The first week of the 4th Quarter is upon us and this Monday has a shaky start, with Asia in red due to the Evergrande debacle and last week’s poor finish. We had a sort of turn around Friday, but the bounce was not a powerful one. We were hoping to see reversals to the upside after the sharp drop in indices, but they were feeble and stopped under the moving averages. Therefore we did not go long stocks this weekend, apart from some call options in case we had a gap-up Monday. From the borderline negative futures this morning it seems that we were correct in our approach. Historically October is volatile and therefore cash can be a position until we get a better image in front of us.
Let’s see how the $SPY looks for today. On Friday it took a dip as mentioned above, and then it rallied until the 8 day EMA, but it did not manage to close there or above, as the tape finished with quite a strong selling program. This gave us no reason to stay invested over the weekend. For the bulls to get back in the arena we need to see the $SPY breaking $436.16 and stay above it, in the direction of $440 (50 and 21 days EMA). IF the $SPY does not manage to achieve these levels the bears are in control and therefore your money should stay put, unless you are a very good short. Now however is not the time to push shorts because we already had the worst fall since March 2020, and the downward move is already running from the beginning of last week. Stay tactical and try day trades for some cash flow. Take your money if a trade worked, until the $SPY shows signs of strength.
The $QQQ is in an even more precarious situation since the fall on Friday did not see such a decided rally to the upside like in the $SPY, it did not even manage to touch the 8 day EMA. Tech has been for sale the whole week, especially $AAPL, $FB and $AMZN. We need to see the $QQQ going and staying above $363.95. $MSFT was the only tech keeping up appearances and reaching the 8 day, but it did not manage to stay there into Friday’s close. You can try today $MSFT as it was the strongest Friday, but again: take your day trades.
The small caps are a different story, as they were the only ones giving investors hope for a bullish comeback. Friday they also went down with the flow but then they managed to rally above all the moving averages and did not participate in the last minutes’ sell program. The $IWM closed above all the lines and it is for the first time in the past two weeks that this move seems to be bullish. I bought some $223 call options for this Friday in order to participate and see if the small caps can bring this market around. I hesitated investing in small stocks, as it seemed riskier than going with the index. Usually when the market is weak the small caps are the first to fall, giving us the first signal the bears are coming to play. Last Friday the small caps showed real strength to push up from the sharp drop and this incentivized me to test it out with some call options. In addition, there is a lot of chatter on the street about the outperformance of the small caps into the year’s end as money will flow from the tech sector into this one.
Today is a day to be tactical, watch closely Asia’s sick man and see how the US market reacts. Do not go decidedly in one direction or the other until you have a clearer picture. I plan on taking the market open slowly and use my old-trusted friend, the trend, to guide me through the turbulent tape. Cash is a position, don’t assume that after a few days down we’ll have a strong bounce, it can be a bear trap and there’s no reason to get caught. As a rule of thumb don’t get into stocks that are under the 8 and 21 day EMA and you’ll live to fight another day.
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