Just when we thought the craziness had finally come to an end, Tuesday’s CPI numbers showed that inflation was still rising, despite the market’s belief that it had in fact peaked.
The result was a bloodbath like we haven’t seen in years.
The Nasdaq fell 5.5% in a day. And the Dow lost 1276 points.
Even our trade in MCK is rolling over. Luckily, we sold half near the highs and raised our stop to breakeven on the rest (see why risk management is so crucial?).
Monthly Chart of McKesson Corporation (MCK) – Source: TradingView
This week, all the major indexes fell back to a crucial support level shown below in white on the QQQ.
Monthly Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
This has been a battleground for stocks since June, so it’s not surprising that this is where the selling finally stopped.
But make no mistake… This is where the rubber meets the road.
As of Friday afternoon, sellers were winning the battle and support was not holding.
Disclosure: I took a short position in QQQ on Thursday with a tight stop above Wednesday’s high.
The Put/Call Ratio has also surged to 1.18.
I expect to see it hit at least 1.40 before this market finds a bottom, so I’m expecting things to get worse before they get better.
Remember that things can change quickly and that works in both directions.
In June, only 13% above stocks were above their respective 50-day moving average.
By August that number was up to 80%… and it’s now back down to 36%.
The only standout this week has been solar…
If there was ever any doubt that solar was leading the market, Tuesday put that to rest.
Top solar names like EnphaseEnergy (ENPH), First Solar (FSLR) and Sunrun (RUN) all went UP on Tuesday!
And in case you haven’t been paying attention, here’s how those stocks have performed since the June lows:
So, it shouldn’t surprise you the two stocks on my watchlist this week are solar names.
Here are the details…
Invesco Solar ETF (TAN)
I’ve been making my case on solar for months, so I won’t waste my breath explaining why I like the sector.
TAN broke out from a textbook breakout pattern in July and climbed 22% in just two weeks – a huge move for a basket of roughly 40 stocks.
It is now forming another base with resistance near $89.
If TAN can get above there, I am expecting another quick move higher.
Altus Power (AMPS)
AMPS is somewhat of an under-the-radar solar stock.
Unlike most solar companies which make panels, chips, or mounting systems for customer-owned solar energy systems, Altus is an electric utility company whose power comes exclusively from solar generation.
It owns and operates a network of solar farms and sells the power to end users.
I haven’t dug into all the details yet, but I imagine large companies are buying power from them just for the energy credits and whatever tax incentives are currently up for grabs.
With a market capitalization of just under $2 billion, it is a small-cap stock.
AMP is coming out of a cup with handle pattern that began late last year, and the 200-day moving average is finally starting to rise.
This looks like the early stages of a new Stage 2 uptrend which is exactly where I like to buy.
The major indexes held their ground this week. As of Friday morning, the S&P and Nasdaq were both trading near the same level they closed the week before.
Markets avoided any major selling days, and volume is picking up slightly as we approach the end of summer, which has historically seen lighter action.
Stocks posted net new highs each day, and the percentage of names above their 50- and 200-day moving averages continues to rise.
Percentage of Stocks above 50-day (left) and 200-day (right) Moving Average – Source: TradingView
The solar energy and biotech sectors are currently leading as the top performers.
Solar, in particular, made a big move over the last few weeks…
Enphase Energy, Inc. (ENPH) is now up 37% from the $220 pivot point I identified on July 22.
Daily Chart of Enphase Energy, Inc. (ENPH) – Source: TradingView
Two other Watchlist stocks from last week, Ionis Pharmaceuticals, Inc. (IONS) and Otter Tail Corporation (OTTR), also made nice moves from their breakout points…
Daily Charts of Ionis Pharmaceuticals, Inc. (IONS) and Otter Tail Corporation (OTTR) – Source: TradingView
But with solar getting a bit extended, I will be focusing on the biotech sector this week.
Portfolio Review
I also want to review our open trade in McKesson Corporation (MCK).
I issued a buy recommendation for MCKon July 27, and we recorded an official entry price of $336.73 in our portfolio.
After initially moving higher, shares pulled back a bit after earnings.
Daily Chart of McKesson Corporation (MCK) – Source: TradingView
What’s important, however, is how a stock responds to bad news…
In this case, shares quickly recovered and made new highs the following day.
This is a good sign of strength.
Our stop remains at $315.70. If you are risk-averse and want to tighten that up, you could move your stop loss up to $326.10 – just beneath the low of the earnings dip.
This would cut your risk from 6% down to 3% on the trade.
Still, I am going to leave our official stop in place at $315.70 in order to give the trade room to breathe.
Stealth Trades Watchlist
Going forward, your Weekly Updates will look a lot more like this one…
They’ll include more information on our current stock recommendations and put less of a focus on our weekly Watchlist.
Now, if you’ve ever wondered how I developed a proven track record of trading along the insiders like corporate CEOs, CFOs, executives and board members…
Do yourself a favor and check out my latest Insider Effect presentation!
Corporate insiders are always buying or selling shares in the companies they operate. These folks have a footing of knowledge that Main Street investors simply do not.
Now, if you’ve ever wondered how I developed a proven track record of trading along the insiders like corporate CEOs, CFOs, executives and board members…
Do yourself a favor and check out my latest Insider Effect presentation!
Corporate insiders are always buying or selling shares in the companies they operate. These folks have a footing of knowledge that Main Street investors simply do not.
I’m elated to announce that my wife gave birth to our daughter this past Sunday.
So far, she seems to be the good luck charm this market desperately needed.
This week, the S&P 500 saw two 90% up volume days, a valid follow-through day and a bullish break of the recent swing high.
It also reclaimed its 50-day moving average.
Daily Chart of S&P 500 Index – Source: TradingView
There were also more stocks making new highs than new lows every day last week.
This was the first time we have seen that since the rally in late March.
Daily Chart of Nasdaq Composite Index – Source: TradingView
None of these factors equate to a guarantee that stocks will go up from here…
But when all of my internal indicators fire to the long side in the same week, I start buying.
So, I have increased exposure in my personal accounts.
Based on how those trades work out, I will either bump my size up again if the trades make money on the whole or go back down to quarter size if they don’t.
Join Me on Monday
Before we get to this week’s Watchlist, I want to remind you to join me on Monday afternoon for our Stealth Trades Live Class at 3:00 p.m. ET…
I’m going to outline our plans for trading during this rally, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
In the meantime, here are the three top trades I’m watching this week…
Enphase Energy, Inc. (Long Idea)
I have been talking about the strength in solar stocks for several weeks now, and Enphase Energy, Inc. (ENPH) is one of my favorites.
Daily Chart of Enphase Energy, Inc. (ENPH) – Source: TradingView
Surge score: 98/100
% Above 52-wk low: 93%
Sales growth: +46%
Return on Equity: 74%
Triple momentum: yes
The stock is completing a textbook breakout pattern, with volatility compressing as pullbacks have shallowed from left to right.
The pivot area is around $220.
A move above that level has a high probability of leading to a strong move to the upside.
McKesson Corporation (Long Idea)
Despite a hideous bear market in the first half of 2022, McKesson Corporation (MCK) stock has been surging.
Daily Chart of McKesson Corporation (MCK) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 79%
Sales growth: +12%
Return on Equity: N/A
Triple momentum: yes
Shares are up 34% year-to-date, and most of that move occurred in just the first quarter.
After making new all-time highs, the medical supply company began consolidating in April and now looks ready to break out for another leg higher.
There are definite signs of accumulation in the base, and volume is drying up as price is tightening at the end… Exactly what we want to see.
Consider buying on a move above $336 with a sell stop at $315. This equates to a 6% risk on the trade.
Consolidated Water Co. Ltd. (Long Idea)
Consolidated Water Co. Ltd. (CWCO) is a small-cap company focused on treating and supplying water products to customers in the Cayman Islands, Bahamas and British Virgin Islands.
Daily Chart of Consolidated Water Co. Ltd. (CWCO) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 61%
Sales growth: +14%
Return on Equity: 2%
Triple momentum: yes
The stock made a powerful move higher in May, advancing 40% in just one month. Shares then pulled back and consolidated in the $14 area.
A look at the volume candles below the chart shows clear signs of accumulation (large buying) and very little selling.
This is a good sign that may point to institutions building large positions in the stock.
Consider buying CWCO on a move above $15.00.
This is a smaller stock with lighter trading volume, so I want to see a large volume spike on the breakout for confirmation.
Don’t Miss My Most Anticipated Event Yet – “Operation: FIRE Trader”
Before I end today’s thoughts, I wanted to tell you about my breakthrough training event I’m putting together next Tuesday.
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This is a HUGE deal…
Which is why, given the circumstances…
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I’ll be going live on Tuesday, July 26th at 1 p.m. EST to reveal all the shocking details…
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Again, this is my most anticipated event I’ve ever put on at Traders Agency…
So, you’ll definitely want to make sure you’re there to see all of the evidence I share.
My wife is 39 ½ weeks pregnant, and our little girl could come any second…
So, I’m writing this ahead of the opening bell on Friday to make sure I got this week’s Watchlist done early just in case.
Now, after a strong week to start July, stocks retraced on light volume this week.
In my opinion, the market is trying to form a bottom.
This tends to be a process with movement back and forth as large traders begin covering shorts and gradually increase their exposure on the long side.
Wednesday’s Consumer Price Index (CPI) report showed that inflation made yet another high at 9.1% for the prior 12 months.
The Nasdaq opened lower but recovered by the end of session to close down just 0.14% for the day.
Believe it or not, this is positive…
Silver Linings
The fact that the market can rally or at least hold on amid negative news is a good sign that the market could be nearing the lows.
Additionally, commodity prices continue to come down.
Commodities are the inputs of most final products, so it takes some time for those price reductions to work their way through the supply chain.
But to me, this is a sign that inflation is cooling. Just take a look at these commodity drawdowns from their 52-week highs…
Lumber -58%, Nickel -54%, Aluminum -37%, Natural Gas -31%, Steel -28%, Wheat -28%, Zinc -25%, Lead -23%, Copper -22%, Soybeans -18%, Oil -13%, Orange Juice -11%.
Daily Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
Now, getting back to the Nasdaq, I’ve drawn two horizontal lines on the daily chart above…
Whichever line is hit first will likely lead the next move.
A breakout above the green line should lead to a rally higher, at least for the short term.
A breakdown below the red line, however, should mean new lows and another leg lower for the markets.
Join Me on Monday
Before we get to this week’s Watchlist, I want to remind you to join me on Monday afternoon for our Stealth Trades Live Class at 3:00 p.m. ET…
I’m going to outline our plans for dealing with whatever the market happens to throw at us next, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
In the meantime, I have three new trades for you this week, each with classic bullish setups that should lead to higher prices…
Molson Coors Beverage Company (Long Idea)
During Thursday’s “State of the Market” webinar with my colleagues Josh Martinez, Anthony Speciale, I pointed out that the alcoholic beverage sector is coming out of a Stage 1 base and is on the verge of breaking out higher.
Daily Chart of Molson Coors Beverage Company (TAP) – Source: TradingView
Surge score: 96/100
% Above 52-wk low: 39%
Sales growth: +17%
Return on Equity: 7%
Triple momentum: yes
Molson Coors Beverage Company (TAP) is one of the strongest stocks in this sector and currently finishing a 12-month “cup with handle” pattern.
Consider buying here with a stop at $54.10.
MGP Ingredients, Inc. (Long Idea)
Another alcoholic beverage stock that looks even stronger to me is MGP Ingredients, Inc. (MGPI).
Daily Chart of MGP Ingredients, Inc. (MGPI) – Source: TradingView
Surge score: 98/100
% Above 52-wk low: 77%
Sales growth: +80%
Return on Equity: +20%
Triple momentum: yes
The distilled spirit-maker is forming a “base on base” pattern with extremely tight price action over the last two weeks.
The relative strength line is steadily climbing higher even as the broader market chops back and forth.
Consider buying MGPI on a breakout above $103.25 with a stop at $99.05 for a very low-risk trade.
Halozyme Therapeutics, Inc. (Long Idea)
Halozyme Therapeutics, Inc. (HALO) is a biotech stock that has been steadily drifting higher since February.
Daily Chart of Halozyme Therapeutics, Inc. (HALO) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 50%
Sales growth: +32%
Return on Equity: 169%
Triple momentum: yes
It broke out to new highs on heavy volume on July 7 but has since pulled back to the 21-day moving average.
Traders may consider a pullback buy here with a stop beneath the swing low at $43.40.
Join the Insiders
Now, if you’ve ever wondered how I developed a proven track record of trading along the insiders like corporate CEOs, CFOs, executives and board members…
Do yourself a favor and check out my latest Insider Effect presentation!
Corporate insiders are always buying or selling shares in the companies they operate. These folks have a footing of knowledge that Main Street investors simply do not.
As I write this on Friday morning, the Nasdaq is up roughly 2% for the week.
The S&P 500 recorded four positive days in a row to start the week, and we are beginning to see signs of institutional buying.
Thursday was an 88% up-volume day, meaning 88% of the volume was on the advance.
I’ve been waiting for a 90% up-day to signal that the low is in, and this was darn close…
Daily Chart of S&P 500 Index with Market Breadth & Volume Indicators – Source: TradingView
The same areas of the market I have been highlighting over the last few weeks continue to show strength – mainly biotechnology and solar stocks.
If you took the trade in Chinook Therapeutics, Inc. (KDNY) from last week’s Stealth Trades Watchlist, you should have seen a nice quick gain as the stock surged 13% in just four days.
Alpha Stocks members took the trade and already locked in partial profits.
Stay Cautious
Make no mistake – The market is not out of the woods yet, and this may end up being nothing more than a tradeable rally.
But I have started to increase exposure in my personal account.
If I see decent gains in these pilot positions, I will continue to buy news setups and increase my size accordingly.
Now, take a look at the daily chart of the Invesco QQQ Trust (QQQ) below, which tracks the Nasdaq index…
Daily Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
This week’s positive action prevented the index from making another lower low.
Should it take out the previous week’s high, this downtrend could finally break.
Join Me on Monday
Oil, natural gas, copper and most other commodities have fallen sharply over the last few weeks.
This is potentially a good sign for stocks as it could be a signal that inflation is finally subsiding.
As an investor, it is important to separate the economy from the stock market.
Remember… The market is a discounting mechanism. All assumptions about the macroeconomic picture are largely already priced in.
The market will bottom as soon as signs point to conditions improving. But it typically takes many months or even years before a recession ends.
With that in mind, I hope you’ll join me on Monday afternoon for our Stealth Trades Live Class at 3:00 p.m. ET…
I’m going to be outlining our plan for dealing with a market environment like this, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
For now, we are indeed in a tradeable rally, and I have three new long trades to share with you this week…
Sierra Wireless, Inc. (Long Idea)
Sierra Wireless, Inc. (SWIR) is a Canadian designer of wireless and embedded modules, gateways and routers.
Computer networking stocks are not showing strength as a group, but SWIR has a Surge Score of 99/100.
In other words, it is outperforming 99% of stocks.
Earnings and sales were both up big last quarter, and analysts are calling for further growth through 2023.
Daily Chart of Sierra Wireless, Inc. (SWIR) – Source: TradingView
Surge score: 99/100
% Above 52-wk low: 86%
Sales growth: +60%
Return on Equity: N/A
Triple momentum: yes
The chart looks great as well. The up/down volume ratio is incredibly bullish at 1.86, and institutional buyers are flocking to the stock.
SWIR has formed a pivot at the $25 level.
In a perfect world, it would trade sideways here for a few days to absorb any sellers near the highs.
That would make it an even higher conviction buy for me.
But demand for this stock is high. Consider buying on new highs with a 10% stop.
Seagen Inc. (Long Idea)
Seagen Inc. (SGEN) is a biotech that has come ripping off the lows.
Shares are up 70% in just six weeks, with almost no pullbacks along the way.
Daily Chart of Seagen Inc. (SGEN) – Source: TradingView
Surge score: 96/100
% Above 52-wk low: 71%
Sales growth: +28%
Return on Equity: N/A
Triple momentum: yes
At this point, price has been consolidating for almost two weeks near the $180 level.
There is also a fundamental catalyst in play…
Reuters reported that Merck & Co., Inc. (MRK) is in advanced talks to buy Seagen at a price above $200 per share – more than 10% above where it trades today.
Consider buying SGEN above $182 with a stop at $167.
United Therapeutics Corporation (Long Idea)
United Therapeutics Corporation (UTHR) is another biotech stock showing tremendous strength as the general market is coming off its lows.
The stock is just entering Stage 2 and currently trades just 1% off its all-time high.
Price action is tightening, pullbacks are becoming shallow and volume dried up for several days.
This is exactly what we want to see pre-breakout…
Daily Chart of United Therapeutics Corporation (UTHR) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 51%
Sales growth: +22%
Return on Equity: 20%
Triple momentum: no
The fundamentals are also strong… Unlike many biotech stocks, which have limited revenue and negative earnings, United Therapeutics is showing solid growth in both areas.
Earnings and sales grew by 44% and 22%, respectively, in the most recent quarter.
This stock is a potential market leader that could make a large advance if the market has indeed found the bottom.
Consider buying UTHR here with a stop at $220.
One Last Chance to Join Alpha Stocks
If you’ve been struggling in this wild stock market environment, with the major indexes down double-digits and many of last year’s leading stocks down over 50%…
Consider checking out my Alpha Stocks trading service, which focuses on only the very best stock trading opportunities — both on the long side as stocks rise and on the short side when markets are crashing.
Alpha Stocks recently recorded a 21.6% gain on the downside in only eight days as Pegasystems Inc. (PEGA) stock plunged…
As well as a gain of 21.3% in just 15 days in Permian Basin Royalty Trust (PBT).
Last Wednesday, we closed another winner in ProPhase Labs, Inc. (PRPH) for a two-day gain of 5.8%.
And as I alluded to above, we just closed out another two-day winner on a third of Chinook Therapeutics, Inc. (KDNY) for a gain of 8.4%.
Of course, we also hold a live members-only session every Monday so that subscribers can ask questions and get guidance about our trades.
As I write this on Friday afternoon, the Nasdaq is down 5.6% for the week.
As expected, the recent short-term bounce was a great opportunity to take a few short trades from better entry points.
And if you took the short trade idea in ZIM Integrated Shipping Services Ltd. (ZIM) last week, you are sitting on a hefty profit.
The market failed to post a follow-through day or 90% up volume day last week – key signs I’m waiting for to signal the market may have found the bottom.
We are still seeing more stocks making new lows than new highs. And breakouts to the upside are still meeting selling and mostly reversing lower.
Roundtrip Market
As a trader, this can be extremely frustrating.
For example, here’s a trade we took in my Alpha Stocks service this week…
65-Minute Chart of ProPhase Labs, Inc. (PRPH) – Source: TradingView
We bought ProPhase Labs, Inc. (PRPH) on the breakout at $11.97 per share. The next day, we were up over 17%.
As prudent traders, we took profits on part of the position at the top and raised our stop to breakeven.
That turned out to be the right move, as the stock reversed all the way back over the next two days.
We got out with a nice average gain, but unless you are using very wide stops (which I do not recommend) and taking on a lot of risk, this environment is making it very difficult to hold onto stocks for longer-term moves.
The Big Picture
So, let’s take a step back and look at the big picture…
I’ve found the easiest way to “remove the noise” is to look at a weekly chart rather than a daily or hourly chart.
Weekly Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
The Nasdaq has been unable to get above its 50-day moving average for several months. Even the 200-day has rolled up and is now pointing down.
We have also seen several weeks of high-volume selling, which is a sign that institutions have been dumping stocks en masse.
Until that changes and we begin to see signs of meaningful buying, there is no reason to be aggressively buying or having much exposure.
My personal account has been primarily in cash since November.
I continue to make short-term trades and take small positions here and there, but I have not been more than 25% invested at any point this year.
This is how I have been able to keep drawdowns to a minimum.
Progressive Exposure
I don’t have a crystal ball. Like everyone else, I cannot predict bear markets.
But I do understand “progressive exposure.” It works like this…
Look at your last four to five trades. Did you make money?
If not, cut your trading size in half.
After the next five trades, look at your results. Did you make money?
If not, cut your trade size in half again. If you did, bump it up.
It’s not rocket science. But it’s a powerful technique for minimizing drawdowns and keeping your losses small.
When your trades are not working, you will be trading very small amounts of money and taking very small losses.
When trades are working, you will be trading very large size and therefore having big wins.
Join Me on Monday
If you got into trouble this year and suffered a big drawdown, don’t beat yourself up.
The best money managers in the world have lost billions this year. Tiger Global, one of the top hedge funds in the world, is down by half.
The important thing is to learn from your mistakes. Take the lesson and move on.
With that in mind, I hope you’ll join me on Monday afternoon at 3:00 p.m. ET for our live Stealth Trades session…
I’m going to be outlining our plan for dealing with a market environment like this.
We’ll talk about inflation and how it is impacting the markets we track, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
Now, we’re focused on making money in the second half of the year, so here are three trade ideas for this week’s Watchlist to kick off the new quarter and the second half of 2022…
Chinook Therapeutics, Inc. (Long Idea)
I added Chinook Therapeutics, Inc. (KDNY) to the Watchlist last week, and it did not rise enough to hit our buy trigger.
As I mentioned in the previous update, KDNY is a biotech stock coming out of a huge two-year base pattern.
Daily Chart of Chinook Therapeutics, Inc. (KDNY) – Source: TradingView
Surge score: 97/100
% Above 52-wk low: 79%
Sales growth: +671%
Return on Equity: N/A
Triple momentum: yes
This week saw the stock pull back slightly to the 21-day moving average.
This is also a previous breakout level that could hold as support.
Traders could buy the stock here and use a 10% stop below the 50-day moving average.
The Howard Hughes Corporation (Short Idea)
The Howard Hughes Corporation (HHC) stock has been decimated over the last couple of months.
Shares of the real estate developer and manager fell from $105 to a low around $60 in just two months…
Daily Chart of The Howard Hughes Corporation (HHC) – Source: TradingView
Surge score: 26/100
% Above 52-wk low: 105%
Sales growth: +N/A
Return on Equity: N2%
Triple momentum: yes (short)
Shares are seeing a short-term bounce to the 21-day line that should continue to act as resistance.
Consider selling HHC short here near the $70 mark.
Citigroup Inc. (Short Idea)
When looking for breakout stocks to buy, I want the best of the best… Stocks with big earnings growth, big sales growth, bullish forecasts and high relative strength.
Identifying names about to break out lower means we want the opposite… Declining sales and profits, poor relative strength and a clear downtrend on the chart.
Citigroup Inc. (C)checks every box…
Daily Chart of Citigroup Inc. (C) – Source: TradingView
Surge score: 35/100
% Above 52-wk low: 2%
Sales growth: -1%
Return on Equity: 11%
Triple momentum: no
This dumpster fire of a stock has been moving lower for a year now.
It is currently forming a shelf with support at $45.
If it breaks this level and makes a new low, consider going short with a stop at $49.20.
Finding Real Alpha
With the major indexes down double-digits and many of last year’s leading stocks down over 50%, consider checking out my Alpha Stocks trading service.
We recently recorded a 21.6% gain on the downside in only eight days as Pegasystems Inc. (PEGA) stock plunged…
As well as a gain of 21.3% in just 15 days in Permian Basin Royalty Trust (PBT) as that stock broke out of its range.
And this past Wednesday, we closed another winner in ProPhase Labs, Inc. (PRPH) for a two-day gain of 5.8%.
We also get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
In our live Alpha Stocks session this past Monday, I pointed out that stocks were severely oversold and I was looking for a short-term bounce.
Stocks rose as expected during the following week, but as I write this on Friday morning, the rally seems fairly unimpressive.
The S&P 500 is up roughly 4% from last week’s close, but we have not seen aggressive buying volume.
Daily Chart of S&P 500 Index with Volume Indicators – Source: TradingView
We managed to avoid any new 90% down volume days, but we did not see a 90% up volume day either…
That’s a sign I am waiting for to signal that buyers might be returning.
The number of stocks making new lows continues to outpace the ones making new highs as well.
Daily Chart of Nasdaq Composite with Market Breadth Indicator – Source: TradingView
While it was good to see the ratio shrinking last week, a healthy market will have stocks breaking out to new highs and fewer names undercutting prior lows.
Unfortunately for the bulls, it has been over two weeks since we have seen a day with net new highs.
Showing Promise
That being said, a few groups of stocks are starting to show promise.
It is vitally important to watch which stocks are making highs when the market is making lows.
This is usually the next group of market leaders that can advance several hundred percent once the next bull market begins.
Chemical, shipping and energy stocks were the clear leaders in 2022. But their reign quickly came to an end.
Over the last two weeks, the Energy Select Sector SPDR Fund (XLE) is down 23%.
Shipping stocks like ZIM Integrated Shipping Services Ltd. (ZIM), Star Bulk Carriers Corp. (SBLK), Genco Shipping & Trading Limited (GNK) and Grindrod Shipping Holdings Ltd. (GRIN) have fallen 25%-30% each.
And Dow Inc. (DOW) has wiped out all of its 2022 gains in just three weeks.
So… who are the new leaders?
Bullish Biotechs
So far, the new leaders all seem to be biotechnology companies. The SPDR S&P Biotech ETF (XBI) rose over 12% last week.
And stocks like Meridian Bioscience, Inc. (VIVO), Chinook Therapeutics, Inc. (KDNY), Immunocore Holdings plc (IMCR), Allogene Therapeutics, Inc. (ALLO) and Vertex Pharmaceuticals Incorporated (VRTX) are all showing a lot of strength on increasing volume.
Meridian Bioscience, Inc. (VIVO) with Volume Indicator – Source: TradingView
The increase in volume is a crucial distinction that is often overlooked by amateur traders.
We want to see heavy buying from large institutions as they are building up positions. And volume is the secret footprint that reveals this activity.
I am also seeing strength in several solar energy stocks. Daqo New Energy Corp. (DQ), Enphase Energy, Inc. (ENPH), SolarEdge Technologies, Inc. (SEDG), JinkoSolar Holding Co., Ltd. (JKS) and a few others are beginning to set up as potential buys.
The general market, however, is still in no-man’s land. It has not yet shown enough strength to start heavily buying.
The indexes are also too far extended to safely enter a good short position.
Therefore, risk-averse traders might consider sitting out for the week until the market shows where it wants to go.
The Nasdaq index, represented below by the Invesco QQQ Trust (QQQ), is beginning to tighten up and coil before making its next move.
Daily Chart of Invesco QQQ Trust (QQQ) – Source: TradingView
Which direction the market moves next remains to be seen, but I have enough confidence in this week’s Watchlist ideas to bring them to you today.
You’ll find two new long ideas and one new short idea addedto the Watchlist below…
Chinook Therapeutics, Inc. (Long Idea)
Chinook Therapeutics, Inc. (KDNY) is a biotech stock coming out of a two-year base pattern.
Here’s how the chart is setting up…
Weekly Chart of Chinook Therapeutics, Inc. (KDNY) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 97/100
% Above 52-wk low: 79%
Sales growth: +671%
Return on Equity: N/A
Triple momentum: yes
The company has three drugs in its development pipeline, one of which is in Stage 3 clinical trials.
Good news from that trial could deliver a big surge in the share price.
KDNY has seen several weeks of big volume on its move to the highs. Consider buying the breakout with an 8% stop.
Immunocore Holdings plc (Long Idea)
Immunocore Holdings plc (IMCR) is another biotechnology stock showing a lot of strength.
Here’s how the chart is setting up…
Daily Chart of Immunocore Holdings plc (IMCR) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 96/100
% Above 52-wk low: 102%
Sales growth: +159%
Return on Equity: N/A
Triple momentum: yes
IMCR just completed a beautiful base pattern with volatility compressing as pullbacks shallowed from left to right – exactly the kind of price action we like to see.
Consider buying this stock here around the $37 mark with an 8% stop loss.
And here’s how the stock is setting up with my Stealth System…
Surge score: 90/100
% Above 52-wk low: 96%
Sales growth: +113%
Return on Equity: 191%
Triple momentum: no
The stock was a market leader in 2022 as marine shipping companies have been able to charge insane rates due to slowdowns in the supply chain.
Earnings surged roughly 10-fold after the pandemic and the stock has done the same.
But President Biden basically declared war on ZIM and the other handful of companies that control the bulk of cargo shipments from overseas thanks to what the White House believes is “price gouging.”
After an 803% move higher in 2021 and early 2022, ZIM has finally started rolling over.
Shares have seen heavy selling volume over the last few weeks, and the stock is now resting on its 200-day moving average for the first time ever.
I would consider selling ZIM short with a buy stop at $52 for protection.
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Last week, I shared why I was bearish on the market and expected stocks to continue lower.
Unsurprisingly, that is exactly what happened.
The Nasdaq and S&P 500 each fell roughly 6%. And BTC dropped another 22% this week!
If you’re new to trading and haven’t experienced one yet, this is what happens in a bear market. It can get ugly in a hurry.
That’s why I’ve been pounding the table since last year telling folks not to get aggressive and remain mostly in cash.
I held a webinar on Tuesday where I talked about a few under-the-surface breadth indicators I am watching to signal when the market has bottomed.
Here is a quick update on the technical picture…
Digging In
The Nasdaq is currently giving oversold readings, which under normal circumstances can lead to a short-term bounce.
But in severe bear markets like this one, stocks will often remain oversold for longer than usual.
Daily Chart of Nasdaq Composite with Breadth Indicators – Source: TradingView
Less than 15% of stocks are above their 200-day moving average, and even the strongest groups like chemicals, shipping and energy have broken down and sold off.
The only surprising thing to me is the put/call ratio. Markets tend to bottom at the point of maximum pain.
When the last bull finally capitulates and sells… When the diamond-handed, “hold on for dear life” boys finally throw in the towel… And the financial news is screaming recession, that is usually the bottom.
Traditionally, we see the put/call ratio spike to 1.40 or higher as investors pile into call options to protect what they have left or bet on lower prices.
But this week, it pulled back below 1.00. That’s a signal that investors may not yet have hit their “cry uncle” point.
We also saw another 90% down-volume day on Thursday, making this the seventh one since April.
Daily Chart of S&P 500 with Volume Indicators – Source: TradingView
To put that in perspective, there were only six during the 2020 pandemic selloff.
No Crystal Ball
I don’t pretend to know how low the market will go or where the bottom will be.
In fact, you should be skeptical of anyone who claims they do.
All we can do is listen to the market and trade with the prevailing trend.
One day that trend will be up. But right now, it is unquestionably down.
And for those of you tempted to buy here because stocks look “cheap,” remember that they can always get cheaper.
Selloffs and meltdowns don’t happen from the top. They come at the end of a steady decline.
Want proof? Here’s a comparison of the S&P 500 in 2008 versus today…
I’m not saying this is what will happen… But you can see how the decline accelerated into the later stages of the 2008 bear market.
Okay… If I haven’t bored you yet, here is my Watchlist for this week. It shouldn’t be surprising that they are all short trades…
The Boeing Company (Short Idea)
The Boeing Company (BA) has been trending lower since last March – 10 months before the bear market even started.
Here’s how the chart is setting up…
Daily Chart of The Boeing Company (BA) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 24/100
% Above 52-wk low: 18%
Sales growth: -8%
Return on Equity: N/A
Triple momentum: yes (short)
Sales are declining, and the company is losing money hand-over-fist. Institutions have also been exiting the stock for the last four quarters.
If you’ve attended the last few live Monday sessions, you know I prefer to short weak stocks when they bounce up into resistance – preferably a downtrend line or major moving average.
BA is roughly 7% below its 50-day moving average, which will likely serve as resistance for the stock.
Traders may consider selling BA short in the $135-$145 range using a 10% stop for protection.
We’re going to have plenty to talk about next week!
JD.com, Inc. (Short Idea)
JD.com, Inc. (JD) is a Chinese retailer offering a wide variety of products via their website and mobile app.
Basically, it is China’s version of Amazon… only not nearly as good.
Here’s how the chart is setting up…
Daily Chart of JD.com, Inc. (JD) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 70/100
% Above 52-wk low: 58%
Sales growth: +22%
Return on Equity: 9%
Triple momentum: no
I’ll admit to being a bit biased on this one because I strongly dislike Chinese stocks.
I have seen too many rug-pulls, ghost companies and too much outright fraud from Chinese companies to have any real faith in their stocks that trade on our exchanges…
Not to mention the government’s history of nationalizing private industries and just generally hating US investors.
That being said, the stock is a textbook short setup…
After a severe decline, JD bounced into its 200-day moving average, which will likely act as resistance.
Consider selling JD short here with a buy stop near $69.
ZIM Integrated Shipping Services Ltd. (ZIM) is a stronger stock than I typically look to short, but I believe this is the beginning of the end for ZIM.
And here’s how the stock is setting up with my Stealth System…
Surge score: 93/100
% Above 52-wk low: 106%
Sales growth: +113%
Return on Equity: 191%
Triple momentum: no
The stock has been a market leader in 2022 as marine shipping companies have been able to charge insane rates due to slowdowns in the supply chain.
Earnings surged roughly 10-fold after the pandemic, and the stock has done the same.
But President Biden basically declared war on ZIM and the other handful of companies that control the bulk of cargo shipments from overseas thanks to what the White House believes is “price gouging.”
After an 803% move higher in 2021 and early 2022, ZIM has finally started rolling over.
Shares have seen heavy selling volume over the last few weeks, and the stock is now resting on its 200-day moving average for the first time ever.
If ZIM breaks below $47, I would consider selling it short with a buy stop at $52.
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The market fell apart this week, with the Nasdaq 100 and S&P 500 each tumbling roughly 5%.
This was the worst week for stocks since January.
The catalyst? Inflation.
Consumer Price Index (CPI) numbers showed another record level for inflation on Friday.
The hope was that inflation had peaked and the May numbers would show signs of improvement. But the opposite happened…
The CPI rose 8.6% in May, which was a new 40-year high. Stocks responded in kind by selling off hard.
Engineering a Recession
Investors know the Fed has no choice but to aggressively raise rates and engineer a recession in order to fight this trend.
That could mean rate hikes of as much as 0.75% or 1% at the next meeting.
For me, that means it is highly likely the market will undercut the May 20 low and send the bear market on another leg down.
As we’ve discussed, the primary areas of strength in the market over the last six months have been energy, chemical and shipping stocks.
These sectors have made up the majority of our trade ideas and the biggest winners in my Alpha Stocks service.
But even these pockets of strength fell apart last week…
Eagle Bulk Shipping Inc. (EGLE) fell 15.7% on the week, while ZIM Integrated Shipping Services Ltd. (ZIM), another leader throughout the year, dropped 22.3%.
CF Industries Holdings, Inc. (CF), Genco Shipping & Trading Limited (GNK), Dow Inc. (DOW) and dozens of other top-performers all broke down below their pivot levels and undercut their 50-day moving averages.
For the time being, there seems to be nowhere to hide in this bloodbath.
Join Me on Monday
Bonds are down. Stocks are down. Digital currencies are down. Even gold, which typically rises during times of crisis, cannot seem to mount a rally.
I have been trading for over 15 years, and this is probably the most difficult environment I have ever seen.
Many traders I talk to are choosing to go to cash and sit out until things calm down.
But I am expecting lower prices and more downside in the markets.
With that in mind, I hope you’ll join me on Monday afternoon for our live Stealth Trades session at 3:00 p.m. ET…
I’m going to be outlining our plan for dealing with a market environment like this.
We’ll talk about inflation and how it is impacting the markets we track, and we’ll take a look at our Watchlist stocks and other potential ideas in more detail.
Now, here are the three new short ideas I’m watching this week…
Grayscale Bitcoin Trust (Short Idea)
The Grayscale Bitcoin Trust (GBTC) is an exchange-traded fund that gives investors access to Bitcoin in the form of a security.
It trades like a stock and can be bought in any traditional brokerage account, so you don’t have to go through a digital currency exchange to trade it.
Here’s how the chart is setting up…
Daily Chart of Grayscale Bitcoin Trust (GBTC) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 16/100
% Above 52-wk low: 9%
Sales growth: N/A
Return on Equity: N/A
Triple momentum: yes (short)
There was long-term support near the $24 area, which broke in early May.
Since breaching this level, GBTC cannot seem to rally and has formed a shelf over the last several weeks.
Traders may consider selling short here or once GBTC breaks below the $18.80 level. I would place a buy stop at $21.00 for protection.
Green Brick Partners, Inc. (Short Idea)
Green Brick Partners, Inc. (GRBK) is a residential homebuilder, and the stock looks ripe for another move lower.
Homebuilders saw huge profits in 2020 and 2021 thanks to a construction boom and rapidly rising home prices. But the party is coming to an end.
Interest rates have more than doubled over the last six months, and the country is on the verge of recession.
With rates expected to rise even further, it is hard to imagine this not ending in collapsing home prices and a serious slowdown in construction.
Here’s how the chart is setting up…
Daily Chart of Green Brick Partners, Inc. (GRBK) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 75/100
% Above 52-wk low: 22%
Sales growth: +68%
Return on Equity: 25%
Triple momentum: no
GRBK has traded below its 200-day moving average (white line) since January.
Shares rallied back in the second quarter but are now failing and rolling over.
Traders could take a short position in the stock here with a buy stop above the swing high at $25.05 to risk 9% on the trade.
Skechers U.S.A., Inc. (Short Idea)
Since going public in 1999, Skechers U.S.A., Inc. (SKX) stock has regularly seen huge swings in both directions.
It mounts powerful rallies and suffers crippling falls. But if you can catch it at a turning point, the profits can be large.
Here’s how the chart is setting up…
Daily Chart of Skechers U.S.A., Inc. (SKX) – Source: TradingView
And here’s how the stock is setting up with my Stealth System…
Surge score: 71/100
% Above 52-wk low: 17%
Sales growth: +27%
Return on Equity: 14%
Triple momentum: yes (short)
SKX has been trending lower for almost a year with a series of lower lows and lower highs.
The stock rallied 25% off the May lows right into the dotted downtrend line and its 200-day moving average.
This is a low-risk area to try a short trade. Traders can place a buy stop on the other side of the 200-day line at $43.00 for protection. The risk is just under 7%.
Finding Real Alpha
With the major indexes down double-digits and many of last year’s leading stocks down over 50%, consider checking out my Alpha Stocks trading service.
We just scored a serious gain in Permian Basin Royalty Trust (PBT) in a little over two weeks.
We also recently recorded a huge winning trade on the downside in only eight days as Pegasystems Inc. (PEGA) stock plunged last month…
Alpha Stocks also provides option alternatives if that’s more of your style.
And we get together every Monday for an hour-long live session so that subscribers can ask questions and get guidance about our trades.
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