When to Short Update

Brandon Wendell
Instructor, CMT

I received several emails regarding my article, “When to Short.”  I wanted to address those questions and look at the markets and where they may be heading.  I wrote the article on September 17th.   Since that time the markets did endure a small correction that failed to make new lows and has now made new highs.

bwendell 20131112 - spy article

One signal that a student offered as a bearish reversal sign was the potential head and shoulders pattern on the Dow futures.  Looking at the chart below, you can see that there were two patterns that worked out well.  The peak of 2007-2008 was a head and shoulders.  The current pattern is NOT a head and shoulders.  The right shoulder is too high and we have now made a higher low and higher high negating the pattern.

bwendell 20131112 - ym h and s

Looking at the Dow may be the wrong thing to do anyway.  Going back to a technique I highlighted in my article, “Watching the Markets.”  I have attached a chart that shows the ETFs that track the major market indexes.  Measuring them from the low on October 9th, you can see that the leader in the uptrend is the NASDAQ.

qqq percentage

The leader should determine when the laggards can fall.  As you can see, the NASDAQ is finding some weakness recently.  The Russell 2000 has already started to fall.

The QQQ’s are sitting in the middle of a weak supply zone from 2000.  That is why prices have started to stumble.  This is a weak zone and the fact that we haven’t dropped yet leads me to believe that price could go higher until it reaches the stronger zone above.

qqq supply

There is also some weakness in the sector rotation.  Consumer discretionary stocks usually outperform the staples during bullish markets.  When the staples start to outperform the discretionary stocks, there may be a market trend change coming.

bwendell 20131112 - xlp xly

So while the bears are still quiet, they are hiding just around the corner.  Be cautious with your long positions and pay attention to the trend for direction.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.