Commentary: Bearish Continuations Galore
Notable Friday movers:
We are still finding attractive bull setups in strong areas of the market (for ex. GAME, TRIP, MR, TAST). But pockets of industry strength aside, the market is seeing an extraordinary number of bearish continuation patterns.
By bearish continuation we mean the “1-2-3″ change of trend formation you can see in this small caps chart:
This bear continuation pattern is everywhere after Friday’s action.
For example, you can see variants of it in SPY, DIA, UCO, EEM, XHB, and XRT, just to name a few…
The charts are flashing a big red WARNING sign here. One of the few non-cooperators is China.
Last week we were caught by surprise in a “China surge” as everything global-slowdown-related shot higher. We speculated it might have been a very large fund manager getting squeezed. Turns out it was inside information — someone knew that a confidence-inspiring yuan adjustment was going to happen, and acted on it early:
Has the “hard landing” scenario really been obliterated? Of course not. But the Chinese government still has enough clout to make traders believe it can do what it wants… even as the all-around backdrop deteriorates, both fundamentally and technically.
As Paul Tudor Jones liked to say, it’s often the case that “prices move first, fundamentals come second.”
Right now the wide array of bearish continuation patterns is a “prices first” warning sign that U.S. indices are close to rolling over.
If the bull case holds going into the new week, we’ll add to our long book via attractive individual equity setups. If the bears see follow-through, however, we’ll add some short exposure through one or more large indices.
It’s still hard to say which would be better (from a trading perspective) — a steady grind higher benefiting strongly bullish groups like China internet stocks (RENN etc), or a full-blown “risk off” correction allowing short profits to pile up quickly.
We’re positioning for either eventuality.