Okay, first let me preface this article with the notion that I don't short a bull market. I really try to trade with the trend. Going against the primary trend is similar to swimming against the current - it's not easy to make any head way. During a bull market, most stocks move higher. Therefore, shorting will require precision and lots of discipline, especially when it comes to setting stops. There are a few areas I'd consider shorting if that's the side of the trade I want to be on.
First, let's start with gold ($GOLD). This commodity was a relative outperformer vs. the S&P 500 for more than a decade but that run ended a few years ago and it has since been a consistent underperformer on both an absolute and relative basis. Check out this chart:
On this long-term chart, you can see that the trend obviously changed back in late 2011 and gold fell below its 50 month SMA in early 2013. Over the past 2 1/2 years, every attempt to clear the falling 20 month EMA (red arrows) has failed. Personally, I wouldn't consider gold on the long side until the dollar shows signs of weakening and a push back through this declining 20 month EMA can be sustained. Even then, I'd likely keep a very tight stop just below this moving average. One slip up and I'd be back on the sidelines. Based on this chart, if I had to trade gold, it would be on the short side until technical conditions change. Gold outperformed the S&P 500 throughout the first decade (and slightly longer) of this century, but it's literally been all downhill since.
The Dow Jones U.S. Mining Index ($DJUSMG) broke to a fresh weekly close last week after recent consolidation enabled the weekly MACD to move back close to centerline resistance. It now appears the downtrend is resuming. Take a look:
I generally assume that uptrending areas of the stock market will resume their primary trend after a period of selling to test price, trendline or moving average support. That is not the case with areas of the market where we've seen distribution for a period of years. In these cases, we really need to see the technical repair take place before committing to the groups. I would continue to stick with what's working, which is being on the short side. On the mining chart, the best reward to risk short entry has occurred either when weekly RSI has hit or approached 60 OR when its weekly MACD has reset at the centerline. In each of the previous "resets" - in 2012 and 2014 - the downtrend resumed in a rather harsh way. Given last week's breakdown in price, mining could be on its way to further losses before the technical picture improves.
In addition, June and July have typically been rough months for the miners over the past 20 years with both months averaging 2-3% losses. Therefore, miners are looking not only at an abysmal chart technically, but also face historical headwinds to boot.
Outside of materials, I recently wrote an article about the probability of healthcare stocks lagging during the summer months. You can read this article HERE. I won't spend a lot of time rehashing that article, but healthcare stocks do also tend to struggle historically during the summer months and there are negative divergences galore on ALL of the weekly charts of every industry group within healthcare. Personally, I still wouldn't short the group as I prefer to trade on the long side during an extended bull market. But for the fun of it, here's an individual healthcare stock that looks ripe for some selling ahead:
The longer-term chart obviously took a huge technical blow on the high volume selloff in April and that now-declining 20 week EMA looms large on any future strength. On the daily chart, gap and price resistance are being challenged currently. If I was shorting, I'd consider short entry at the current price based on the daily chart and perhaps a second short entry if the falling 20 week EMA were tested. I'd keep a fairly tight stop above that 20 week EMA, however, in the event the six year bull market carries SPNC along for the ride. Here's the daily look:
Let me emphasize one more time. I don't short bull markets so I won't take this position or any short position for that matter. I will short if the overall market dictates that, but currently I'll stick with long positions. The SPNC set up, however, is appealing to me. If we were downtrending in a bear market, the high volume breakdown and recovery to price and moving average resistance as the MACD nears centerline resistance is the type of trade I like.
Happy trading!
Tom
