Tales of a Technician: Did Monday’s Selloff Change Anything?
December 21, 2020
Monday morning’s gap lower was the first time in a long time that bears actually inflicted any damage on the major indices. Smart traders should be considering whether the drop changed anything about market dynamics.
Is the uptrend dead?
Is this beginning of the end?
Is Santa Claus dead?
And, why did we drop after Congress agreed on a $900 billion stimulus bill?
Let’s consider each question.
Death of an Uptrend
The definition of an uptrend is higher pivot highs and higher pivot lows. It doesn’t end until you break support and make a lower pivot low. And even then, there’s always the chance that it’s a ruse. Further evidence is usually needed such as breaching the 50-day moving average and forming a lower pivot high.
As I survey the major indices (IWM, DIA, SPY, QQQ), the only one that came close to breaking a prior pivot was SPY. But the intraday bounce saved us from any such nastiness.
As such, the answer to the question is NO. The uptrend is not dead. If you want a line in the sand to watch, I suggest Monday’s low of $362.03. Close below that and then we can entertain more rigorous discussions on the daily trend changing.
Is the Beginning of the End?
Who do you think I am, Miss Cleo? No one knows the answer to this question. You can’t call market tops real time. Not consistently, at least. Today was a single shot across the bow. It’ll take more than an isolated cannonball to sink the bulls’ ship. Most tops are a process, anyways, not a one-day event.
The posture of QQQ and IWM still look mighty bullish to me.
Is Santa Claus Dead?
Don’t mistake the general tailwind that equities have in December with the oft-mentioned Santa Clause rally. The former is a way of expressing that bulls have historically owned the month of December. The latter is a seven-day period covering the last five trading sessions of the year and the first two of the new year.
The last time I checked, this seven-day period has a strong tendency of boosting equity prices. History has taught you shouldn’t fight bulls into year-end. If anything, today’s market movements could prove Santa is very much alive. Did you see the bounce off the lows we just had? Seems to me like things could have been far, far worse.
Buy the Rumor, Sell the News
If you’re scratching your head over why stocks sold off on such seemingly good news, then scratch no longer. Investors on Wall Street are always pricing in the future – ahead of time. We’ve been rallying in anticipation of another stimulus bill for weeks, if not months.
And so, now that the news finally hit, profit-taking ensued. It was short-lived though. Particularly in small-caps which rallied back to close unchanged on the session.
If you took too big of a hit this morning all it means is your account is overleveraged. And, I’ll hasten to add, it should scare you that a -2% drop in the S&P 500 generated such a big loss. As I said in the Options Report over the weekend, now is the perfect time to reassess portfolio exposure and make plans for how to handle the next -10% correction. It’s not a matter of it will come, but when.
The first thing that goes out the window for me when I’m de-risking a portfolio is short-term swing trades. These are the easiest to enter and exit at a moment’s notice. They’re heavily impacted by the short-term trend of the market, and thus the first thing I typically exit when support breaks and I downgrade my market outlook.
For now, my bias is still +2 on SPY and +3 on IWM.
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Tyler in the right place at the right time to give guidance. Thank you as always!
Mariana