Hi folks!
I just wanted to make a quick post to help make sense of the wild, white-knuckle ride this market has put us through recently! I'm sure many traders have become exceedingly frustrated and maybe even a bit angry and lost in this price action.
This market reminds me of a chart that I annotated that became very popular back in 2018.
Now, this chart doesn't so much reflect the indices as closely as it does very popular, highly traded and owned stocks like $PLTR, $HOOD, $APP, $UPST, $HIMS and $CRWD at the moment. There are many more charts that mimic the attributes in this chart almost identically right now.
These charts have near uniform characteristics of the first four phases of the traders mindset and thinking.
1: The Rally Phase
Traders are making money and they they're starting to feel good about things. "The stock market is the easiest place to make big money!". "I bet I can be a big shot hedge fund manager!"
2: Topping Out Phase
Movement without progress. Market tries to pullback only to rally back. Traders say things like "This bull market is so strong bears are wimps!". "Next dip I'm gonna buy on double margin!"
3: The "Stuck" Holder
Stocks drop out of a multi-day topping out phase. This is when stock holders become "stuck holders". Anxiety becomes to tick up but you're hopeful things will "snap back!" and you'll be making big money again. Only to find out there is more pain to come!
4: The Corrective Phase
The corrective move down lasts about 5-6 days before a reversal bottom prints. This is when traders who were "stuck holders" will start to sell their positions and promise to "NEVER buy stocks again!" Emotions are very high and they're scared about the long term outlook. This is when traders sentiment is as negative as ever. If not outright doom and gloom. Bearish! Some are pretty damn angry!
$CRWD, $HOOD, $PLTR Phase 1 - 4 Characteristics:
Ok so why does this all matter? Are there any other characteristics that mimic these same patterns?
Sentiment. Sentiment is a big part of how this plays out on a short term basis. Using something as simple as a Fear and Greed index can confirm this.
"But indices are barely off their highs, how can sentiment be so negative!?"
An argument I've seen over the past few days on X. I think what needs to be taken into consideration is that retail traders love to follow highly talked about, strong trending stocks. They study them, they trade them and they own them. Sentiment indicators are usually built off the backs of the retailers. So if you have a portfolio or a "go-to" watchlist with a high concentration of names like $PLTR, $HOOD, $CRWD, $APP, $HIMS or an even bigger name like $TSLA that has been in a 3 month downtrend and now 40% off of highs your perspective on the stock market is very skewed from that view point. It isn't always the "stock market" it can be the "market of stocks!"
Ok, great! So we have a market with many short term oversold stocks and negative sentiment at highs! What should I look for next?
Indices. Indices are just now coming off of 5 - 6 down days in a row. On Thursday I spotted signs of panic selling characteristics which set the stage for a short term low. I talked about this after market close with Art of Trading members:
Positive RSI and MACD divergences began to emerge on the Nasdaq this day too.
NYMO and NAMO indicators began to show signs of positive divergences as well.
One of the biggest tells that the market may be ready to pivot, at least short term came mid day Friday after political video clips and headlines hit the tape. The market first reacted negatively to the news, $SPY actually made a new low on the day and $QQQ tested the low. The market quickly digested these headlines, making a pivot to the upside after testing lows. By the end of the day indices were closing on a new high for the day as the market rallied into the close.
If the market begins to pivot direction, look for that trend to hold. The strongest momentum names that are 30% - 40% off of highs in the past two weeks have a good chance to follow the strength. Those bounces usually work out to be the most powerful.
Strong bounce candidates for next week to add to your watchlist are $PLTR, $HOOD, $APP, $UPST, $HIMS, $CRWD, $TSLA, $MSTR. Experienced traders may look for leveraged products such as $TQQQ, $SOXL or for individual names $PLTU, $TSLL, $MSTU.
For now we have strong lows to use to gauge our risk. Be mindful of position sizing and make sure to flow with the market. Don't get overly comfortable with a position that seems "strong". Booking trades into strength until the market proves that it wants to stabilize should be part of the game plan!
Trade em' strong! Trade em' well!
Cheers and Happy Trading!
