I’ve Got Some “If This Happens…Do This” Trades

Be Ready for Anything and Everything!

The stock market is now in that post crash mode in which just about anything can happen.  And while under normal circumstances, human nature would be in panic mode, as a trader this is a good time to make a conditional – “if this happens, do this” - shopping list, to which I will be adding candidates over the next few days.

We can make this super complicated, or just keep it simple. I prefer the latter, so rather than setting up a bunch of useless rules, I will just let the market do the talking.  So, here’s what I’d like to see before moving back into stocks aggressively:

·        A reaffirmation of the the market’s recently excellent breadth;

·        A stabilization of bond yields; and signs that smart money is moving back into blue chip companies which are full of cash and command their business sector.

It’s also important to remember that because of the speed with which algo trading machines work, an acceleration of the selling or a full market reversal to the upside can happen at any moment. Therefore, this is a time to remain very attentive to what’s happening in the markets.

The Lay of the Land

The New York Stock Exchange Advance Decline line (NYAD) is adjusting to the new market reality – whatever that is.  Compared to the major indexes, NYAD slept through the recent three day crash. That’s a good sign.  I expect some backing and filling here, especially since the RSI is holding near 50. That’s usually a sign for a pause.

The U.S. Ten Year Note yield (TNX) as I’ve been expecting is rising after moving well below a normal trading range during the panic.  This morning’s move above 3.8% is nothing extraordinary.  We may see TNX rise to 4% in the short term as traders take profits.   

You can see that TNX is still outside of its lower Bollinger Band, which means it will likely rise a bit further to return to a normal trading range.   Also, RSI is oversold at 30, also supporting a rise in yields.  I would start worrying if TNX moves above 4% convincingly.

A useful sign that the current bounce has potential would be a move above 5300 for the S&P 500 (SPX). This would be a sign that money is moving back into the big stocks.  As with TNX, SPX is still  trading well outside its lower Bollinger Band, a sign that some sort of bounce is very likely.

The Nasdaq 200 index (NDX) is already back inside its lower Bollinger Band, which is encouraging more because it’s returning to a normal trading pattern than anything else.  But there are lots of disappointed people who bought between 17500 and 18500 who are likely to sell on the first bounce.  Once NDX gets above 18500, we can breathe a little easier.

The bottom line is that even if we’ve seen the bottom, there is still some bumpiness ahead.   In this type of environment, it’s best to be prepared, which is why I’m offering two “if this happens, do this (ITHDT)” conditional trades, just below.

Thanks to everyone for your ongoing support.  I really appreciate it.

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