Uptrends are easy to trade, downtrends are easy to trade, but choppy “transition periods” can be difficult. Right now, that’s what this current environment is feeling like, as the monthly squeeze that provided us with so much momentum over the last two years has lost energy.
The key to remaining profitable during these choppy transitions is to seek balance in your trades with a few longs and a few shorts. Once the trend is clearer, the focus should revert back to placing trades only in the direction of trend. In the meantime, keep it simple and look to get long the best setups possible, and short the ugly ones.
In terms of ugly, we initiated a short position on the IWM this week. Unlike the SPY, QQQ, and Dow Jones, the IWM is seeing a loss of structure on the weekly chart with momentum very much bearish. Looking at the chart of the weekly squeeze below, note the lack of positively stacked exponential moving averages (EMAs), mixed with a close under -1 average true range (ATR), and bearish histograms/10x bars across the board. While the small caps have been very much trapped in consolidation, this shift of momentum and loss of structure suggests the energy may be fixing to get released to the downside.
Our initial target is a move down into $200, and we will look to add to our current position on any oversold bounce into the daily 21 EMA. For this trade, we are risking 1 to make 2 with a slightly in-the-money (ITM) call credit spread.
In terms of setups that still have bullish trend, structure, and momentum characteristics, one of our favorites at the moment is MP, which we have a February expiration long position in the Compounding Growth Mastery. LCID, AZO, GILD, QCOM, and LITE are also on the watchlist and all have the criteria we need to justify a long position.
Heading into next week, we’ll be looking for more clarity out of the indexes in regards to what the path of least resistance will be in the markets moving forward. If the path is “chop”, we’ll continue to short the pigs and get long the charts that continue to look poised for higher prices.
In Sunday’s watchlist video, we have a small “homework” assignment for all of you, so keep an eye out for that!
Stay Focused!