I Am Bullish Again… Cautiously
It’s been a tumultuous month in the markets.
The S&P is down nearly 5% over the past month, the Dow is down nearly 2%, and the Nasdaq is down nearly 8%.
We’ve seen tech stocks fall from grace as the high-growth angels boosting everyone’s portfolios. And we’ve seen more forgotten-about sectors like real estate and staples rise…
That is until Thursday, when the broad market started breaking back up through some key levels. We’re now seeing the beginning of a reversal of this trend.
Tech is separating itself from the pack a little today while real estate lags:
Tech is the light blue at the top while real estate is the purple line at the bottom.
Both of those, in my view, are indications of a return to bullish conditions for the short term.
We saw tech get hit the hardest and real estate bounce during the big drawdowns the past month, so this is the mirror image of that in the short term.
Dare I say this market is starting to look like a healthy grind higher?
We broke through both levels I thought were important to establish some bullishness last week and I believe that until we break all the way back below last week’s lows, I’ll be looking for longs in the short term here.
Today looks like it will end up being a “pause” in the markets without really any net movement to either side (which, again, I cautiously consider bullish after last week’s move because we’re not selling into any strength that shows up).
But we certainly need to be careful as the range to the downside has become very expanded. Volatility remains quite high.
And that’s where I think traders need to be very careful…
I think it’s worth noting that the range of movement has really opened up in the last few weeks, which changes the structure of directional trades. In other words, when we were making higher highs every day, if the market broke lower at all it would invalidate a bullish trade… Now, the range for where a short term buy position can still be valid is a lot wider in my view.
I think the big mistake people will and can make from here is to try to go short every time there is any downside momentum and to go long any time there is bullish momentum because it’s more than likely that we’ll get some testing of recent areas along the way.
Those tests are going to feel like a deep correction compared to how the market has behaved the last 8 months because the market may drop 1.5% to test a recent area without actually flipping into a bearish mode — this is new territory for us.
A smart thing to do for options traders might be to just add a week or two to the expiration (aka timeline of their trade) to give themselves a little more durability in these volatile scenarios.
The market is shifting rapidly and drastically. For example, the morning was characterized by upticks in buying while the afternoon saw more selling. And the VIX has risen by about 2.3% today after falling 35% over the last week.
And I think today’s market action is a pretty good roadmap for what we might see more of whether this market grinds up or down. But for right now, I’m bullish… cautiously.
— Nate Tucci
P.S. If we get one more break higher, I have a few trade ideas I will post in Telegram for you. Make sure you’re inside my free Telegram channel so you can take advantage.
Oh, and with this kind of market action, I think watching gaps makes a ton of sense. Roger and I talked about how to trade his “Gap to Green” method in a live workshop today and I recommend watching that right here.
