Last week I again noted that CPI and Fed announcement days are ones to watch and suggested the best strategy is to be holding cash and then focus on one trade with a big position and watch it closely. That week, the markets blasted higher on Nov. 30 at 11:30am after Powell’s speech. This past week, the entire move was erased. I still struggle to trade such full reversals effectively, even when I’m watching for them. It’s just hard to believe such moves are pure manipulation with no substance.
Next week we have the CPI report at 8:30am on Tuesday and FOMC on Wednesday at 2pm. Clearly, the markets are set to break either direction, and they might go one direction on Tuesday and the opposite on Wednesday, like they did in November. And this time it could be down after the CPI and up after the FOMC. There’s really no way to predict the direction in advance and the big boys will push the markets the direction they want, regardless of the actual report information.
On the long side, I’m going to focus on SOXL. On the short side, I plan to trade SQQQ along with UVXY.
Three weeks ago, I wrote: Simple math paints a clear picture. Basically, compounding returns can provide stellar returns, so selling out after a large move is generally best, especially with leveraged ETFs. Even when you’re certain that a stock is going higher, based on fundamentals, it can trade over a range for a long time, so best to take advantage of it. You can always re-buy if it makes a surprise jump higher.
Gold miners are a good recent example. After recommending KRR back in July, it held a range till November before finally taking off, +75% since then. Trading a portion of your position allows you to lock in profits, increase the size of your position and perhaps most importantly, keep you from getting worn out in the waiting.
Oil producers are also a prime example of how long you sometimes need to wait before they made an ‘obvious’ move higher. In 2020, after oil dropped from $20 to -$39, it was completely clear that the price of oil would go higher as would the related stocks. Within 6 weeks, oil was back to $40 and oil producers had also shot up. As oil held $40, the producers then fell back to their recent lows. It made no sense!
Watching Suncor fall back to the March low of 14.02 was agonizing. Selling out early in June on the sharp reversal could have avoided that pain. On a slow fall, it can be very, very difficult to sell out, because you know it’s going to reverse, you just don’t know when. If you’re already out on the sharp drop, then waiting as it slowly slides lower, builds anticipation of capitalizing of the eventual potential.
In early November 2020, they finally turned with a minor uptick in the price of oil. Clearly, big money was pushing the prices down and then finally went long. Many say that oil producers are still undervalued, and I’m still trading small positions, but after bagging over 1000% with NVA, BTE, IPO and others, I’m content to look elsewhere for the next big win. Many are saying gold miners could be the big winners next year. With KRR and IAU my biggest positions, that would be nice.
Natural gas is what got me looking closely at the choice of holding versus trading. The wacky world of natural gas!, written Nov. 5 and being updated as the wackiness continues, proves clearly that it’s better to sell when the price heads south and then wait for the fundamentals to take hold. Remember that lesson was already learned with oil producers in 2020.
Since Nov. 23, the short NG trade with KOLD went up 115% to Dec. 6. NG hit 5.35 and turned up. Even if you’re certain NG will go below $5, the markets never move in a straight line.
Straight lines can however be a good indicator of what to expect next. Last week the S&P was hitting resistance and pulled back on cue. NDX continues to lag, but the chart patterns are remarkably similar.
XBI and SOXX, the base ETFs for the leveraged versions LABU and SOXL, are also setting up for a breakout, up or down. I think it will be up and likely with a fake lower to start.
Good luck next week!
The week in review: Well, the CPI and FOMC did indeed trigger some big moves, especially the CPI with a large gap open, the big boys sold, and hopefully you did too, and then the air was let out of the balloon. A big change from Nov. 10 when they sent the market lower pre-CPI and then kept their foot on the gas after the large gap up open. Perhaps the fall after the Nov. 30 blast was an indicator for this week’s fall after the initial blast. All us small fish can do is react the best we can early after big events.
On Mon. Dec.12, Avi wrote: “In very simple terms, as long as this pullback holds the 3700-3870SPX support region below us, we should be setting up to rally to the 4300SPX region, with potential to even exceed it, depending upon the structure the market takes over the next two weeks.” I’ve drawn the 3700 support line on the chart above.
JC is also taking long positions and finally closed his SDOW position for a gain on his low buy and break even on his Oct. 28 buy.
Many indexes are at or near potential support so best to watch for reversals, which may also come after breaking support.
Natural gas had another wacky week with big swings daily in each direction.
I still like the short potential but trading the bulk of your position has provided incredible compounding returns.
Update Dec.16-30: The biggest move in the final 2 weeks of 2022 was NG finally taking the plunge. January will likely provide a good move up that you can trade with BOIL, but don’t buy early as NG could still fall under $4 and as low at $3.60.
The markets showed some weakness but mostly held up and showed a bit of strength to close the year. To start the year, be ready for a fake one direction and a sharp reversal. Holding cash and waiting for an extreme is probably the best strategy.