After a strong showing Friday by the bulls and the chance to show us Monday that they are finally here to stay, the bulls instead chose to cower in the corner. Today was a very light volume day that some say is technically good because it’s a low volume pullback. Many times that analysis is correct. However, today formed a bearish harami in the S&P 500 which means tomorrow could get very ugly. It could be argued that the bearish harami was not truly formed because the trading range wasn’t tight enough but, if it wasn’t for the last few minutes of the market sell-off today, the formation was very clear on the chart. I made the mistake of identifying this formation too late and was not able to build upon my shorts prior to the close. When we have such boring low volume days in the market, it takes strong discipline to focus and today I made that mistake of not focusing enough.
It appears we are about to test support around 1040 once again and if we break below that, we are just down the street from the lows of the year. Doug Kass believes we are in a trading range but I’m still fearful of a major market sell-off like 2008. While I fully expect some bounces, I will likely use those opportunities to sell some long positions and go further short the market. We still have some hot sectors such as utilities and agriculture for the bulls, so I may play some longs there if they continue to show strength. The area I’ll really be paying close attention to is energy though. If energy rises due to the hurricanes, the market is likely to ignore technical analysis and rise with it. If energy prices are not going to rise due to the hurricane, I see little reason to believe the bulls can win.
If we have a green day tomorrow, the bearish harami will not be confirmed therefore, we can disregard it for the time being. If it is confirmed, I will look to quickly and aggressively add to my ProShares UltraShort S&P 500 (SDS) position as a hedge against my long positions.
On the long side, I added to NVIDIA Corp (NVDA) on a pullback today due to a downgrade that I believe is not warranted and already priced into the stock. NVDA may not have significant upside until the markets turn more bullish but the downside risk should be minimal. However, if the markets downtrend, that downgrade will appear to hold much weight and with my bearish perspective in the market now, I would have preferred to wait to add to NVDA.
I also started a position in U.S. Natural Gas (UNG) as a natural gas long. With the hurricane, natural gas prices should see some upside. Also, last year around this time, natural gas went on a rally that saw UNG double in about a month. However, after some more research, I quickly sold my UNG position today in favor of First Trust ISE-Revere Natural Gas ETF (FCG). UNG is under some regulatory pressures so FCG looks to be a safer play for natural gas.
If I wasn’t so concerned for the bulls in the short-term, I’d really like to have large positions in Orient Paper (ONP) and Orexigen Therapeutics (OREX). I believe they have significant upside potential in their respective situations. Since the markets seem to lack support though, the downtrending market could very easily drag these stocks to unforeseen levels so my positions will stay small or be stopped out entirely. My style of investing makes me more focused on protecting capital in this type of market than trying to make significant gains by gambling too much. The downside risk is very real and I will not be caught arguing with the illogical beast known as the stock market.
As always, do your own homework to see if you agree. Have a good night and I’ll see you in the morning. Good luck out there.
At the time of publication, Kudrna was long OREX, NVDA, SDS, ONP, and FCG but positions may change at any time.
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