocks tip. Generally they are going to follow the market and will do so in an aggressive way whether that's to the upside or downside.

Longer-term this market is in a downtrend, rallies are generally selling opportunities in downtrends. However if we do see an upside resolution that holds the key 1,950 level, a further and violent chase could be on.

Also realize these are short-term trades. I am not making long-term investment decisions based on this analysis. If this market is going to squeeze higher I want to participate in my aggressive trading accounts. I will be doing so through FB, GOOGL, and AMZN. However if these moves turn out to fail and we see pressure on the new trend, I will exit quickly.

Thanks for reading.
-ZT