Thursday's gap-down open sent the indexes plumbing various lows seen in 2021, with the S&P 500 Index undercutting its June 2021 low while the NASDAQ Composite undercut its March 2021 lows. The rally on Thursday continued into Friday and the indexes are now in a two-day rally off the Thursday lows. The news flow regarding the Ukraine Invasion remains extremely fluid, and creates a very slippery environment for traders. We continue to view this as a market for nimble, alert, and resourceful swing-trades on the long and short side, while intermediate trend-following investors are best advised to stay in cash, sit back, and enjoy this crazy market show.
The Market Direction Model (MDM) remains on a SELL signal.
Semiconductor short-sale targets that we first reported on in early June finally hit near-term lows on obvious cover signals when they undercut prior lows in their patterns and rallied. As discussed in Short-Selling with the O'Neil Disciples, Gil uses undercuts of prior lows in a pattern as downside price objectives and cover points. Like clockwork, these all signaled cover points on Thursday as they pulled U&Rs at prior January lows.
Chewy (CHWY) and Iridium Communications (IRDM) were reported on as short-sale entry targets at their 50-day moving averages two Fridays ago. Both stocks then came down with CHWY breaking the hardest before undercutting its January low, a clear cover point for short-sellers who had taken positions at the 50-day line two Fridays ago as we reported.
Palo Alto Networks (PANW), which we reported on as a short-sale entry along its 20-dema around 505 on Wednesday morning after it gapped up on earnings, reversed hard that day and closed at 477.61. That was a successful short-sale entry, but the next day cyber-security stocks of all stripes rallied hard on fears of Russian cyber-attacks, which sent PANW back up through its 20-dema. Alert short-sellers would likely have recognized the turn quickly enough to react and cover the position with at least some profit. Otherwise, the 20-dema served as a minimum covering guide on the ensuing news-driven rally.
Near-term the short side has played out, with textbook cover signals seen in all five of the stocks we have reported on as short-sale targets prior to this past week and a quick breakdown in PANW the day before the market turned. While we are skeptical that the market has put in a final low, especially given global tightening and Powell hawkish stance, we will now sit back and watch this rally closely as it could bring short-sale target stocks back into shortable resistance along moving averages or prior price levels. For now, unless one is seeking to swing-trade the market on a very short-term basis, or unless one wishes to market time using the Market Direction Model, cash remains king.