The markets were met with strong selling pressure this week and the daily charts of the major indexes and sectors lost bullish structure. To us, a loss of bullish structure takes place with a series of closes under the daily 21 exponential moving average (EMA), a negative histogram, red 10x bars, and a lack of positively stacked EMAs.
Until the market has two to three solid closes above the 21 EMA, the path of least resistance is most likely to the downside. The goal is to continue playing the ebbs and flows of the market but in the opposite direction of what we have been doing for the last handful of months. This is what we refer to as a “short-the-rally” market environment.
When going short, we want to pick our spots just as wisely as we do when we’re going long. To profitably trade a downside trending market we want to avoid shorting “in the hole.” In other words, we want to avoid shorting at -2 to -3 average true range (ATR) extensions. Instead, we want to short the rejections of the bounce into the 21 EMA and aim to take profits on the flush into -2 to -3 ATR (chart below).
With a decent bounce into the close on Friday, we’ll have to see if the markets can gain support into Monday for a move back to the 21 EMA early next week. If the S&P 500 (ES) gets rejected there this could be where we get our opportunity for a better short.
In Sunday’s video, we’ll dive a bit more into the shift of momentum we’ve seen over the last few weeks, along with a few “gems” that are still setting up with bullish structures in the midst of a volatile market. We were able to take profits on both our HD and NFLX swings this week in the Compounding Growth Mastery. Have a restful weekend and we’re looking forward to tackling whatever the market throws our way next week.
Talk to you on Sunday!
Stay Focused!