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Caution Warranted As A Deep Correction May Be Beginning

Today, I was stopped out of my last two positions, Amazon and ENTG and am now fully in cash. Trading has become increasingly frustrating over the last two months as I have found myself stopped out of many quality setups. In addition, many former leaders such as NIO, PTON, APPS, TSLA, and ZM have broken down below their 50-day or even 200-day moving averages. It has increasingly discouraging to trade in such an environment only to watch the S&P 500 and Dow Jones continue upwards to new highs. However, now the major indexes are starting to break down.


Indexes

While still within striking distance of a new high, the S&P 500 has seen four distribution days since April 20. In addition, it is quite extended from its' 200-day moving average and may need some time to digest its' monster gains from 2020 and early 2021. Similarly, the Nasdaq Composite shows three distribution days during this time frame.





The Russell 2000 has been the weakest index by far. It has been showing a clustering of distribution over the last few weeks and may be forming a head and shoulders pattern.


Growth in general has really been underperforming as evidenced by the charts of IWO and ARKK.



In addition, when we look at the Percentage of Stocks Above Their 50-Day Moving Average, we can see that it has been declining much more than the index itself. This shows us that there is weakness beneath the surface and some big cap stocks are holding the index up.



Sentiment

Everyone and their cousin seems to be a bull here. Option speculation has been running rampant as you can see by the chart below. It's usually better to be on the opposite side of fear or green when the market reaches such extremes.


Seasonality

In addition to all of these, we have entered a part of the year that is usually not favorable to stock trading. "Sell in May and go away" doesn't not always ring true, but I have found the period from May to September to often be time when trading can be very choppy and difficult.


Cryptocurrency

I've gotten a flood of messages about trading altcoins this week. However, what's interesting is that Bitcoin has been showing weakness over the last few weeks. After I sold Bitcoin, I was looking to see if support would come in. However, now it looks like Bitcoin may need some time to base and reset. I was extremely bullish on Bitcoin as it approached $60,000, but it never pays to argue with the market and I do not like holding Bitcoin below its' 50-day moving average as the large drawdowns are not something I enjoy "hodling" through.

Now, that bring me to the other coins. Ethereum has been an absolute monster the past few weeks. However, the weakness in Bitcoin worries me. Consider what legendary trader Jesse Livermore once stated:

While Dogecoin has been exciting for those who own it, is it the true cryptocurrency leader? Does it have the largest market cap? Is it the one that is the most well known? The failure of Bitcoin to rally may lead to trouble in the entire crypto space. Bitcoin's chart is showing increasing weakness with distribution and it may possibly be forming a head and shoulders pattern.


Crypto related stocks are also showing weakness. This worries me as it shows institutions are refusing to accumulate crypto-related stocks like they were in months prior.





It is interesting to note that Bitcoin topped on the day Coinbase has its' initial public offering. Isn't it funny how it seems to work out like that? It seems the insiders always like to get out while the market is hot, leaving many with nothing but regrets.

So where does this all leave us? For me, I like to do more of what is working and less of what is not working. 2020 was just a remarkable year. Speculating on margin, trading growth stocks, buying Bitcoin- it just couldn't get any better. This time around, it seems that the prudent thing to do is take a step back. Typically, periods of extremely strong markets are followed by downtrending or choppy markets. It's almost as if the market has to take back all the easy money it gave to even things out. Over the past few months, trading growth stocks clearly has not been working and cash is always a position. I was stopped out of my two remaining positions today and will happily wait in cash for future opportunities to arise, whether that be in cryptocurrencies or in the stock market. This may take place next week, next month, or sometime later this year. I'm really not worried about trying to predict when my next buy will take place. Instead, I'll let the charts tell me when it's safe to get back in.



To learn more about swing trading and trading in general, visit my course page.


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