This is the Market Overview and contains some strategies for dealing with Monday’s open. (This is typically a “premium” video, but I am making this available to everyone this weekend). (November 14, 2015)

print
SP-500 DJ-30 DIA VIX--X DJ-20 T2100 SP-500 T2122 COMPQX TNX--X TLT SP-500 

It very well could be on Monday morning that we’ll see a big gap down. It’s really difficult to say because this occurred on Friday. There’s two days for the markets to digest this, so I just couldn’t tell you whether this is going to be a really big deal on Monday morning; where the S&P, the market, a lot of stocks are going to gap way down to a point where all the selling occurs at the open. And then by 9:35 you’re going to get this big “whoosh” higher. Really, really hard to say, in fact it’s impossible to say with any kind of creditability. I’m sure you’ll get some people who have already come out and told you exactly what the market’s going to do on Monday. I’m telling you this, those people are flipping coins, they have no idea.

I believe that either on Monday or Tuesday you’re going to see a lot of margin calls coming in, which is going to force more liquidation. The reason is, I want you to stop and think about this, I mentioned this in a video that you’re going to get Monday night. I was talking about how money managers, I’m not talking about the individual traders, I’m talking about money managers are likely behind the market right now. They’ve lost money for their clients and that doesn’t make the client feel too good. Because if I’ve got somebody managing my money and I’m paying them a couple percentage points or whatever. If you’re a hedge fund it’s nice to be you, two-and-twenty; I can lose money by myself or I can put my money in the bank and almost get a return.

So the bottom line is money managers, certainly hedge funds, need to be making money for their clients or they’re actually going to have a bunch of x-clients. So because of that, at the end of the year and as this market has moved higher, you’ve got more and more investors, more and more traders, and money managers that have been on margin trying to catch up. So we get this little bounce here and suddenly it accelerates to the downside. Well now magically all those margins positions are really going to matter. So I think you could see some forced liquidation next week that could, in fact, lead to a pretty good buying opportunity. But as I sit here right now I couldn’t tell you, I’m not going to waste your time. I could spend 5-10 more minutes thinking about all these different ways that I could tell you I have no “flippin’” idea what’s going to happen on Monday morning. But there, I just said it.

The Dow Industrials ( DJ-30 ), same thing. The further down the market gaps, and by the way, for all I know the market could gap up on Monday. I just don’t know; I’m doing this on Saturday afternoon. The further down the gap is on Monday morning, if you’re long, if you have positions, the more your tendency is going to be to be liquidating, to selling. Like “Oh my gosh! I can’t believe that my stock has gone down this much. I’ve got to sell.” Look, I’ve fallen prey to that, here’s how you get out of it. Seriously. Listen to me, I’m giving you “pearls” here, you can take this with you and you’ll use it forever. If a stock that you own gaps down, or lets say it just really gets away from you and it’s down at a horribly low level because you didn’t have a stop in. Or maybe you had a stop in and you knew the stock was going to gap down so you took your stop off before the market opened, which by the way is a good idea to do.

The stock gaps down so much, lets say you own this stock SPDR ( NYSEARCA:DIA ), it gaps down for whatever reason, gaps down, we’ll say to this level (162.00), big, huge gap, 10 points, massive gap. So this, this is money that you’ve already lost. The market opens up on Monday, you had a stock that was up here, now suddenly Monday morning you’re stock is down here. Well, if this was trading during the day, as this stock started to fall maybe you’d have sold. Maybe you’d have sold here, or here, or here. But up probably wouldn’t be holding the stock down here. So you wouldn’t suffer the SHOCK of seeing the stock open up here and magically the next trading instant, from 4:00 on Friday until 9:30 Monday morning, open up down here. My point is this can be like “shock and awe”, where the stock opens down there. So what are you doing? You’re alarmed. Your alarmed. You see this big massive “whoosh” down this big gap and you say, “Oh my gosh, I’ve got to sell!” No! No, you don’t. You WISH you had sold. There’s a difference between, “I’ve got to sell,” versus, “I sure to heck wish I had sold last week.”

Well there is no such thing as a “way back machine”. That’s only in the old cartoons. You don’t get to go back and redo it. And by selling down here you don’t get to get credit for having sold up here. Because you didn’t. What you are doing by selling is locking in a loss. By the way, for some of you the “lights” just went on. You’re going, “Oh crap! I think he’s right.” No, I know I’m right, you’re locking in a loss. Here’s support, right here. Okay, forget about the red box here. To use “locker room” language, “you’ve already been screwed”, you’ve already lost this money. You can’t do anything about that. So instead of even fretting about that you’ve got the time in the world to fret about it later. Instead, consider this, consider that you were never long this position. And by the way this applies to the entire market. We’re talking about Monday morning, we’re talking about Monday morning. Consider you’re not long anything and then wherever the market opens up consider that you bought right there. This is exactly where you bought, right here. Okay, so now you’re in a new trade. Because hey, it’s a new day, and it would be Monday. You’re in a new trade right here.

Now, what’s your risk? Again, forget about this, you don’t get credit for this. You already lost that money. This is a new trade. How far down are you going to allow your brand new trade to go before you sell? Whatever that distance is, that is where you put your stop, right down there. You can say, “Well Dan, then that would mean that I let my position go all the way down to here.” No, because again, you already took a “screwing” here, you already lost your shirt. That trade is over. It started again on a brand new trade on Monday. And so then you consider it a new trade because the stock gapped way down and the only reason you’re “buying” is because you think the market is going to move higher. You think the stock is going to move higher.

So how much further risk are you going to take? By going through this analysis and essentially just wiping this trade off the books like it never even really even happened, and instead you’re starting a new trade at the open, then you get to create a whole new risk profile. What that prevents you from doing is selling right at the bottom. That’s what you have to do. You have to consider it to be a new trade on Monday morning so that you can make an entirely new risk profile. Because think about this, lets say a stock that you have gaps down 12 percent. Oh my gosh, that’s brutal. Lets say it gaps down 20 percent. That’s a brutal loss. So it opens up and then it continues to trade lower for like 2 percent. So it gapped down 20 percent, fell another 2 percent for a total of 22 percent drop, then it starts to move higher.

Well meanwhile you got all reactive at the open and you sold down 20 percent. Okay, the market turns around, the stock turns around after falling just another 2 percent. Now you’re sitting there like a fool, cash in your pocket, a loss on the books, a BIG loss on the books and the stock that you sold is now moving higher without you. Instead, what would have happened if you had bought the stock at the open? Down 20 percent, I’m in.
What would have happened if you had bought the stock at 20 percent down? The stock would have fallen 2 percent. You’d have been staring at it, going like, “Huh, darn it I didn’t get it at the exact bottom. Lets see how far it goes.” Then the stock starts rolling upward, and now you’re wondering, “Should I be adding to my winning position?” It’s a totally different mind set if you begin each day literally “mark to market”. Meaning whatever the value of your stock is, whatever the value of your option is, it’s a brand new day.

Okay, Volatility Index, the “fear gauge”. The amount that traders are paying for hedges basically, on their portfolios, has been going up for a few days. You’re going to see this spike on Monday. All the other stuff, you know the different breadth indicators; well hey, lets look at that. Advance/Decline Line ( T2100 ), doesn’t really matter. Okay this, T2122, the four-week New High/Low Ratio. I talked about this the other day, about how it gets down to this extreme and it’s not a timing indicator it’s a condition indicator. This gets down to these really super extreme levels and I would call four an extreme level, particularly where at one point on Friday it got down to .88. That’s a massive sell-off in the market over time. Again, this is the new week, the new four-week highs over the new four-week lows, a ratio. When it gets down to basically a fraction you can virtually always look for a move higher.

So I was looking for that potentially on Friday morning, but certainly didn’t come. So now we’ve got to look for that again and this goes back to the beginning. After this kind of massive sell-off any kind of gap down, where ever it is, is likely to be met with buying. The further down the gap is the higher the probability that the next move will be higher, seriously. Because if you’re fairly new to trading and you see what’s happened over in Europe. You may be looking at your portfolio going, “Oh my gosh! I’ve got to sell. What do I have to sell on Monday? This is horrible.” No! You should be saying, “Well okay, maybe now I’m going to get a good buying opportunity because I’ve got a feeling there’s a lot of people that are looking to sell.” So just keep that in mind. Massive, massive move down here.

T2108, this is kind of a similar index really, well it’s actually a little slower. This is also on the low part of the range, but not at an extreme, not at a super extreme. Think about this, this was back in August on the 24th or here on the 25th, but really, really massive low number here, well below 10. So I would like to see actually this at some point on Monday be really low, like below 20. Let me move on here. Nasdaq Composite (COMPQX) also heading lower, look for some kind of a bounce on Monday. Treasuries (TNX-X) the yields were already coming down here in my view because the market’s starting to see, and they definitely started to see on Friday that the Fed is basically clueless, Huh, imagine that.

You’ve got five different Fed governors talking on Friday, and they’re all basically saying different things. And then at the same time as “jumpin’ Janet” is talking about a live discussion of a rate hike on the Fed funds rate, you’ve the EU talking about EASING over in Europe. So you’ve got these completely divergent monetary policies based on whether you’re in Europe or over in the U.S. and you’re managing the banking sector, basically the world. You’ve got these opposing views and that makes for a really difficult market environment for people where a quarter basis point one way or another really does matter. So there’s a lot of stuff that’s shifting back and forth. And by the way, what happened on Friday, don’t think for a minute that is not going to impact or influence what these bankers do. Don’t think for a minute that what’s happening over there isn’t going to maybe give Janet Yellen another reason to not hike rates in December.

All of this stuff does matter. It may not matter to you. It may not matter to me. Shoot, raise the Fed funds rate 1.5, I don’t care. Raise it 3, it totally doesn’t matter to me and it doesn’t matter to you either. But the fact that it does matter to the real powers that be, the powers that move your stocks around, my stocks around. Well suddenly it does matter to me, and it matters a lot. That’s kind of my best take on what’s happening with the Fed and with the Mario Draghi and Christine Lagarde and all the others over there. There’s a lot of uncertainty and that’s going to be reflected, in my view, in the bond market where you’re going to see these yields go down because there’s going to be more buying of treasuries, which drives the prices up.

You’re going to see on the long bond as well, the TLT, your going to see these prices continue to come up. So don’t lose sight of that. But just know again, and I’m going to end it here. Just know that on Monday, at some point, I think you’re going to see a pretty good buying opportunity. Perhaps right at the open, but at some point I think the selling is going to run it’s course. Because the market, the crowd, whatever, has already got kind of a head start on the “stock for cash” game.

Free Chart

Leave a Comment