A little after my Thursday purchases of Nasdaq 100 3x ETF (TQQQ) and Beauty Health (SKIN), which were conveyed via notification emails to premium members, the market peaked for the day just after penetrating the 20 ema.
This left a suspicious shooting star candlestick pattern on the Naz, which saw follow-though selling on Friday and a poor close.
The upshot was that the index went from a positive bias to what appears to be a second bear flag in an ongoing down trend.
Unlike the Nasdaq, the S&P 500 nearly rallied back to the 50 ma before stalling. Another sign of relative strength in the S&P is its forming an inside bar on Friday, whereas the Nasdaq made a lower price low on that day.
The two-day action at the end of last week provides enough evidence to wipe the Focus List clean of long ideas. It brings up the possibility of a few short plays for those who are so inclined.
In the past, I have said that shorting every pullback in the averages is not the best idea. This is because the buy-the-dip mentality renders these pullbacks to be short-lived affairs. It is best to wait until a bear market is in place.
A couple of months ago, I also said that the best time to short is when the building blocks of a sustained down trend are present, i.e. a breadth divergence, a Fed raising the fed funds rate, a back-up in bond yields, and relative weakness in financials such as the banks and brokers.
While no bear market prediction is being made here, the following is in place:
1) a three-and-a-half month divergence in the NYSE a-d line
2) a divergence in the % of NYSE stocks below their 200-day ma
3) the yield on 10s has ramped from 1.13% to 1.60% in just two months
4) the Fed has said it expects to begin its taper in November
5) a divergence between regional banks and S&P, though not money center banks or the broad financial sector
For Part II of this report, which is a video that will also serve as a trading lesson in short-selling, please click here.
For the Focus List, please click here.
In summation, the key to this market is understanding what occurred in the Thursday-Friday time period. Then, the second rally -- a three-bar bread and butter pullback just like the first one in late September -- in an ongoing down trend in the averages stalled. This increases the likelihood of a resumption of the trend lower.
Introduction to the service video (38:00)
Money management and risk management video (20:27)
Bread and butter pullback video (11:10)
Bread and butter pullback: Pt II video (15:09)
Bread and butter pullback: Pt III video (31:48)
Bread and butter pullback: Pt IV video (30:16)
Short-selling video (25:53)