Wow! Talk about a sell-off. There’s no sense beating around the bush today, so let’s dig into yesterday’s price action and look at where we might go from here…

Wednesday’s Stock Market Selloff – Analysis and Outlook:

In case you’ve been out of the loop, financial assets around the world got absolutely crushed yesterday. And while it feels like an oversold bounce is likely, so far there’s haven’t been any signs and futures are currently pointing lower. So personally, I’m not diving in to catch falling knives (at least not yet)

To help you see what I mean, let’s go back to the SPY daily chart, which has evolved quite a bit since yesterday:

Talk about a broken elevator, right? Yesterday’s drop is a big change of pace from the price action we saw this summer. And it’s a stark escalation from the weakness we’ve seen developing the last week or so.  I guess the good news is, by taking exits as soon as stops were triggered, I have built up a meaningful cash hoard.

So as bad as it was yesterday, things could have been worse.Because from large tech stocks, to small cap domestic companies, the selling was pretty indiscriminate.

As the FinViz heatmap shows, there really was nowhere to hide. Just look at those eye-popping drops in the largest and most well-known companies…

And it wasn’t just US stocks, either! Treasuries and overseas markets also sold off, leaving diversified investors out in the cold. Because right now, it looks like cash is the only place that’s safe

so where do we go from here?

Well, about the only thing we know for sure, is that anything is possible. But we can also be pretty confident (based on previous market panics) that periods of volatility tend to cluster together. So more big swings, either up or down, wouldn’t surprise me.

In fact, it does feel like markets are very overdue for a strong oversold bounce here. And I for one would love to see a V-shaped recovery squeeze higher, relentlessly. But maybe this time is different, and dip buyers are the ones who are in for more pain. For now…

My main goal is to avoid catching a falling knife. Because while I appreciate the desire to dip buy, my main goal is protecting my capital by focusing on better risk/reward opportunities. So for perspective, I want to take a step back and share some important weekly charts I’m keying off from.

Given the intensity of the selling, I think this longer-term view can help us contextualize the recent moves. Let me guide you through what that looks like…

Weekly Chart Recap:

Now first of all, let me apologize to all the purists out there. Because importantly, although we are reviewing weekly charts, the recent week hasn’t closed yet. So consider the right-most candles on these charts to be works in progress. And to the degree buyers can bid prices off the lows of the week, I’ll be more optimistic about an upside resolution.

But first things first, let’s survey the damage.

Naturally, SPY is a pretty good place to start. I’ve already showm you the updated daily view. But here’s how it maps to the weekly:

As you can see, it looks like a date with the up-sloping 50-week MA could be next. In any case, this recent candle is a bit change of character from the easy coast higher all summer.

Over in the Nasdaq 100 ETF, things look similar…

And bringing up the rear here’s the IWM ETF for small caps, which have been leading us to the downside and show no sign of letting up…

So while I was mentally prepared for more downside yesterday, I didn’t expect it to unwind this fast or this far. The bad news is, that seems to be the case across many market sectors.

For instance, one potential bright spot I’d been watching in US stocks was the industrial sector. Because while tech was getting sold, these late-cycle ideas were still looking pretty good.

Unfortunately that changed in a hurry, as you can see via XLI:

And along the same lines, although materials were already lagging, the punishment only accelerated yesterday. I guess it’s possible this is all an elaborate fake breakdown, but the technical damage sure feels real…

So as you can see, (and no matter how you slice it!) the scene in US stocks isn’t all that appealing! Even the defensive parts of the market like utilities and REITs have failed to make much headway during this latest bout of risk aversion.

And speaking of risk, the relatively safe haven of treasuries hasn’t been providing much insulation either. Keep in mind, this recent decline is consistent with the idea of rates trending higher too…

Personally, I’m of the belief interest rates have likely bottomed and the top in TLT is in. Of course this change of trend has been predicted ad-nauseum the last few years. But this time might be different.

Now moving beyond US assets…

It should be no surprise to see emerging markets continue to trend lower. We’ve been watching this slow-motion train wreck all year.

I’ve been grateful to have no EEM exposure, especially as it looks like this trend has more room to fall. And until the underlying country indexes start to firm up, it’s hard to imagine much stability here.

Now to make matters worse, while global stocks have been lagging all year, that doesn’t just mean EEM.

For example, Vanguards European Index ETF is also hitting 52-week lows with no end in sight:

And the interesting thing about Europe is, when you dig deeper, it all looks bad. For instance, I thought it might be the weak economies that are dragging all Euro area stocks down.

But German markets, as shown via the EWG ETF, don’t look good at all…

And to be sure, Italy at the other end of the economic spectrum is also suffering from lagging equity markets.

Here’s EWI:

Italian markets have broken down to fresh lows, as investors globally have fled to cash. And I guess while we’re at it, here’s a look at France too (just so we check off the 3 biggest Eurozone economics):

So you get the idea: No matter the headlines, we are seeing some major breakdowns… pretty much everywhere you look. And so as you might have guessed, I’ll be very curious to see how these weekly candles shape up today and tomorrow. It’s still possible we get a gigantic rally and these will end up being just wild weekly hammer candlesticks, but that’s probably a low-probability bet.

In the meantime, I’m going to stick to my stops (which continue to trigger). So let me bring you up to speed on the trends I’m exiting today…

Trade Alerts:

Because I have so many alerts to update you on… (you did see how much stocks went down, didn’t you?)… I’m going to keep the commentary light. In a couple cases these are newer exits that triggered because of a quick reversal after entry (looking at you HIIQ). And in a few other examples they were longer or intermediate-term trends that simply reversed (because as you can see above, lots of charts are reversing right now).

As a longer-term trend follower, these are the costs of doing business. The more wiggle room you give your positions, the more you give back when things come to an end. Exactly how you mange this is up to you, but I’ve found weekly ATR-based trailing stops strike a nice balance for me. The same goes for end of day stop losses. I like to wait until end of day to avoid getting shaken out, but as you’ll see below, that can mean bigger than planned drawdowns. It’s a give and take.

And due to the severity of the selling, I actually don’t have any new buy alerts. For the first time in a long time, there are zero stocks on the S1 screen. So I guess I’ll have to wait for a more meaningful bounce to get back to work. For now, I’m happy to reduce my exposure and watch and see where we go from here.

Sell ACN (Model Portfolio and Personal Holdings):

  • Entry price: 164.19
  • Target exit price: $161.74 (vs. $164.59 stop)
  • # of shares: 25
  • P&L: -61.25 (-1.49%)
  • Trading system: S1

Sell AMZN (Model Portfolio):

  • Entry price: $1,821.95
  • Target exit price: $1,755.25 (vs. $1,862.24 stop)
  • # of shares: 3
  • P&L: -$200.10 (-3.66%)
  • Trading system: D2

Sell HIIQ (Model Portfolio and Personal Holdings):

  • Entry price: $62.99
  • Target exit price: $50.03 (vs. $53.29 stop)
  • # of shares: 60
  • P&L: -777.60 (-20.57%)
  • Trading system: S1

Sell TTD (Model Portfolio):

  • Entry price: $92.54
  • Target exit price: $118.65 (vs. $130.41 stop)
  • # of shares: 20
  • P&L: $522.20 (+28.21%)
  • Trading system: S1

Sell ADBE (Personal Holdings:

  • Entry price: $210
  • Target exit price: $237.91 (vs. $241.11 stop)
  • P&L:  14.77%
  • Trading system: S1

Sell ETSY (Personal Holdings):

  • Entry price: $29.82
  • Target exit price: $39.98 (vs. $42.68 stop)
  • P&L:  34.98%
  • Trading system: S1

Sell LULU (Personal Holdings):

  • Entry price: $72.73
  • Target exit price: $140.68 (vs. $140.97 stop loss)
  • P&L:  93.73%
  • Trading system: S1

Sell HEI (Personal Holdings):

  • Entry price: $68.60
  • Target exit price: $83.40 (vs. $84.14 stop)
  • P&L:  22.80%
  • Trading system: S1

Sell NKE (Personal Holdings):

  • Entry price: $80.07
  • Target exit price: $72.94 (vs. $82.45)
  • P&L:  -5.61%
  • Trading system: D1

Sell RCM (Personal Holdings):

  • Entry price: $6.17
  • Target exit price: $8.44
  • P&L:  36.63%
  • Trading system: S1

Now even though it feels good to clear the deck, my fear is missing out on an upside reversal (which is probably just around the corner). I’m up to 50% cash after today’s sales, and open risk is still above zero. So that’s why I’m still looking for breakout setups (even if they are few and far between). I’m also open-minded to shorting breakdowns on further weakness (though right now many names are extended). So…

Thursday’s Charts To Watch:

DG is one of the few charts that’s holding up pretty well here. If we see a broader bounce here this could be an appealing long-term entry.

ROYT has been holding up reasonably well, despite the broad market turbulence. And if we see some momentum back in the oil space, this might be one to jump on for another leg higher…

ENDP looks like it’s made a compelling bottom and has also held up well during the recent turbulence. If healthcare can stabilize I think this one is worth a solid look.

Now I don’t think I’m going to short in the model portfolio. But I’m open to it in personal accounts (including via put options). So when considering these ideas, I’m inclined to focus on stocks that aren’t just correcting, but really appear to be rolling over.

That means, going back into stage analysis, I’m looking for names that are heading into Stage 4 downtrends. One of the best examples of this kind of ideas is BABA… (FB also fits the bill):

Overall though, in fast-moving markets I prefer to slow down and do less. After yesterday’s panic selling, many short ideas are oversold and a bounce could provide better entries (on both the long and short side, ironically). So while we wait for some stability and a green close, I’ll continue to take my stops as they come.

In the meantime, I also continue to sharpen my mental saw with critical thinking and thoughtful reading. Hopefully these links below will keep you feeling positive and productive while the market sorts itself out…

Further Reading:

“We have never believed that long-term rates were being held down by recent slow growth or low foreign rates. We believe they have been held down by the Fed’s policy of low short term rates and the market belief that the Fed would hold them low. That has now changed.” Powell Moves Markets

“A single indicator can’t possibly tell you the whole story. But the potential problem with using multiple indicators is they can reveal anything you want to believe.” A Bullish Washout

“Human nature never changes. Investors’ default settings let fear or greed overpower their common sense; they fall prey to the carnival barker du jour.” Insurance On Your Soul

“As always, where there is potential reward there is always risk. And in certain cases you may take the view that the perceived risk may be higher than others, but it is worth remembering that risk is always present in any stock, in any sector.” Another Example of A Nasty Price Gap

“You already know a lot of things you should do to improve your life. Where we often get stuck is knowing what’s most important. What comes first. Where to start.” How To Make Your Life Amazing

Alright, that’s it for now! Let’s see how things shake out at the close and I’ll be back at the same time tomorrow with another update for you.

For more commentary and ideas throughout the day, you can find me on StockTwits and Twitter sharing ideas. Any questions or ideas of your own? You can shoot me an email or comment below. Happy trading!