Free Trend Following Trade Ideas For October 2018 (Part 5):
Well, that went from bad to worse! And it sure looks like October is shaping up to be a very volatile month in the stock market. So let’s take a look at the price action these past few days and prepare for the trading week ahead.
Because it’s fast-moving markets like these that will really test your discipline. But if you do survive the turbulence, conditions like these can also present an opportunity in the form of new uptrends.
So before getting into specific stock charts, let’s take a look at the stock market indexes and discuss the implications of the fast-changing price trends. Because, while we’ve been riding a bullish uptrend for quite some time now, things could be starting to change.
Be Aware of Changing Market Conditions:
The volatility this past week (and indeed, this month overall) have really picked up from what we saw in the summer. And in my experience, it pays to pay attention to changing market environments.
While it’s relatively easy to ride trends in slow-moving bull markets, it’s another story entirely when index prices are gyrating wildly higher and lower every other day.
So in addition to protecting your trading capital, being aware of shifting market regimes can also help you keep your emotional capital intact. After all, you’re much more likely to make a critical trading mistake if you’re feeling unhinged or out of sorts.
So first things first, try and be aware of how you’re feeling and consider dialling down your exposure if you find yourself unable to focus on anything but the latest stock quote. That kind of stress is more likely to cause you to over-trade and make an unforced error. And yeah…
I know this might all sound a little bit silly. But managing your mental state is another big part of trading success. And it’s often hardest at turning points like we’re seeing now, when the strategies that have been working start to get challenged.
Let me show you what I mean…
Weekly Market Review – Have Stocks Topped Out Globally?
If you’ve been reading these weekly updates regularly, you know I’ve been getting more and more cautious as stops were hit, and cash was raised. But this neutral stance has become a little more bearish due to the developments in the last few trading days.
And front and centre for me is the long-term weekly chart of the All-Country World Index, which is a good proxy for global stock markets. But as you can see below, this is looking more and more concerning…
As a proponent of stage analysis and long-term technical trend following, I’m pretty concerned with the way this chart is looking. Because after a year of sideways action, it looks like ACWI has now rolled over and may be closer to the top than the bottom.
I don’t mean to come across as an alarmist, but I’m calling it how I see it. And if you dig in under the surface, emerging market and European indexes which contribute to ACWI are mired in serious downtrends that will at least take some time to recover from.
So considering this backdrop, it looks like US stocks are finally going to be dragged down by the rest-of-world weakness that’s been plaguing overseas markets all year.
Here’s the weekly chart view of $SPX so you can see what I mean:
At best, maybe the S&P-500 flops around in a sideways trading range the next couple quarters? But a retest of the annual lows doesn’t look impossible either. And if we don’t see a bounce there, who knows where we might end up.
On the other hand…
One potential source or stability I have my eye on is small caps, which have led us lower over the last few weeks. So I’m curious if the IWM weekly chart will be able to find support. It looks like this might be starting to happen…
This could be a level to watch in the week ahead to see if we start to see an end to this selling. But for now, I’m personally not trying to catch any falling knives by stepping in to buy the dip. I prefer to wait and see for a bit more support from other buyers before putting cash at risk.
And the biggest reason for my deference here is just because of the severe technical damage that’s starting to add up on stock chart around the world. Because in addition to heavy-looking indexes, some of the individual sectors are acting even worse.
Consider, financial stocks appear to have put in a top, as shown by the XLF ETF:
And at the same time, materials are continuing to dive lower, as you can see via XLB:
Finally, some of the growth industries like semiconductors, also look like they might be in for more downside:
So all this to say, it looks like the technical damage is adding up. And given the extent of the pullback in these sectors, I think it’s reasonable to expect lower lows and lower highs from here, at least for a little while longer. As a trend follower, I don’t expect these declines to reverse on a dime.
With that context in mind, you might start to see why I’m leaning a little more bearish for the first time in a couple years. Now there are pockets of strength – which I’ll focus on below – but I think it’s important to understand the top-down implications of the current price action. Meaning…
Because most stocks move in a convoy (especially during volatile corrections), any follow-through on individual names may be hard-fought with breakouts more likely to fail. Understanding this context can help adjust expectations and trading plans.
All that said, if we do see a big upside bounce this week, here are some prospective stock ideas to keep on your watch list…
Free Trend Following Trade Ideas For October 2018 (Part 5):
One of the areas of the market that’s been acting strong lately has been Brazil. While most stocks have been putting in news lows, a lot of these country’s stocks have been holding up well.
For example, Banco Bradesco (BBD), has been charging towards 52-week highs while most stocks were slumping:
To be fair, this isn’t quite the trend-following setup I love to see but the relative strength is impressive and another leg higher seems likely if momentum comes back into the market.
Now the other setups I’m finding in the market are turnarounds, and potential bottoms.
So take a look at the chart of World Fuel Services Corp International (INT), which has finally put in a higher weekly closing high:
And given the breadth of the selling lately, I think this kind of relative strength is worth paying attention to. With a stop below recent lows, I like this set-up for a potential breakout.
Another area of the market that’s acting well are the shippers. Companies like Frontline (FRO) are managing to start turning higher, just as the market overall is slumping. Take a look:
And it’s not just FRO. The rest of this group has been starting to trend higher too. So I’m hoping some industry momentum could continue to push this up.
Lastly, the other pockets of strength in this market are likely to be coming from earnings season. While most reactions have been getting faded, there are some standouts like E-Health (EHTH)
I like how this one is in an uptrend near all-time highs, and is still holding up in a weak tape after beating earnings on both the top and bottom line. With any luck this one can keep coasting higher, especially if the broad market agrees.
Now before we finish…
I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.
They might be of interest because everything is laid out in charts so you can easily see what’s what.
Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.
I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.
While I’ve obviously shown you some of my favourite picks for the week ahead, I can also help teach you how to fish for your own trading ideas!
Just keep reading.
Learn How to Scan For Breakout Stock Picks:
If you want to learn more about how I find these kind of stock picks, I encourage you to check out my Breakout Stock Blueprint. What’s that, you ask?
Well… it’s a +90-page PDF… packed with everything I know about finding, buying and trading breakout stock picks.
This Blueprint shares the EXACT step-by-step process I use to find and trade stock picks each week (just like the ones above). So…
If you want to see how to find high-potential-momentum stock picks, learn how to let your winners run and be confident about locking in profits, then this Blueprint is for you.
Can This Blueprint Improve Your Trading?
Learn how I find and trade breakout stock picks… in under an hour each day!