Yesterday Tuesday we wrote: “Dip6 has been overdue for over a week now. And under the hood, market internals are saying that stocks are more primed for selling than buying. All that’s needed it a negative catalyst. This catalyst is likely to be FOMC announcement tomorrow. .... So the probability of Dip6 arriving after FOMC is higher now.” Dip6 indeed arrived, immediately after FOMC announcement. We must confess that the selling was hard and fast. That took us by surprise. So now the questions are: Is Dip6 done? How much lower can it go? Updates from market internals Volatility: The fact that $VIX $VXN rose up aggressively in the last couple days indicated the coming of Dip6. Now $VIX $VXN show they are still likely to continue rising, with $VIX possibly reaching 19, and $VXN reaching 21. Market breadth: Market breadth continues to decline for NYSE stocks, and increasing their decline for Nasdaq stocks even more. CBOE Equity Put/Call Ratio: This ratio continues its bearish selling pattern that it has been carving out the last few days. It confirms the possibility of continued selling. Here’s the thing that’s worrying us. Market internals and price actions are sending out messages similar to the start of May. This means we could be in for Major Pullback2. We don’t think it will get quite that bad, but you should keep this possibility in the back of your mind. Support and resistance zones for $SPX $NDX We’ve completely updated the table below. Please read the numbers carefully since today’s selling changed the landscape big time. We also left out $RUT. Sorry but we are running out of time and this index is getting hard to predict. Note that the new Support3 is likely where Dip6 will end. How to approach your trades Even with today’s selling, in the big picture context, the Up Trend that started on 12/26/18 is still intact. Market internals are not sending out messages saying it’s the start of a new Down Trend. However, there is a strong possibility that Dip6 will be bigger than the average dip. If you have core positions designed to ride most of the Up Trend, the new potential size of Dip6 may be bigger than your comfort level. And we do have the possibility of Major Pullback2 looming as well. So factor all these in. For short-term swing traders, tomorrow Thursday, we may see $SPX $NDX gap up to probe Resistance1 again. They may even reach Resistance2. They are unlikely to surpass Resistance2. So this may be a good setup to enter short. The theme for the next few days will be price probing support and resistance levels. But overall, the odds favor more selling, until market internals change their messages. That will most likely happen around the new Support3. 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.
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Stocks are primed for selling rather than buying Yesterday Monday we explained that $VIX $VXN were likely to rise up in the short term, which supports the theory that Dip6 is likely to arrive after FOMC announcement tomorrow Wednesday. Indeed, today $VIX gapped up and rose to a high of 14.18, and $VXN gapped up and rose to a high of 17.69 today. This happened a bit sooner than we anticipated though. And now the rest of market internal indicators are putting out an increasingly louder and more bearish message. We all really should pay more attention to this. Dip6 has been overdue for over a week now. And under the hood, market internals are saying that stocks are more primed for selling than buying. All that’s needed it a negative catalyst. This catalyst is likely to be FOMC announcement tomorrow. The Fed is expected to cut rate by ¼ point tomorrow, which they most likely will do. But the Fed is unlikely to commit to cutting rates aggressively for the rest of 2019, into 2020. This is what the market really wants, and it is likely to be disappointed and upset about this. So the probability of Dip6 arriving after FOMC is higher now. Updates from market internals Volatility: As we said above, we’ve been expecting $VIX $VXN to rise. They just rose up sooner and more aggressively than we projected. This tells us that traders are getting more nervous ahead of FOMC. Complacency is still high though, as evident by current VIX M1 contango reading at more than 9%. (High readings of this number indicate traders are feeling bullish.) Here is the treacherous part about placing multi-day bets on VIX or against VIX right now. Earlier this year on May 3, VIX M1 contango was 9.11%. Market was bullish and complacent, and traders who owned UVXY TVIX SQQQ TZA were feeling a lot of pain. Then after Trump’s tweet, by Tuesday May 7, VIX M1 contango went into backwardation at -0.84% as $VIX $VXN both surged. (When this number goes negative, it means traders are fearful and ready to sell.) What followed was a month of selling in May. So what we are trying to say is this. Don’t get complacent with bullish bets right now. But be careful that if you bet on rising volatility, you may have to endure some initial pain. Market breadth: Market breadth is starting to decline for NYSE stocks, and continue to decline even more for Nasdaq stocks. This is not a sign of bullish fundamentals. CBOE Equity Put/Call Ratio: This ratio surged up today. In the process, it etched out a pattern that indicates more selling ahead. This is the pattern we've been monitoring for. So this ratio confirms the overall bearish message. The collective message from market internals is pretty loud and clear. This is not where you want to deploy fresh cash buying new long positions. The possibility of more aggressive selling is high. Support and resistance levels for $SPX $NDX $RUT We’ve updated support and resistance levels the table below. Note that Support3 is really the bottom of Dip6. Expect some major price swings after FOMC announcement. However, the odds of a major Dip6 coming and going all in a matter of 4 hours after FOMC is very low. We sincerely doubt that you will see Surge7 start tomorrow. Instead, the odds of a major Dip6 hidden arrival in a bull trap pattern is high. So be very leery of price surges and bullish looking patterns on price charts. You may recall a lot of overly bullish short-term traders got trapped after FOMC announcement on March 20. $SPX surged to a high of 2860 on March 21. Then it kept dropping all the way to 2785 by March 25. We may experience something comparable to this starting tomorrow. How to approach your trades Again, in the big picture context, the Up Trend that started on 12/26/18 is still intact. If you have core positions designed to ride most of the Up Trend, the size of Dip6 may not be enough to cause for you to jump out of your Up Trend core position. But you may want to use Support3 levels as a guide to place your protective stops. If you want to add more capital to your core positions, or initiate new core positions, wait until the end of Dip6. Support3 is a low-risk place to buy in. For short-term swing traders: Don’t initiate any new position before FOMC. Know that if you bet on the arrival of Dip6, you are likely to be correct short term, but you are trading against the Up Trend long term. So trade small and be really nimble about it. After FOMC, we may see $VIX $VXN drop sharply while $SPX $NDX $RUT surge up. SPX $NDX $RUT are likely to probe at least Resistance1, possibly Resistance2. If SPX $NDX $RUT surge up to Resistance1 or above, and if $VIX drops into the range between 11.69 and 13, and $VXN drops into the range between 15.12 and 16, that is likely the start of Dip6. Look for confirmation on the intraday chart patterns before you enter short though. And use a tight stop. 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. Yesterday Sunday we wrote: “Based on the message from market internals, the odds are high that tomorrow Monday, we will see test of Support1 before $SPX $NDX $RUT can march back up. The odds are also high that $SPX $NDX $RUT will pass this test at Support1 tomorrow Monday. If that happens $SPX $NDX $RUT will rise up quickly to Resistance1.” This is pretty much what happened today. $SPX $NDX $RUT passed the test at Support1 which is essentially just a shallow dip. And they all rose up. And based on futures actions tonight, at least $SPX $NDX will rise up to Resistance1 tomorrow Tuesday. So price actions are looking bullish on the charts, but under the surface market internals are sending out more short-term bearish signals. Updates from market internals Volatility: Yesterday we wrote: “On their intraday charts, $VIX $VXN formed a pattern that suggest the likelihood of $VIX rising back up to 13, and $VXN rising back up to 16 again tomorrow Monday." In fact, $VIX reached a high of 13.17, and $VXN reached a high of 16.85, before pulling back. Both $VIX and $VXN are unlikely to drop below their lows of last week. And their patterns suggest that they are very likely going to start marching up again. $VIX can surge up to 16, and $VXN can surge up to 20 in the near term. This scenario corresponds with the likely arrival of Dip6. However, the odds of this happening before FOMC announcement on Wednesday is low. So factor it into your plans, but don’t bet on rising volatility just yet. Market breadth: Market breadth is declining for Nasdaq stocks, and forming a topping pattern for NYSE stocks. This is clearly a bearish divergence with NYSE and Nasdaq price actions. But bearish divergence can last for quite a while, causing a lot of pain for early bears. CBOE Put/Call Ratio: This ratio continues to stay right in the middle range, but its pattern indicates a high possibility of it rising sharply and suddenly into selling territory. We don’t think this will happen before FOMC however. So the collective message from market internals at this point is this. Don’t be an early bear, but don’t get complacent either. Support and resistance zones for $SPX $NDX $RUT We’ve updated Support1 in the table below. The rest is the same as yesterday. Again, note that Support3 is really the bottom of Dip6. The odds are high that tomorrow Tuesday, we will see $SPX $NDX $RUT attempting to push through Resistance1. At this point, the chance of them succeeding is average. If they do succeed, they can push all the way to Resistance2 by Wednesday. There is also a decent chance that $SPX $NDX $RUT will retest Support1 again tomorrow Tuesday. If that happens, $SPX $NDX $RUT will most likely find support there, and then rise up to Resistance1 again. The chance of $SPX $NDX $RUT dropping tomorrow Tuesday to Support2 is low, and all the way to Support3 is very low. How to approach your trades Again, in the big picture context, the Up Trend that started on 12/26/18 is still intact. If you have core positions designed to ride most of the Up Trend, the size of Dip6 may not be enough to cause for you to jump out of your Up Trend core position. But you may want to use Support3 levels as a guide to place your protective stops. If you want to add more capital to your core positions, or initiate new core positions, wait until the end of Dip6. Support3 is a low-risk place to buy in. If you are a short-term swing trader with long positions in $SPX $NDX $RUT, consider taking your profits at Resistance1. There likely will be some major turbulence on Wednesday. If you are considering shorting this market, wait until after FOMC when there might be a more predictable setup. If you are an early bear, keep in mind that this market is primed for the arrival of Dip6, possibly after FOMC. But the setup for Dip6 can be essentially a bull trap, with prices rising sharply higher right after FOMC, causing early bears a lot of pain. 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. What constitutes Dip6? Stock market price levels rise and fall as a result of the moment by moment battle between buyers and sellers. Us human traders need to slap a label on the up and down movements just so we can keep track of things mentally. For us, we’ve been using the label Dip6 to track a possible good size dip that is somewhat overdue at this point, at least for $SPX and $NDX. After successfully testing Support1 last Thursday 7/25, which essentially was a shallow dip, market participants decided that it was a good enough support level to buy into. And so $SPX $NDX $RUT all rose enthusiastically on Friday, helped along by GOOGL strong earnings report. Many traders are wondering at this point whether Dip6 will ever come. It would be helpful to define what Dip6 looks like. In our definition, if tomorrow Monday, $SPX $NDX $RUT drop down from the current level to the following support levels, then that would be Dip6. $SPX: 2938 $NDX: 7700 $RUT: 1540 However, given the current enthusiasm for buying, the chance of that drop happening Monday is low. So Dip6 per this definition will most likely not happen tomorrow. Can a comparable drop that would constitute Dip6 happen later this week though? Very possibly. Most likely after FOMC announcement this Wednesday 7/31. Updates from market internals Volatility: $VIX $VXN ended the day on Friday with a sharp drop down, ending in the low zones again. On their intraday charts, $VIX $VXN have formed a pattern that suggest the likelihood of $VIX rising back up to 13, and $VXN rising back up to 16 again tomorrow Monday. $VIX $VXN are saying that there's a lot of complacency on the part of traders right now. While $VIX $VXN are positioned to rise rather than drop further, with contango running above 9% right now, small rises in $VIX $VXN will not have significant negative impact on $SPX $NDX $RUT. In short, $VIX $VXN support our projection that Dip6 is unlikely to happen tomorrow Monday. Market breadth: The Advance Decline lines turned back up on Friday for NYSE and Nasdaq stocks, but not with the same magnitude that you would expect from a market making higher highs. This pattern is especially true for Nasdaq stocks. The percentage of bullish NYSE stocks rose back up to almost 67% to end the week. However, the percentage of bullish Nasdaq stocks dropped to 76%. This number has been dropping from the start of July, from 82% to 76%. It’s not a big drop, but it’s the kind of pattern that implies under the hood, $NDX is not as strong as its rising price suggests. CBOE Put/Call Ratio: This ratio has been stuck in a tight range this last week, which implies that stocks are not at overbought or oversold level yet. However, this ratio’s pattern indicates a high possibility of it rising sharply. And that means possible sudden selling of stocks. But keep in mind that this ratio can grind it out at this middling level for quite a while. So the collective message from market internals at this point is “be cautiously bullish”. Support and resistance zones for $SPX $NDX $RUT The table below shows current support and resistance levels for $SPX $NDX $RUT. Note that Support3 is really the bottom of Dip6. Based on the message from market internals, the odds are high that tomorrow Monday, we will see $SPX $NDX $RUT testing Support1. If $SPX $NDX $RUT pass this test at Support1 tomorrow Monday, they are likely to rise up quickly to Resistance1, possibly piercing through it, and get up to Resistance2 by Wednesday. If however, $SPX $NDX $RUT fail at Support1, they will drop down to test Support2. There is a very good chance that they will succeed at Support2, and resume climbing back up to at least Resistance1. As we mentioned at the start of this post, at this point the possibility of $SPX $NDX $RUT dropping down to Support3 tomorrow Monday is low. How to approach your trades In the big picture context, the Up Trend that started on 12/26/18 is still intact. If you have core positions designed to ride most of the Up Trend, the potential size of Dip6 may not be enough of a reason for you to get out of your long positions. But you may want to use Support3 levels as a guide to place your protective stops. If you want to add more capital to your core positions, or initiate new core positions, wait until the end of Dip6. If $SPX $NDX $RUT successfully find support at Support3, that is likely to be the end of Dip6, and is a low-risk place to enter long. If you are a short-term swing trader, wait for $SPX $NDX $RUT to successfully test Support1, or Support2, and enter appropriately. You can place a protective stop just below the successful test level. Trail this stop up as $SPX $NDX $RUT head for Resistance1, and possibly Resistance2. We don’t recommend that you attempt to short this market, whether for a shallow dip or the possibility of Dip6. In a strong Up Trend environment like this, the odds of price taking off suddenly is high. 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. We make no guarantee that you will make money based on our information. 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. You may make money, or you may lose a lot of money. 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. Surge6 is likely to transition into Dip6 Yesterday we wrote: “For tracking purpose, we’ll continue to refer to this as the resumption of Surge6, and the dip from 7/15 to 7/19 was a minor dip. ...The reason is because we are tracking the definition of Dips by the impact $VIX $VXN have on prices. In this minor dip, $VIX $VXN have not made enough of a panic impact on prices yet. Therefore, the real Dip6 is still lurking.” Today’s price actions and rise in volatility confirm that Dip6 is still lurking. While $SPX $NDX $RUT may have resumed Surge6 yesterday, the possibility is high that Surge6 is transitioning into Dip6, and that Dip6 can be a good-size dip. And Dip6 is likely to arrive after FOMC announcement next Wednesday 7/31. Updates from market internals Volatility: Yesterday we wrote: “almost every time $VIX has a sharp drop into the low zones, it ends up rising up sharply very soon afterwards. The same is true with $VXN.” We saw this behavior repeating itself again today. $VIX $VXN dropped down sharply yesterday, and they both gapped up at open today. This is an important message to note. $VIX $VXN are saying that traders are getting nervous in a serious way. The nervousness has not morphed into real fear yet, but the nervousness is persistent, and it is likely to increase. Therefore $VIX $VXN are confirming that Dip6 is likely still coming. Market breadth: Both the Advance Decline lines and the percentage of bullish stocks turned back DOWN today for NYSE and Nasdaq stocks. The failure to rise higher by market breadth indicates that under the hood, stocks are primed for selling rather than buying. All that’s needed is a negative catalyst, which most likely will come after FOMC on Wednesday. CBOE Equity Put/Call Ratio: This ratio is currently at 0.753. It continues to stay in the middle range, being neither overbought nor oversold. However, it continues to form a pattern that indicates a higher possibility of selling rather than buying. So the collective message from market internals at this point is “be ready for the selling”. However, be patient as the selling will not necessarily take off right away yet. Support and resistance zones for $SPX $NDX $RUT We’ve updated the the support and resistance levels for $SPX $NDX $RUT. Note that we also added information for TQQQ as many of you are interested in this ETF. First of all, note that the Resistance1 is now the high of Wednesday 7/24. There’s strong selling pressure at that level, based on the bearish change in market internals. $SPX and $NDX survived the test at Support1 today, but not $RUT which has more ups and downs than a Disneyland ride. The odds are high that they all will gap up tomorrow Friday at open. The odds are also high that they will not surpass Resistance1 as their highs tomorrow. Furthermore, $SPX $NDX are likely to revisit Support1 again tomorrow. So we are looking at the strong possibility of $SPX $NDX bouncing between Support1 and Resistance1 for Friday. Additionally, the odds are high that $VIX $VXN will continue in their attempt to climb higher over the next few days, as nervous traders buy more insurance. How to approach your trades While Surge6 is transitioning into Dip6, price actions are likely to be choppy. For long-term core positions designed to ride the Up Trend, the potential size of Dip6 is not enough of a reason yet to exit long. However, you may want to tighten your stops. If you want to add more capital to your core positions, wait until Dip6 ends, and market internals confirm that Surge7 is coming. You can be sure we will let you know when that comes. For short-term swing trades, price choppiness combined with high contango value will make it hard to hold any positions overnight. So if you feel the need to trade, consider day trading small positions with tight stops. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. Tonight’s post will be rather lengthy. We have some important messages to communicate to you. A number of issues arose recently that made us rethink how we offer our service to you. A change in format First of all, we apologize for not posting our own stop loss settings. The problem is that we adjust our stop loss several times a day on multiple positions. It is not practical for us to post every time we jiggle them. You as our readers would be really annoyed at the constantly changing targets. However, this lead us to rethink a number of important things. You may have noticed that we try hard NOT to advise you specifically on what to do with your individual trades. We are not brokers. We are not registered financial advisers. We don’t know your finance, your portfolio, your risk tolerance, your trading instruments, or your personal preference. We don’t feel comfortable telling you what to do with your money. The major downside of us posting our own trading plan is that some of you may choose to follow it. This very thought makes us uncomfortable. We are ok with losing our own money. We are NOT ok at the thought of you losing your money because you are imitating our trades. We have to be able to experiment and learn from our own mistakes. But we don’t want you to lose your money while we are going through our experiments. So here is what we can do for you. We will continue to offer our nightly analysis of market internal indicators, posted here on our website. It seems that this information is quite useful for a lot of you. Many of you have written to us to say so, which we really appreciate. You can use our daily analysis to SUPPLEMENT your own trading system. Hopefully, it provides you with a more complete picture, helping you to make better trading decisions. We will post entries and exits for our Core Positions. These are positions designed to ride the majority of the trend. (Right now we don’t have any Core Positions in play). We will no longer post entries and exits for our Fast Positions. These positions require a lot more work and monitoring. By their nature, they can also result in more minor losses because you have to protect them with tighter stops. And sometimes you have to fiddle with the stops constantly during the day. (By the way we got stopped out of TZA for a loss as well today.) Following us on these Fast Position trades is only useful to you if it can be done in real time. But we just can’t guarantee that we can provide that for you. So it’s best not to go down this path. Updates from market internals Let’s take a look at the message market internals actually sent out today. Market breadth: Both the Advance Decline lines and the percentage of bullish stocks turned back up today for NYSE and Nasdaq stocks. Market breadth now confirms the rise in price, with a caveat. Nasdaq market breadth is still clearly lagging behind, while $NDX continues to rise up. The message from market breadth is "be cautiously bullish". CBOE Equity Put/Call Ratio: This ratio is currently at 0.75, which is right in the middle range. It is neither overbought nor oversold. However, it is forming a pattern that indicates a pent-up need for selling. So the message from this ratio current disagrees with the message from market breadth. Volatility: $VIX $VXN dropped sharply today into their low zones. This may lead us to think that Surge7 is here for sure. However, almost every time $VIX has a sharp drop into the low zones, it ends up rising up sharply very soon afterwards. The same is true with $VXN. Furthermore, on the hourly charts, both $VIX $VXN have not formed the prerequisite pattern that indicates a proper Dip6 has really taken place. Therefore , volatility patterns suggest the potential of more volatility to come. Again, this message contradicts with market breadth. How to approach your trades The conclusion we are drawing is this. However you want to label it, the dip that took place between 7/15 and 7/19 is a minor dip. And now $SPX $NDX $RUT appear ready to rise up further. So for tracking purpose, we’ll continue to refer to this as the resumption of Surge6, and the dip was a minor dip. The reason is because we are tracking the definition of Dips by the impact $VIX $VXN have on prices. In this minor dip, $VIX $VXN have not made enough of a panic impact on prices yet. Therefore, the real Dip6 is still lurking. But for now, we think you can apply the “cautiously bullish” message to your short-term trading plan. Support and resistance zones for $SPX $NDX $RUT The table below shows the potential support and resistance levels for $SPX $NDX $RUT. We think that $SPX $NDX $RUT are likely to probe Resistance1 first tomorrow Thursday. Then they are likely to drop down to Support1, either Thursday or Friday. If they survive Support1, they will try to push above Resistance1, but they are unlikely to reach Resistance2 before Monday. If they don't survive Support1, they are likely to test Support2 next. The probability of this scenario happening tomorrow Thursday is low. Given that Surge6 has resumed again, the low-risk, high-reward short-term trade is to wait for a successful test of Support2. Enter long there, for a ride up first to Resistance1, then possibly to Resistance2. Support2 is also a good place to add a bit more capital to your long-term Up Trend Core positions if you have any. If you want to test a long position at Support1, then consider testing small and using a tight stop placed just below Support1. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. Bearish divergence in effect We mentioned yesterday Monday that there is a bearish divergence in effect between market internals and $SPX $NDX $RUT price actions. We saw more of that today as $SPX $NDX $RUT climbed back up to retest the highs of Friday 7/19. Meanwhile $VIX $VXN dropped down sharply today. $VIX is now down at 12.61, and that’s the low zone where it has been surging up from, back on 3/15 and 4/12. $VXN has reached 16.07, which is the zone where it surged upward from, back on 3/1 and 4/26. This is important because there’s a lot of hand wringing on Stocktwits about the drop in $VIX $VXN today. These are the moves that anchor $VIX $VXN into a strong foundation, so that they can surge up a good amount. The rest of market internal indicators confirm that the bearish undertone still exists. Market breadth for Nasdaq stocks is particularly negative, even while its price actions don’t appear that way. Again this is part of the bearish divergence in effect right now. We want to pause here and show you a few charts to put in perspective the current price actions and the potential scenarios that may unfold. Observe how similar SQQQ hourly chart for today looks compared to the price actions at the start of May, immediately prior to Major Pullback1 that lasted all of May. Notice the similarities in TZA hourly chart patterns from today versus TZA hourly chart patterns the month before the Down Trend of 2018 that lasted from October to end of the year. Our trading plan A number of our positions got stopped out today as shown below. The bearish divergence will last until SQQQ gaps up at open above 32. When that happens, we will place a buy order to enter SQQQ during the intraday pullback at around 31.8. We may also add more TZA at that point. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. We would like to welcome new subscribers. If you have not had a chance to read our weekend analysis, please read it before reading this post for clearer understanding. Dip6 is launched We have a bearish divergence right now where $SPX $NDX are acting as though they may recover from being down since 7/15. However, under the hood, market internals are collectively shouting “Dip6 is happening!” Here are some specifics. $VIX $VXN are forming a pattern indicating they will surge. $VIX can surge up into the zone of 17 to 17.5. $VXN can surge into the zone of 21 to 21.5. When $VIX $VXN sharply surge, $SPX $NDX $RUT will sharply drop further. Market breadth are no longer confirming the bullish scenario. Both NYSE and Nasdaq A/D lines have been steadily marching down since 7/15. The percentage of bullish Nasdaq stocks has been dropping steadily since 7/3, NYSE since 7/15. CBOE Put/Call ratio has been forming a pattern indicating it is ready to rise into selling territory. And it is nowhere near oversold yet. Finally, $RUT has gone ahead with its steady march downward today. $RUT is the canary in the coal mine. It adds further confirmation that Dip6 is happening. Support zones for $SPX $NDX $RUT at the end of Dip6 We are likely to see prices reach into the following support zones before Dip6 ends. $SPX: 2925 - 2940 $NDX: 7640 - 7700 $RUT: 1518 -1530 What to expect after Dip6 Yesterday Sunday, we wrote: "Trade for now as if Dip6 will end at the above support levels. At the end of Dip6, $SPX $NDX $RUT will undergo a recovery test. If they fail in this test, and if market internals collectively confirm, then Major Pullback2 will emerge for real.” This is still true. However, we want to emphasize the following points. The highest probability scenario right now is to trade Dip6. Just stick with that. If you want to look ahead, then know that $SPX $NDX $RUT need to go through a quick recovery test at the end of Dip6. Failure to pass this test will lead to Major Pullback2. Success in this test will launch Surge7. However, there is no way to tell right now whether $SPX $NDX $RUT will succeed or fail. So please do not jump head and plan on one scenario versus the other. The odds are 50/50 right now. Trading Plan This morning we posted on Stocktwits that we entered partially into UVXY, SQQQ, and TZA. (We decided not to put all our eggs into the UVXY basket.) There is a high probability that $SPX and $NDX will both gap up at open tomorrow, most likely at Friday 7/19 highs. This is the bearish divergence that we mentioned at the start of this post. We consider this a low-risk opportunity to add to our bearish positions. So we plan on buying more UVXY, SQQQ, and TZA at that point. This will be it for our total bearish positions though. Also note that we have lowered the sell price for UVXY. We are not sure that $VIX $VXN will surge beyond the resistance levels mentioned at the start of this post. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. Our trading strategy This past week was a big one for us. Our membership jumped by 20%. We would like to welcome all our new subscribers who came on board recently. We would also like to share with you a snapshot of our trading strategy. We hope this helps to put in perspective the way we frame up our market analysis. Our trading system is based primarily on analysis of $SPX $NDX $RUT price actions, with heavy reliance on market internals for context and confirmations. When we say market internals, we mean specifically:
Many of our readers have remarked that our trading system is amazingly accurate. (Thank you!) As you may have noticed, we don’t rely on popular technical indicators. That is because they are overused, and because they are derivatives of price actions. Prices can be easily distorted in the short-term. Instead, we have found over the years that market internals, when analyzed properly and viewed collectively, can deliver a much more reliable message consistently. Up Trend is still intact Before we plunge into the discussion of Dip6, we should explain that the current Up Trend that started on 12/26/18 is still intact. And it may last into early October, though that is merely an early projection at this point. Dip6 is launched During most of last week, we relied on market internals to guide us through the transition from Surge6 into Dip6. It was a very useful guide as market internal messages were spot on. And now market internals are collectively shouting "Dip6 is happening for real". During Dip6, we should expect to see $SPX $NDX $RUT drop substantially more. $VIX $VXN will surge a good amount. However, at the start of tomorrow Monday, $SPX $NDX $RUT are likely to re-test the highs of Friday 7/19, before dropping for real. So when you see prices climbing back up tomorrow, don’t get fooled into thinking that Dip6 is done. Instead, use the minor bounces as the opportunity to enter your short positions. We’ll discuss more of this in our trading plan below. Support zones for $SPX $NDX $RUT at the end of Dip6 Unlike Dip4 and Dip5, Dip6 will be a good size dip. We are likely to see prices reach into the following support zones before Dip6 ends. $SPX: 2925 - 2940 $NDX: 7640 - 7700 $RUT: 1515 -1530 Dip6 may morph into Major Pullback2 Market internals are also warning us that there is a 40% chance that Dip6 may morph into Major Pullback2, comparable to the big drop in May. $SPX $NDX $RUT may end up a lot lower than the above support levels. However, let’s not get too far ahead of ourselves. We urge you not to plan on holding your short positions past the end of Dip6. Not yet. This is especially true if you plan to trade SQQQ TZA UVXY TVIX. Trade for now as if Dip6 will end at the above support levels. At the end of Dip6, $SPX $NDX $RUT will undergo a recovery test. If they fail in this test, and if market internals collectively confirm, then Major Pullback2 will emerge for real. You can be sure we’ll tell you plenty more about it if that happens. By the way, we mentioned above that the Up Trend is still intact. So if you have long term positions designed to ride the entire Up Trend, you probably don't want to jump out here yet. On the other hand, if you want to avoid the possibility of a large draw down in the scenario where Dip6 morphs into Major Pullback2, tomorrow Monday is a good time to exit your long positions. Our trading plan In the trading plan for Friday 7/19, we wrote: “For us, we are waiting for our proprietary filters to detect a particular type of pattern on $VIX $VXN charts to tell us that the test mentioned above is done and is successful.” As we posted on Stocktwits on Friday, the test happened, and the test was successful. But we chose not to enter UVXY or SQQQ because we personally didn’t want to enter ahead of the weekend, while contango was still running at 7%. However, starting tomorrow Monday, we will be looking for minor bounces in $SPX $NDX $RUT, and minor drops in $VIX $VXN, as opportunities to enter UVXY. (New members may want to take a moment and read our background article about trading UVXY during dips and down trends. This article applies to TVIX as well.) We usually warn you to stay away from UVXY TVIX due to the drag-down effect of contango on your positions. However, tomorrow Monday we are expecting to see the setup for another sharp surge in $VIX $VXN. It is a reasonable trade to capture this sharp surge in volatility with UVXY. We expect UVXY to surge first to the zone around 29.5. Then it will likely pull back. Then it will likely surge back up to resistance at 32. That would most likely be all of Dip6. If you are trading SQQQ, you may want to monitor for the following price traversals. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. We’d like to welcome a number of new members who just signed up today on board. Please make sure you read yesterday's post before proceeding with this post, as there's a lot of explanations that we won't be repeating. The transition into Dip6 is happening Yesterday Wednesday we wrote: “On Thursday or Friday, the bouncing that we mention will likely start... There’s a high probability that $VIX $VXN will surge at the start of tomorrow Thursday where $VIX can reach into the zone between 14.6 and 15. $VXN may reach up to 18.5...Then $VIX $VXN are likely going to drop as $SPX $NDX $RUT rise back up to test the highs of Monday 7/15... If you have already entered UVXY TVIX SQQQ TZA, you may think the market has started Surge7 and is moving against you. This isn’t the case. This is just a test. And this test is crucial for $VIX $VXN to really rise up, and for $SPX $NDX $RUT to have a meaningful drop that constitutes Dip6.” It is pretty amazing that $VIX $VXN $SPX $NDX $RUT pretty much followed this script during the day today Thursday. (Sorry we have to crow about it for a bit here :-) You do understand this greatly increases the pressure for us to come up with another precise script tomorrow. Well, for that we offer you this $SPX hourly chart. $SPX $NDX $RUT will likely gap up tomorrow Friday. $SPX can reach as high as 3025. This will result in an hourly chart that looks quite similar to Fri 5/3/19. And under the hood, market internals are looking very similar to how they looked on Friday 5/3/19, right before the start of Major Pullback1, which lasted all of May. This means that while prices are rising up for $SPX $NDX $RUT, internal market forces are primed to sell rather than buy. All it takes is a negative catalyst for Dip6 to be launched officially. If you were a nimble day trader, you might have been able to make decent profit on 5/3 by going long. However, most swing traders who were long on 5/3 got caught short (all puns intended) when $SPX $NDX $RUT started Major Pullback1. So be very careful betting tomorrow. Trading Plan For us, we are waiting for our proprietary filters to detect a particular type of pattern on $VIX $VXN charts. When these patterns appear, it means that the test mentioned above is done and is successful. It means that Dip6 is ready take off. We don't think this will happen until Mon 7/22. But we’ll be monitoring closely tomorrow. We will post on Stocktwits when we detect this pattern, and when we enter our position. By the way, we have decided to capture Dip6 with UVXY. More on that this weekend. Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them. |
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