This Week, We’re Betting With the Bears

Nick’s Note: We’re in one of the longest bull markets in history. And we think it will go higher… But the market never goes up in a straight line. Today, master trader Jeff Clark explains why he sees a short-term pullback in the next month or two… and how you could potentially profit from it.


By Jeff Clark, editor, Market Minute

The bulls had the easy-money bet last week.

The S&P 500 was oversold last Monday. It was trading more than 40 points below its 9-day exponential moving average (EMA) line—an extreme condition.

And the Volatility Index (VIX) had just triggered a new “buy” signal for the broad stock market. So when stocks dipped even lower last Monday morning, it gave bullish traders a low-risk setup to bet on a bounce.

That bet paid off well, as the S&P 500 rallied from a low of 2417 on Monday to a high of 2455 on Wednesday.

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This week, though, we’re betting with the bears. Here’s why…

Late August through late October tends to be a weak period for the stock market. Short-term weakness—which often reverses quickly during other times of the year—tends to persist during this period.

For example, look at what happened last year…

Three times last year, the 9-day EMA crossed below the 50-day moving average (MA). This “bearish cross”—if it’s not reversed quickly—often marks the start of an intermediate-term decline phase in which the S&P 500 moves lower for several weeks.

Traders need to understand, though, that a bearish cross is a lagging indicator. It occurs AFTER stocks have already declined. By the time the 9-day EMA dips below the 50-day MA, stocks are already oversold. They’re vulnerable to an oversold bounce. So it’s usually a bad idea to short an index right as the bearish cross occurs.

It’s a better strategy to wait for the inevitable oversold bounce to occur. Then, as the index makes its way back up to the moving average lines and the market works off the oversold conditions, traders can take a lower-risk short position.

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They’ll either profit as the market turns back lower… or they’ll stop out of the trade for a small loss if the 9-day EMA crosses back above the 50-day MA—a “bullish cross.”

In the chart above, you can see the quick reversals that happened in May and June last year.

Traders who shorted the S&P 500 when the index approached its moving averages from below suffered relatively small losses if they closed those trades when the moving averages completed a bullish cross.

But—and this is the main point for this week—the bearish cross last September produced a persistent decline that lasted for several weeks. Traders who shorted the S&P 500 when it popped back up to its moving averages in mid-September had solid profits by early November.

Now, let’s take a look at the current chart of the S&P 500…

The moving averages completed a bearish cross during the market weakness from two weeks ago. Last week, though, we got the oversold bounce back up to the moving averages.

This gives traders a low-risk setup for a short sale. We can short the S&P right here in the 2445–2450 range. If the 9-day EMA crosses back above the 50-day MA, thereby completing a bullish cross, we can cover the short position for a relatively small loss.

On the other hand, if the seasonal weakness kicks in and stocks move lower from here, then we have a trade we can probably hang on to for a few weeks and look to profit from as stocks decline.

Best regards and good trading,

Jeff Clark
Editor, Market Minute

P.S. My free Market Minute newsletter tells readers where the action is headed every trading day… including which sectors to watch and which to avoid. And it’s easy to join. You can sign up with just one click.

Click right here to subscribe to the Market Minute, and you’ll receive your next issue at 7:30 a.m. ET.

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MARKET BRIEFS

From Skeptic to Investor: Mark Cuban is the owner of the NBA’s Dallas Mavericks and host of the television show Shark Tank. He was also a cryptocurrency skeptic. In June, Cuban tweeted, “I think [bitcoin is] in a bubble. I just don’t know when or how much it corrects. When everyone is bragging about how easy they are making $=bubble.” Now, the tech billionaire is singing a different tune…

Cuban is an early backer of 1confirmation, a crypto venture fund. The fund launched last week and plans to invest exclusively in cryptocurrency assets, according to a filing with the U.S. Securities and Exchange Commission (SEC). Cuban’s about-face indicates Wall Street is changing its view of cryptocurrencies. Financial firms and institutional investors are waking up to their profit potential. Just last week, we told you asset manager VanEck is launching a crypto fund. “I might have to rewrite all these replacing stocks with $btc. Might have to finally buy some,” Cuban recently tweeted. Welcome to the bandwagon, Mark…

Introducing the Whoppercoin: Yes, that’s right. According to Russian news reports, the country’s Burger King subdivision has launched its own cryptocurrency. The coin is part of a new loyalty program. Customers will receive one Whoppercoin in a special cryptocurrency wallet for each Whopper they purchase. It’s still unclear if the coins will have a wider use. But reports say Burger Kings across Russia will accept the coin as payment.

Balancing the Budget: Could cryptocurrencies be the solution to national debt? Estonia may soon find out. The small Baltic nation is considering issuing its own crypto tokens via an initial coin offering (ICO). The government would use the money raised by the ICO to invest in new technologies. The experiment may sound unusual. But we think it’s better than raising taxes…

Nick’s Note: Regular readers know we’re fans of cryptocurrencies. But if you’re still sitting on the fence, we want to hear from you. What’s holding you back from getting into cryptocurrencies? Let us know right here

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