Dave Landry's Trading Simplified

The Rally Could Continue, But I Wouldn't Bet My House on It


Editor's Note: This article was originally published on Tuesday, April 28th at DaveLandry.com.

In my 04/20/20 Bear Market Update, I wrote about the man on the street as a microcosm. In that article, I mentioned that one of the contractors for my house (the "wood guy") expressed an interest in trading after seeing some of his friends' initial success. I told him not to get caught up in the excitement but, rather, to be prudent and learn properly. I set him up with a course so that he can learn to trade in a conceptually correct manner. Yesterday, I spoke with him about acquiring some lumber for a "honey do." After business was done, we began talking about trading. So far, he's just begun to scratch the surface and fortunately, so far, he hasn't put any hard-earned cash on the line. He did mention that one of his friends recently mortgaged his house to begin trading. I explained that, in spite of his friend's initial success, "that'll work until it don't."

"Retail Mania"

I try not to confuse the issue with facts, but, every now and then, some news "creeps in." Recently, I shorted GSX (actually bought puts) based on a Bowtie sell signal. Afterwards, by accident, I discovered that Citron Research had just published a report not about how that company is a fraud, but how big of a fraud this company is. It reminds me of many years ago when Marcy (my bride), who was frustrated with someone (and never has anything bad to say about anyone) said, "I'll bet you a million dollars that she doesn't know she's stupid." Anyway, long story endless, I noticed in one of their tweets they used the phrase "retail mania" (buying by small traders vs. institutions) to describe one of their stocks that was defying gravity (vs. imploding based on their research).

Dave, do you have a point? Yeah, and it's that I've been seeing a lot of "retail mania" from the bored-from-being-quarantined-turned-traders. As mentioned, long lost friends, extended family and neighbors have been coming out of the woodwork (including, ironically, a guy who does woodwork!) expressing an interest in trading. I think mortgaging your house to start trading is the icing on the cake here. I think it's safe to say that these newly minted traders don't have a money management plan in place. In fact, I'll go out on a limb to say that I'd bet you a million dollars that they wouldn't know money management if it hit them in the ass! My point is, when (not if) the SHTF for these guys, will they all be forced to run for the door at the same time?

I'm no economist. And I'm not really a fan of the way they often tell you tomorrow why what they predicted yesterday did not come true today. I guess I'm wrong enough, so some could say that about me. ANYWAY, I recently read where an economist said that longer-term, markets don't go up on artificial stimulus. It (eventually) takes money from real growth to support a market. However, what is, is. Channeling Keynes: "Markets can stay irrational a lot longer than you can stay solvent." I find it hard to believe that free money and retail mania can support this market for much longer. I suppose to "stay solvent," I'm going to have to honor my stops and be willing to "throw some maidens into the volcano." Said alternatively, I'm going to have to lighten up on shorts as they take out my stops, even though they will promptly reverse - as I write this, UBER is "exhibit A," and yes, I dropped an F-bomb when it turned right back down.

Believe In What You See, Not in What You Believe

I believe this market is in "sheep dip." I also believe that a confirmation bias is a dangerous thing. We tend to look for evidence that supports our beliefs and toss out anything contradictory. As someone who scored very low in agreeableness (and in some sub-categories, no score at all), I'm guilty as charged! How long can free money and retail mania support this market? Well, long enough to cause the most amount of pain to the most amount of people. Long enough to punish the shorts until the last one is squeezed out - I'm beginning to feel lonely. Then, the market will then begin causing pain to the buy and hope, new traders in quarantine - especially that poor bastard that just mortgaged his house to fund his trading account. I'm not being schadenfreude. Like that annoying Farmer's Insurance dude, "I just know a thing or two because I've seen a thing or two."

Just The Chart, Ma'am

As I compose this prose, I suppose that I need to stop confusing the issue with facts and look at the charts. The problem is that the charts are a bit conflicted. Longer-term, it looks pretty ugly (how's that for an oxymoron from a Trend Following Moron?). Shorter-term, things have obviously improved.

Looking to the daily chart, notice that the Bowtie Moving averages have come together and will likely turn from downtrend proper order (10SMA<20EMA<30EMA) to uptrend proper order (10SMA>20EMA>30EMA) soon - provided of course, that the S&P stays above the MAs. The crossing is "sloppy" and not an ideal "tight" crossing like the recent sell signal. Also, we're coming off of 2-year lows, which is significant, but not nearly as significant at all-time highs like the last sell signal.

Now, let's take a look at the daily "Landry Light" vis a vis the well-watched 50-day simple moving average (da fidy). Due to whipsaw, I'd never follow something like this strictly mechanically. It can be useful, though; if you stay mostly long when it's green (lows > da fidy) and out or short when it's red (highs < da fidy), you would generally stay on the right side of the market. If you squint your eyes, you'll see that it has turned from red to green. Let's not start kissing each other just yet, but, admittedly, the market is improving. BTW, speaking of "kissing," sometimes the market will rally to "kiss the MA goodbye" before turning back down. FWIW, I actually have a setup based on Landry Light using the 20-day ema "kisses."

The longer-term weekly chart paints a different picture. Notice MAs have flipped from uptrend proper order to downtrend proper order, followed by a pullback. This signals a major sell around 2550 (a) with a more aggressive pullback-type entry of around 2700 (b). Every bear market in history has started with one of these. However, for the hopeful bulls, not every one turns into a bear market. This reminds me of a saying from my buddy Greg Morris: "We treat all signals as if they will become the big one" (Elizabeth implied).

The weekly "Landry Light" also paints a different picture. Notice below that it remains red for now. Also, notice that, as a general rule, you want to be mostly long when the indicator is green and out or short the market when it is red.

So, What Do We Do?

The market remains overbought on both a short-term and longer-term basis. This doesn't mean that it can't continue higher, but, at some point, it's going to need a breather - it's hard to run a race right after you ran a race. So, it's dangerous to blindly buy at this juncture. For the aggressive, opening gaps at overbought (like today-04/28/20-could provide intraday shorts in the indices). For the bears, you can't confuse the issue with facts. On any sustained rallies, you're going to have to "buy (in) down to the sleeping level." The other thing in the back of my head is this pesky virus thing, especially since I'm waiting on the results from my antibodies test (I had a strange lingering cold after recent international travel). The doctor told me that "If it's positive, then I had it. If it's negative, then it doesn't mean that I didn't have it. If it's positive, then I may or may not mean that I can't catch it again. And, they may or may not want my plasma because antibodies may or may not help you." I replied, "So basically, what you're trying to tell me is y'all have no idea." I'm guessing the doctor was smiling under her mask when she paused for a second, breathed sigh of relief, and said, "Okay, so, you get it." This reaffirms that they have no f'n idea about this thing. God bless them for trying though! And, God bless the healthcare workers! My point is that there is event risk in this environment. I think that, with the market being so overbought, we could be priced for perfection. If you're long, have a money management plan in place, especially if your house is on the line.

Stay Safe and Sane!

May the trend be with you!

Dave Landry

Dave Landry
About the author: has been actively trading the markets since the early 90s. In 1995, he founded Sentive Trading, LLC - a trading and consulting firm. He is the author of "Dave Landry on Swing Trading" (2000), "Dave Landry’s 10 Best Swing Trading Patterns & Strategies" (2003), and "The Layman’s Guide to Trading Stocks" (2010). In addition to his weekly show on StockCharts TV, Dave has made several television appearances, written articles for numerous financial magazines and journals, and has spoken at trading conferences both nationally and internationally. Learn More
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