Short squeeze getting long in the tooth

Monday, 21 January 2019
Melbourne, Australia
By Murray Dawes

  • Retailers under the pump
  • Pot stocks coming back to life?

US markets have continued to grind higher, but they’re heading towards some very stiff overhead resistance. Even if markets are going to keep heading higher over the next few months, we should still see some selling coming out of the woodwork pretty soon.

Markets never move in a straight line. Short term traders are usually cannon fodder for the big players. So as this short term uptrend develops and more traders get long hoping that the trend will continue, large traders who may have been caught overly long during the big sell-off last quarter will be licking their lips and getting prepared to offload some risk.

That selling may not be enough to unravel the uptrend completely. We may still be in for higher prices. But if short term momentum turns back down from here you can be sure there will be plenty of people who don’t want to miss the boat. 

One of the key things that markets do over and over is retrace over old ground shaking short term traders out of positions. Even if markets are trending they will gyrate around wildly, nearly retracing 100% of previous waves before continuing the trend.

The major area of a wave that I like to focus on when looking for opportunities is the 75% to 87.5% retracement area. That is the spot where I see changes of direction most often.

The ASX 200 is right in the middle of the sell zone (a 75–87.5% retracement) of the most recent down-wave in this downtrend. It is a spot where there is a good chance we could see a shift in momentum.

I’ll explain more below, but first, a look at markets around the world…


The Dow Jones Industrial Average has closed up 499.19 points, or 2.06%.

The S&P 500 gained 34.75 points, or 1.32%.

In Europe, the Euro Stoxx 50 index finished up 65.57 points, or 2.14%.

Meanwhile, the FTSE 100 rose 1.95%, and Germany’s DAX gained 286.92 points, or 2.63%.

In Asian markets, Japan’s Nikkei 225 is up 69.86 points, or 0.34%. China’s CSI 300 is up 0.66%.

In Australia, the S&P/ASX 200 is up 20.70 points, or 0.35%.

On the commodities markets, West Texas Intermediate crude oil is US$54.06 per barrel. Brent crude is US$62.94 per barrel.

Turning to gold, the yellow metal is trading for US$1,281.33 (AU$1,788.02) per troy ounce. Silver is US$15.31 (AU$21.36) per troy ounce.

One bitcoin is worth US$3,527.05.

The Aussie dollar is worth 71.66 US cents.

ASX 200 in the danger zone

chart image

Source: CQG Integrated Client
Click to enlarge

Now, any shift in momentum from here should see a sell-off back to the midpoint of the wave at 5,640, nearly 200 points below here. If things turn bad again then prices could head a lot lower because we may see the trend continue.

So the higher this market heads, the further it will fall once the selling returns.

I’m personally hoping that the rally continues to higher levels because there will be some great opportunities to either lower risk or gain exposure to the short side if we have a rally into the sell zone of the whole sell-off [refer to chart above]. That’s up at 6,100–6,200. I don’t think the market will be able to manage a move above that area during this year so any spike up into that zone in the short term will be short lived.

With the markets looking so interesting at the moment I thought it would be a bit of fun to have something to discuss over the coming week while we watch things unfold. My guess is that an early spike this week will be sold into and a daily sell pivot will be created, which should spark the selling.

5,950 is a bit of a line in the sand in our market and a move above there will give targets to the upper sell zone between 6,100–6,200. But as long as we remain below 5,950 the odds are stacked in favour of a balancing up move back to 5,640 before deciding on what to do next.

The higher US markets go, the more confident the US Fed will be to continue raising rates. That will knock the stuffing out of the markets again. Then the Fed will back off and markets will try to rally. Rinse, repeat ad infinitum or until something breaks.

In such an environment we should continue to see heightened volatility, which will be good for the short term traders but it will possibly cause some seasickness for investors.

Retailers under the pump

The weakening retail environment is all over the news at the moment. I was very interested by the news that foot traffic in shopping centres and department stores was at the worst level in 20 years over Christmas. We are starting to see ‘confession season’ cough up the ugly details of what went on. All eyes are on poor old Myers [ASX:MYR]. With a share price that looks like it is tottering on the edge of oblivion, a bad announcement could see its price crash below the $0.345 level reached last March. Solomon Lew must be kicking himself for jumping in at $1.00 not so long ago. 

It’s not only technological change that is seeing retailers suffer. We all know that clouds have been gathering for quite some time as electricity prices shot to the moon and housing prices faltered. I’ve been surprised by how well retail sales have held up in the face of the onslaught, quite frankly, so it makes sense to finally see things softening off.

There will be a time to wade back into the sector at discounted prices, but for now it is an area of the market that has more risks to the downside. I for one am staying away from them, or even looking for shorting opportunities.

Pot stocks coming back to life?

After a blistering rally during 2017, ‘pot’ stocks as they are lovingly known have been going through a consolidation period while the reality tried to catch up to expectation.

Before we look at an example stock and why it may be indicating good news for pot investors, I should point out that Port Phillip Publishing’s small-cap specialist, Sam Volkering, is currently recommending a ripper pot stock. You can find out more about that here.

One stock that jumped up onto my radar on Thursday last week was Cann Group [ASX:CAN]. They haven’t given a buy signal yet so please don’t go and rush out and buy them, but they are showing signs that the period of consolidation may be over and the uptrend could be ready to resume.

CANN Group showing signs of life

chart image

Source: CQG Integrated Client
Click to enlarge

Ultimately I will keep the actual entry point and timing for members of my service, but in the interests of education, it is a good case study in how ranges develop within stocks and how you can use calculations off the ranges to develop trading strategy.

You will see in the above chart that I have pointed out the initial range that calculations were made off. My contention is that all of the price action that you have seen since that time can be explained by referring to the support and resistance zones that are created once the range is in place.

The point of control is the midpoint of the range and should be seen as a gravitational point around which prices are oscillating. The levels 0.618 above and below the range are strong support and resistance zones where you often see reversals in price. You can see that prices spiked up to the level 0.618 above the range but got swiftly rejected from there.

Just recently we saw the lower bound level 0.618 below the range hold quite well and we saw a weekly buy pivot last week (to be clear, a buy pivot doesn’t mean that you buy the stock, it just means it is a pivot that points upwards rather than downwards).

The weekly buy pivot points to a shift in momentum in the stock, but a monthly buy pivot will ultimately carry more weight and a quarterly buy pivot will have the most weight. The stock may be a lot higher by the time we see one of those.

There are calculations that I make once all of the ducks have lined up to ensure we get an entry point with the best risk/reward characteristics, but of course exactly what they are is information that I can’t give away. That wouldn’t be fair for my paying Alpha Wave Trader subscribers! But perhaps you have your own methods for entering stocks and in that case this could be a stock that goes onto your watchlist to keep an eye on.

That’s it from me today. Tune in the rest of this week as we keep an eye on developments on the ASX!