Happy Sunday Surfers!
In this appointment, we talked about:
Breakdown: truth or lies?
Plan B
But what about these small caps?
Where does this take us?
Breakdown: truth or lies?
Although the daily lows of the last three trading days are rising, Friday's gap up and subsequent sell-off did not present an idyllic picture, and the week's close below 4300 points is definitely a black mark for bullish traders.
Currently, the picture is not too convincing, and the breakdown of the August lows remains in place.
Let's take a look at the S&P 500 over the past 3 months:
Widening the time horizon, we see that we have reached a decisive point with prices right on the support we had seen here.
As of the date I am writing, this remains a medium-term pullback after the bull run from the March 2023 lows, although the graphical analysis indicates a worrisome bearish H&S pattern.
Here there are two possibilities:
We break downward by going to deeper support
The area is holding, and we are witnessing an upward slingshot that would delineate a failure breakdown, but for that, we must necessarily return above 4350 points
Of course, a failure breakdown is an eye-catching scenario, and if it were to be triggered very likely we would have a movement similar to the one that started from another false break, namely the one in mid-March that kicked off 5 months of uptrend.
So are we bearish?
Prices speak for themselves, and the downward movement since August certainly does not look good, especially with the break of 4300 points and Friday's bad day.
Considering now the overall context, as well as prices, makes me think that support will hold, and we will have a bullish fourth quarter:
Friday was the expiration of the month and the expiration of the quarter, so a bit of fuzzy price action can be expected.
Considering the extremely bearish sentiment readings (Analysis Sentiment) I do not give the bulls for defeated.
Monday begins the most bullish period of the year, and October is well known as the bear market killer ⇾ Bear market killer
I do not see a major exit of capital from RISK ON areas.
This is not to say that as early as Monday we would have +2% days, and until prices confirm this thesis there is little we can do, we will see what this last quarter will give us.
Plan B
Like any self-respecting plan, we must necessarily have a backup one should the sale continue.
Now, we all know that if we imbricate the direction is right, a lot of money can be made!
But at the same time, if the direction is wrong, it could be painful, especially if you remain 100 percent invested and those who remained liquid or with an unloaded portfolio made a good choice (we don't have to be in the market 100 percent of the time).
I have given some hints on How to position yourself for the month of August.
We currently have 5 stocks in the Surfers Portfolio with very low total exposure (about 20%)
I have not added any more meat to the fire for two months for this very reason, that is, I preferred to keep the bulk in cash, especially when I saw that the small caps did not have the behavior I was expecting.
I continue to be very optimistic about the fourth quarter and 2024.
However, it is hard to ignore the key break in the S&P 500 and if we do not recover quickly in the next 1 to 2 weeks and Wall Street were to accept these levels, this would be the first real bear victory since the October 2022 lows.
So what are the next supports?
The important area concerns that around 4200-4150, a level identified in And finally comes the weakness of early August points where there is a confluence of:
February 2023 highs
Accumulation of spring 2023 before the last bullish move of May-August 2023
Fibonacci's retracements of two different bullish legs, i.e., 38% of the October 22-August 23 leg and 50% March-August 23 leg
But what about these small caps?
I said earlier that the behavior of small caps was one of those reasons why I stayed liquid with the portfolio, this is because we shave been and remain in a damn sideway for 18 months now, sideways full of false movements in the medium term in both directions.
But let's go step by step…
In this section, I repost various charts shared over the past few months to help me delineate the small-cap landscape.
The first is the one in the series of articles Cracking the Stock Market (->here for the original article), where I was analyzing the various market phases of IWM on weekly timeframes.
Well … Nothing has changed.
We remain in a potential accumulation phase until prices break out of the area between $190 and $160.
The rising lows of the accumulation phase give me hope, but I would like to see an outperformance of these small caps to confirm.
Now let's turn to a chart on the daily, which, at first glance, might seem messy.
If you want to refresh your memory of what we are talking about, look at these sections of some past articles:
Small caps clear first hurdle July 13, 2023
The third time is the charm… of July 20, 2023
Somebody give small caps a nudge of Aug. 12
In two-three months, small caps have:
Tested the key level in the $197 area, danced up there a bit, and then plunged back toward support in the $188-189 area.
Support in the $188-189 area, former resistance, was cut like butter in mid-August also breaking the black dashed-line bullish channel
They found relief further down and pushed past 188-189, drawing a bearish failure breakout. In the same move, they touched the back test of the dotted-line channel.
They broke key support in September, and seem to be trying to recover it with no small amount of difficulty
Throughout this period, relative strength continued to decline after outperforming in June and July
In short, it is currently not a good place to put one's capital, except with hit-and-run operations on the dip buying of key levels.
The only positive note concerns seasonality. Note how the out performance of the IWM in the fourth quarter of 2022 was quite significant.
Where does this take us?
There are mixed signals.
First, the stock market is at a critical inflection point. It has broken an important support, but at the same time just below it may find another very important support.
Every intraday break is brutally sold, and there is really no upward continuation on any day in recent weeks.
On the other, signals from sentiment and RISK ON reports showing no signs of subsiding indicate that it is time to buy.
In addition, we are about to enter the fourth quarter, and mid-January 2024 is the absolute best seasonal period.
Happy trading!