How To Trade Bear Market Rallies

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Last night, I included 4 “tells” that would help me (and hopefully you as well), determine if the worst is over.

Let’s review:

1. QQQs if can hold the 23 month by end of January, good clue that worst is over-January is only ½ way over but with Thursday’s move, it is back above 102.87 proving that “a quick shower and a pound of makeup, NSAD(Y) (does indeed) clean up nicely.” Furthermore, with Thursday’s possible reversal candle coupled with the possible January Calendar Range low, QQQs are wine instead of blood.

2. Keep eyes peeled on interest rates. The longer the flight to safety lasts, the longer it will take for the FED to continue its rate raising schedule; hence, the longer it will take for us to feel any sense of real confidence in the market-TLTs closed back under the 124 pivotal area and below resistance. TBT’s the ultrashort, had an inside day from Wednesday’s range. A move and close over 42.10 would be a good sign.

3. Watch solar energy as the new “oil” barometer. With TAN dropping to the lowest levels since July 2013, I’m not holding my breath for a bottom. However, I find comfort in knowing where to look for one. -Solar City was down at one point over 15%. It came back a tad to close down 13%. Although First Solar fared better, I am waiting to see the ETF TAN confirms its possible reversal candle and get back over 25.25.
   Another thought-USO, although I no longer consider it a barometer, it does have to stop the bleed. Thursday, it held the recent lows and got a meager oversold bounce.

4. Modern Family Particularly IWM and - The Russell 2000, although well under the 200 week moving average indicating the bull trend is over, did have a marginal one-day reversal pattern. (closed just shy of the 25% of the intraday high). Transportation (IYT) made it but with average volume.

Since QQQs, IWM and IYT all had possible reversal candles, here is what needs to happen for those to confirm on Friday (which is also the last day of trading before a 3-day weekend.)

Thursday’s lows have to hold. That seems like a safe bet. Friday, all must close above Thursdays’ highs. Those levels are 104.98, 102.71 and 122.92 respectively.

IWM and IYT particularly have significant overhead resistance at the 200 week moving averages. For IWM that is at 105.11. For IYT it’s 127.39.

I mention this because where the volatility and wide ranges wreak the most havoc are with risk/reward ratios. With IWM, one would have to risk $3 to the lows to make possibly only $3.00 to the resistance. If you think that the bottom is in and are willing to take that swing risk/reward to see if you are right, fine. Sell ½ at the resistance level, go to a no loss stop and see what happens.

My best advice is think about a much smaller timeframe trade when trading against the trend or anticipating the trend could change. That means a tighter risk and a quicker profit with more of a 2:1 risk/reward ratio. This especially makes sense before a long weekend.

Overall, continue to watch for signs of a continuation of the trend rather than a true bottom. Biggest rallies happen in bear markets.

S&P 500 (SPY) Did not have a reversal candle even with the up move. 190 pivotal with 195.75 resistance if holds.

Russell 2000 (IWM) Between SPY’s non reversal candle today and this one as more marginal I see no reason why we should think that this was more than a relief rally. 102 pivotal

Dow (DIA) 160 nearest support held. Over 165 I would bite.

Nasdaq (QQQ) Big volume and a decent reversal candle will definitely need confirmation with a close over Thursday’s high

XLF (Financials) 20.74 the 200 weekly moving average and unless it clears 22, will most likely see it

KRE (Regional Banks) 36.30 the 200 WMA. Got close and bounced but not enough to generate excitement

SMH (Semiconductors) A clean reversal candle so a candidate for follow through. Needs to clear/close over 49.45 and hold Thursday’s low

IYT (Transportation) Although it did have a reversal candle, the volume was good but not monumental.

IBB (Biotechnology) Great volume. Huge January range which I think will make it hard to much except break the lows and maybe rally midway from 330 to 273.50

XRT (Retail) Not impressive at all

IYR (Real Estate) Death cross.

GLD (Gold Trust) Back under the 50 DMA.

SLV (Silver) Never mind on that 50 DMA unless it gets back over 13.52

USO (US Oil Fund) 2 inside days, meager bounce-that means all it did was work off oversold conditions

OIH (Oil Services) Possible reversal candle-needs to clear 24.00

UNG (US NatGas Fund) Gapped under the inside day low and went south

TAN (Guggenheim Solar Energy) Volume was under the average. Let’s see if clears 25.25 with volume to end the week

TLT (iShares 20+ Year Treasuries) Broke 124 but with the inside day, has to take out 123.27 or clear 125.50

UUP (Dollar Bull) Has a gap overhead it hasn’t filled which could be negative, yet it is holding the 50 DMA

FXI (China Large Cap Fund) A move and close over 31.36 would be good. But until it clears 35 not a sea change