Signals & Trading Plan for Wednesday 11/13/19

Updated Tuesday 11/12/19 at 11:58 PM EST

Market context
All stock indices rose up sharply at the start of today as the headlines blared:
“The bulls are back, global recession concerns vanish and ‘Fear of Missing Out’ prompts a wave of optimism and jump in exposure to equities and cyclicals"
(source: Bank of America)

Prices rose just enough above Resistance1 for $SPX $NDX SPY QQQ TQQQ to trigger protective stops for bearish positions, and buy stops for bullish positions.  Then came the afternoon sharp reversal downward. Enough to cause pain for the late bulls, and regrets for the stopped-out bears.

If you have been following our short-term trade setups, you may have entered long at Support1 in the last couple days, and taken profit at Resistance1 today.  You would have made small amounts of profits.

If you have been waiting for the pullback to enter long for the intermediate terms, you probably groaned in disappointment at the start of the day, but felt glad you didn’t jump in once prices reversed in the afternoon.

Meanwhile, market internals continue to deliver a firm short-term bearish message under the hood.  However, prices can still drift higher, widening the bearish divergence.  This makes our trading decisions much harder.  

Table of support & resistance levels
We updated the S/R levels to reflect the latest price actions.

Projections from market internals
Here are the specific readings from the different market internal indicators.

• Market breadth dropped even more today Tuesday 11/12/19. This applies to both NYSE and Nasdaq stocks.  Again, this increases the short-term bearish bias. However, market breadth is still ok for intermediate time frame.
• CBOE equity put/call ratio shows that it is overbought and is likely to rise, which is bearish, in the short term.  However, the intermediate-time frame pattern of this ratio shows that it’s not ready to rise into rapid selling territory yet.  Therefore the intermediate time frame is bullish.
• The percentage of bullish stocks is still on the high side, but is starting to head down for NYSE stocks.  
• $VIX and $VXN are acting in a maddening manner.  To the inexperienced eye, it certainly looks like volatility is dead and complacency is surging.  However, UVXY and TVIX both formed an end-of-day pattern that indicate they are likely to rise in the short term, possibly back up to the high of November 6.  And this is happening despite a high level of contango.  So $VIX $VXN are likely to rise in the short term as well.  

Additionally, the following ETFs which tend to lead stocks on the way up are forming a clear top at strong resistance levels: IWM EEM JNK.  It's important to pay attention to them.

Finally, $SPX $NDX SPY QQQ TQQQ all formed a bearish inverse hammer on their daily charts today.

However, despite all these bearish messages, $SPX $NDX SPY QQQ TQQQ are still sitting at the top, and can still drift higher.  This creates a bearish divergence, which is not good for stocks. The longer this bearish divergence persists, the harder stocks can fall.  What may be just a moderate pullback to Support3 can end up becoming a Major Pullback. We saw this bearish divergence back in late April and late July.

For now, we work with the following projections from market internals.  But if the moderate pullback does not materialize soon, and instead the bearish divergence continues, then our projections will be changed.

Short-term bias:  Bearish enough to cause $SPX $NDX SPY QQQ TQQQ to drop down soon and test Support2, possibly dropping all the way down to Support3.  

Intermediate-term bias: In the intermediate term, Surge9 which started on 10/18/19 still has room to go up.  If $SPX $NDX SPY QQQ TQQQ test Support2 / Support3 soon, Surge9 will likely resume and can last through early December, most likely until FOMC announcement on 12/11/19.

Long-term bias:  As long as market internals show a bullish bias in the intermediate time frame, we continue to maintain a bullish bias for the long-term outlook.  The Up Trend that started on 12/26/18 is still intact for now.
  
Planning your trades
Long-term investment portfolios:  these portfolios can stay in stocks for now, and you can continue to buy the dip to add to your long-term investments.  

Intermediate-term trades:  The upcoming dip can swing prices for $SPX $NDX SPY QQQ TQQQ all the way down to Support3.  Intermediate-term traders should keep this in mind as you determine your protective stop levels for your existing long positions.

Intermediate-term traders looking to enter long should focus on scaling into $SPX $NDX SPY QQQ TQQQ positions during this upcoming dip, if this dip happens soon.  We are not sure at this point the exact levels that $VIX and $VXN will rise up to.  So our recommendation is this.

Place limit orders to scale into long $SPX $NDX SPY QQQ TQQQ positions as follows:

• Enter ⅓ of capital at Support2.
• Enter ⅓ of capital at the halfway point between Support2 and Support3.
• Enter ⅓ of capital at Support3.

The zone between Support2 and Support3 is still a strong support zone for now.  Prices can rise from this zone up to Resistance2 or Resistance3.  

Given the current bearish divergence that has started to emerge, we don’t recommend shorting this market for intermediate-term traders.  Prices can still drift higher despite the messages from market internals.

Short-term trade 1:  The short-term trade that spans Support1 and Resistance1 has been profitable for the last few sessions.  If you choose to trade it again, keep in mind the following information for Wednesday.

• $SPX $NDX SPY QQQ TQQQ may re-test Support1 and try to bounce up from there once again.  They still have a 50% chance of succeeding.  
• If they do rise, they have an 80% chance of getting stuck at the new Resistance1.  

If you choose to enter long at Support1, trade small, protect with a tight stop and take profit at Resistance1.

Short-term trade 2:  We mentioned above not to short this market and hold on to your shorts too long, especially against $SPX $NDX SPY QQQ TQQQ.  However, given that $RUT IWM TNA have formed a clear short-term top in a strong resistance zone on their daily charts, you can consider a small entry in TZA for a quick trade.  Be sure to protect with a tight stop.

• If TZA if it gaps down to the zone around 39.2, it has an 80% chance of rising.
• If TZA rises up toward 43.2, it has a 60% chance of reversing.  

Disclaimer
The information presented here is our own personal opinion.  It is intended to supplement your own research and trading systems.  Consider it as food for thought. We are not registered financial advisers or licensed brokers.  We make no guarantee that anything will unfold according to our projections. While we offer scenarios for you to consider in your trade planning, know that you are proceeding at your own risk if you follow our suggestions.  

Note that we trade highly risky 3x leveraged ETFs.  You may end of losing a lot of money with them. They suit our portfolio, but they may not be appropriate for you.    Please read more about them before trading them.