Strongest week in nearly a decade after recent market meltdown

(February 16, 2018) The speed of the bounce back in the markets was breathtaking. The markets set records in the past two weeks both for the largest one day drop in the Dow and for the most rapid correction cycle.  

A 10 percent correction typically occurs about once a year. But we had no such correction in 2017. A correction typically takes more than 60 days; this correction lasted for 9.

Only one week ago the markets had given back gave back all of their yearly gains and then some. But the markets bounced off the uptrend line going back to the November 2016 elections (white line). This is what the markets looked like last Friday (weekly chart of the Dow).

In last week’s post we indicated that a large green candlestick bar this Monday following last Friday’s hammer bottom candlestick could set the market for a more bullish mindset. Accordingly, we entered one long position last Friday and 3 more bullish positions on Monday and Tuesday of this week. All of these positions were closed later this week for profits.

The market’s ability to shrug off higher than expected inflation numbers on Wednesday was impressive. The Dow initially reacted to this news by dropping about 300 points pre-open after the inflation numbers came out, but managed to end the day higher. This week we saw buying spikes in contrast to last week’s selling spikes.

Source: Trade Ideas Pro

So do we have an all-clear sign now? Not so fast. With the technical damage we experienced last week, it is rare for the markets to be able to just put this sort of selloff in the rear view mirror.

Common behavior after this sort of selloff is for the markets to bounce, meet resistance and retreat again. So far the markets have already powered through the first resistance levels. The Dow and S&P have rebounded to their 50 day moving averages. The NASDAQ’s rebound has been considerably stronger with its closing price well above its 50 day moving average. It is worth noting, however, that a number of momentum names in the NASDAQ are still far underwater  (such as favorite Arista Networks which just reported and despite beating on earnings and revenues, lost 18% today).

We will be watchful to see whether a subsequent down leg is in store for the markets or whether we have put in an intermediate low.

We expect continued volatility, which can actually be a positive for swing trading. It does require being on the right side of the market employing bullish or bearish strategies as market conditions dictate.

On the chart below we see the huge spike in market volatility that occurred with the market selloff. Volatility spikes often mark an interim market low. But it is worth noting that volatility remains far higher can than its pre-correction levels. This is what  suggests that we are likely to see continued volatility.

Indices

Here is a look at the charts of the major indices at close of trading Friday:

NASDAQ

Last week the NASDAQ broke down below its 20, 50, and 100 day moving averages  and nearly tested its 200 day moving average. This week it managed an extremely strong rebound to once again close above its 50 day moving average.

The NASDAQ showed a stronger rebound than the S&P or the Dow.

SPY

Last week the S&P dropped all the way down to test its 200 day moving average before bouncing last Friday. It is now just a hair above its 50 day moving average, a point which can prove to be an inflection point.

FSS Swing Performance Update: 12 of last 13 trades profitable

In these past two turbulent weeks in the market, we closed 13 trades, 12 of them profitable. Our one losing trade lost 1%. We had 6 bearish positions and 7 bullish positions.

FSS Swing Trading Strategy Update

Our trades were of a shorter duration than usual the past two weeks as the markets made large moves in both directions. Last week our emphasis was on short positions; this week we emphasized long positions.

With the rapidly moving markets we may put out some trades next week that we close the same day. If we do so, we will label them as such.  Currently, we have had no day trades in the past 5 trading days.

With an approximately 62% bounce off the lows, we are at a point where the markets could experience resistance. We are also at a point where the Dow and S&P are playing with either side of their 50 day moving averages, averages which had not previously been breached since May of 2017.

In the upcoming week, we will maintain a position of continued agility, selecting bullish or bearish trades as the market tells us whether it wants to climb higher or pause at resistance. 

This week’s activity in our positions

As was the case last week, it was a more active week than usual and trade durations were shorter with these unusual market conditions.

Full Swing Stocks is currently flat with no open positions in front of Monday’smarket holiday.

We closed five positions this week, of which four were profitable. Four of the positions were long positions and one was a short position.  This is in addition to the 8 trades we closed last week, all profitable.

  • NFLX +3.8% (Netflix)
  • AMZN +3.4 (Amazon)
  • CAT +3.0% (Caterpillar)
  • DATA +2.2% (Tableau Software)
  • UNH -1.0% (United Healthcare), SHORT

Symbols: FULL

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