Markets closed down on another day of slow selling as both the large-caps and indexes grinded lower, down -2.75% on the Nasdaq this week so far. The high percentage downward movement during the low-volume holiday week is a bit surprising (see TSLA, AAPL), though it could be chalked up to tax-loss sales, so maybe we see a reprieve and bounce next week. Alternatively, it could be a sign of things to come when volume returns.

Either way, the Nasdaq is sitting at year-to-date lows, and though the S&P-500 is in better shape, neither are in position to initiate trades. In fact, they are in relatively precarious positions where they could sell off for another leg down or bounce and set up for a trend change. As I mentioned on Sunday, it’s best to sit out and wait for higher-probability trading days. That strategy has been great for mental capital this week. I like to watch the cold-deck get dealt from the sidelines.

That being said, there are no new setups in tonight’s letter, so it’s a short one. I will do a full review of the best setups to watch in Monday night’s issue. For now, tune in for a lesson on trading with the trend as well as updates on the market indexes. Let’s get into it!

Index Update

As a post-trade analysis exercise, I created a year-to-date Nasdaq chart which shows only the candles that are above the rising 21-day exponential moving average. This is the moving average of which I track the cycle as a market trend proxy in conjunction with the 50 and 200-day MAs.

Take a look below. How would trading only during those periods (long) have affected your returns? Conversely, how would shorting only during the opposite periods have affected your returns? These are the sorts of questions you should be asking as you review your 2022 trades.

Taken in context with the 50-day moving average, there are even less periods where the market was conducive to trading long as determined by price trading above both the 21EMA and rising 50MA:

Using the longer-term proxy of the 200-day moving average, the whole chart goes dark since 1/4:

All three moving averages must be taken into account when determining the context of the overall trend. These charts show why the market environment has been very difficult to trade long positions. The long-term trend has been down for the whole year, and the medium (50) and short (21) term trends often concurred. No matter your time frame, always be aware of the trend. For my style, it pays to be trading with the trend on your side, and this is a major lesson that I will be taking into 2023.

This should provide color around why I meticulously track the market trend indicators.

Currently, all of my market trend indicators are red as we closed Day 9 below the 21EMA with net highs/lows down for 17 days straight. This signals strong caution on long positions.

The Nasdaq put in a very weak bounce attempt last week and is now sliding down to year-to-date lows. The 50-day moving average is starting to curl down which will leave this index below all key moving averages, declining in order. Not a great sign for the bulls, but let’s see what the new year brings when volume comes back in.

The S&P-500 is in better shape than the Nasdaq as it has quite a bit of room to go before year-to-date lows, but it’s below all key moving averages as well. The low-volume move downward could be a harbinger of what will happen when volume comes back in, or it could just be end of year tax selling. Either way, watch for this index to regain the shorter-term moving averages on it’s way back up to the 200-day MA.

Stock Updates

No updates tonight.

Best Setups

There are no new setups tonight as it’s best to remain in cash until the market conditions improve. It’s very unlikely that anything will change for the next few days during this low-volume holiday week, so tune in on Monday night for new setups to watch.

That’s all for tonight!

See you back here on Monday night, as the market is closed Monday for New Years, for an update on our stocks.

Cheers,

Dan Dormody

The Next Market Leaders

The Next Market Leaders - 12/28