As an investor and trader using chart patterns for making decisions, the drop at the end of the week resulted when the “tightening spring” broke. Read last Monday’s letter if you missed it. There was also a failed attempt to move higher on Wednesday. That failure was an additional catalyst that ignited prices lower.
After a couple of hours of buyers stepping up — that did not care about the news of trade wars, at the 3/22/18 pivot low (we will look at that in the video), that low gave way and the DOW fell almost another 1,000 points from that point!
As technical traders, we say that we don’t care about the news. It is the “reaction to the news” that we focus on that tells us about the market or that stock. Well, the reaction was negative, and it sure looks like the next pivot low that — which is also the low of the year in the DOW — isn’t going to hold either.
It does make sense that a trade war (if it happens) will hurt profits of companies that do business overseas. However, the selling was across all sectors, so the concerns were much more than companies that would be directly affected. Out of 146 sectors tracked, 140 were down on the week; virtually nothing was spared.
Based on the put-call ratio that we follow, fund managers, traders, and investors loaded up on bearish bets going into the weekend. Historically, betting on the market’s direction at a time when the put-call ratio is at an extreme, does not work out.
That being said, based on the charts as of the closing Friday, that bet looks like a sure thing — at least for the beginning of next week, we’ll see. If the markets do sell off at the beginning of the week — and I hope they do — it will set up an excellent short-term opportunity for us to profit on a reversal.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. Last week, I wrote about the spring getting tighter — and it sure unwound fast when it broke.
The initial attempt to move lower on Monday — that was followed by an inside bar — set up as a classic Breakdown Bar Failure. It initially moved higher, but when prices could not get through resistance, prices fell back to the low of the day. That day ended with a Topping Tail (TT) and that failure followed through Thursday morning.
As mentioned, buyers did step up for a couple of hours during the lunch period between 12 and 2 o’clock ET. Buyers were unable to rally prices above the high of the day, sellers took control again, and it was all downhill from there right into the close on Friday. And it certainly looks like it’ll follow-through lower.
There are multiple reference points below where the Dow may reverse from: those being the prior pivot low marked Major Support (MS) on the daily chart, the 200-day moving average (red line), and the two unfilled gaps below.
My choice for a reversal would be the lower area of the unfilled gaps between 23,000 and 23,200. A move down there on Monday would be roughly about an equal range day to the down days on Thursday and Friday.
A move there is exceeding the two prior reference points should increase bearish sentiment (put/call ratio) off the charts. That would set up a high probability reversal.
The two Major Resistance (MR) areas left above will be formidable areas to get above in the future — unless prices can move sideways for a period of time, which would put some distance between the current prices then and those two reference points of Major Resistance.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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NEW STOCK TRADE IDEAS
Below is a daily chart of Lowe’s Companies, Inc. (LOW).
Trade: Under $83.74, consider shorting stock provided it does not gap down. Also only recommend half lot and we will look to add on a bounce.
Technical Setup: Breakdown from bearish consolidation at d20-MA and 200-MA daily, bearish -123 continuation weekly.
Stop Loss: $87.28.
NEW OPTION TRADE IDEAS
Below is a daily chart of Dollar Tree, Inc. (DLTR).
Trade: Under $91.81, consider shorting Apr (4/20) $97/102 bear call credit spread (26 DTE) for a limit of $.80/share (closed at $.85/share).
Technical Setup: Breakdown after Bear Pro Gap and rally towards d20-MA daily.
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $96.12.
Below is a daily chart of Green Dot Corporation (GDOT).
Trade: Under $65.00, consider shorting Apr (4/20) $70/80 bear call credit spread (26 DTE) for a limit of $1.80/share (closed at $1.90/share).
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $70.02.
Below is a weekly chart of The Cheesecake Factory Incorporated (CAKE).
Trade: Under $47.17, consider shorting Apr (4/20) $50/55 bear call credit spread (26 DTE) for a limit of closing mid-point of $.50/share.
Technical Setup: Breakdown after Bear Pro Gap and rally towards d20-MA daily.
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $50.22.
We are watching:
With last week’s selloff, the elevated volatility levels in the market (Implied Volatility Rank of the VIX (Volatility Index) is at 97%) favors shorting overpriced options (with the charts as always) and/or trades with positive time decay. This should be an incredible week for selling short-term puts/spreads – particularly if we get our anticipated further weakness to the downside in the already oversold broader markets.
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All the best,
Greg Capra
Managing Director of Master Trader
Trading the Pristine Method — Origin and End
Dan Gibby
Chief Options Strategist
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