Good morning!
With red futures at the time of writing this article today it looks that the path of least resistance is to the downside. Omicron looms over the US and Europe and further restrictions are on the table. This shows continuation from Friday’s weak tape and since we are 90% cash we have the flexibility to try out the strongest stocks from last week for a red to green trade. Be careful as the volatility index has peaked its head up so the fear factors is returning to the table. Unfortunately with the $SPY and the $QQQ being so weak at the end of the week I can only recommend for you to be tactical, keep cash as a position and try day trades for scalping. It is not an environment in which you can keep a portfolio running when the $SPY plays around the 50 day EMA. However, the $IWM and the $XBI seemed to have been trying reversals on Friday, but can they be trusted? They can be players for the ‘January effect’, but with so much uncertainty regarding the pandemic situation I would not run to buy large option plays for a possible run to the upside.
$SPY Chart
After Thursday’s aggressive red bar I switched to 90% cash in my portfolio, and therefore I could play around with some stocks for a red to green on Friday. I recommend trying the same tactic today. Maybe the red futures can improve at the market open, but with Biden’s awaited speech on Tuesday and the strains created by Omicron the news is not conducive for a green week, despite strong seasonality. $459.34 is the 50 day EMA and $450.61 is the 100 day EMA, with $448.92, the low of the month. We are playing around these levels, therefore you should be careful as there can be a sharp drop due to the macro situation and there is no need for you to give back some gains from December. Follow the trend as it is your best friend, and the trend signals the beginning of a turn to the downside, and until there are are no green signals cash is a position.
https://www.tradingview.com/x/D8siv7bi/
$QQQ Chart
The $QQQ posted a green bar, but under the 50 day EMA $387.34, and its low on Friday was not far from the month low of $378.90. The 100 day EMA is at $377.90 and therefore there is no reason for you to be in tech for the moment. Even though Omicron news should push tech higher, now we have headwinds such as tapering and inflation which push balance to the negative side. If there are reasons for you to be out of this sector there is no need to fight this trend until you see a reversal. If the $QQQ manages to push above $390 and stay there I will be a buyer of tech, but until then I am out of the game.
https://www.tradingview.com/x/VXLOx7yY/
$IWM Chart
The $IWM made a new bottom at $210.30 on Friday and then it tried to push above the 8 day at $216.90 and failed. However is closed above Thursday’s low and this got people slightly involved in the small caps. When there is negative news and the risk appetite lessens the $IWM is the signal to get out of stocks. This reversal on Friday might have been misleading for investors, but you could have taken advantage of its move for some cash flow. I am looking to buy some call options for the January effect, but I am waiting for a clearer signal from macro news.
https://www.tradingview.com/x/VXLOx7yY/
$XBI Chart
The biotech sector has been crushed from the beginning of November, and even the reversal from the beginning of December has been annihilated. It has been a difficult sector to tackle since seasonality should have been strong for this sector but it was full of misdirection and failed reversals. This Friday though it might have posted the first real day 1 for the beginning of a new active sequence to the upside. I was a buyer of $XBI when it went past the 8 day $112.59 and I trimmed close to the 21 day, when it went past $115 I added to it, and trimmed close to $116. I am still in a large portion of this sector, with also biotech stocks such as $LPTX and $MBIO if there is any continuation. If this was another failed attempt I will get out of this sector if it goes under the 8 day EMA.
https://www.tradingview.com/x/wjmgnBgB/
The whole choppiness of this market could have eaten through your portfolio if you would have tried to fight the trend, and I hope we managed to help you avoid this kind of situation. With such strong macro headwinds now it is not the time to play the hero and prove the market it is wrong, because it is never wrong or right, it is just a cumulus of probabilities, and the signals for the moment point us to the beginning of an active sequence to the downside. Until we hit the month lows everything is in the air, so I recommend waiting for market discovery. Keep cash as a position and if you want some trades for cash flow try some stocks against the levels, but don’t buy falling knives, as you may get your portfolio slashed. You can also start shorting if the levels are broken, but do it surgically and choose the weakest stocks against levels. I will be mostly a watcher rather than a do-er until I can see a clear trend forming and I recommend the same to you.
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P.S.: Alex will have in the Morning Game Plan a more detailed analysis of our vision for this end of the year, so I recommend investing in one of our paid services for a substantial return on investment. It’s like having a Netflix subscription, but this one can generate you capital, not just chill.