The big news?
Yesterday the Dow and the Nasdaq both closed at record highs, Gang. Not necessarily surprising for the Nasdaq, but the Dow has been one of the markets that’s been reluctant to join the flush of liquidity we’ve seen.
As the FOMC continues to expand their balance sheet, the markets continue to rally.
So I’ve received several questions like “Well, Ragh would you short this?”
Let’s dive into that…
STEP ONE: Would You Short This?
First off, I’ll certainly tell you, I’m going to be very steady about this. I’m not going to buy names up at the highs. I’m certainly not going to buy them at levels we’ve exhausted at before, either.
Now back to the main question — “Well, Ragh would you short this?”
I think that’s probably the wrong question here.
As of yesterday, we’re starting to see the first inkling that the Dow might actually have a little bit more bullish structure. This doesn’t mean I want to buy it… but more bullish structure would actually allow a fade or a short sell at these highs.
How could we look to find those opportunities?
STEP TWO: The Dow, The Transports, and Relative Outperformance
To start, we want to be more specific about what we would do with an index full of stocks. So we’d need to actually look at the stocks.
Fun Fact: This is more or less a futures first perspective on watchlist building. So feel free to use a similar approach when you’re looking for stocks to trade, Gang.
Since we’ve been focusing on the Dow and its new highs, it seems appropriate to stick with that narrative. So we’re going to look at the Dow, the transports, and relative outperformance. Then back to our main question at hand… “where to short?”
You could look at…
Boeing, but keep in mind, it’s a very headline driven stock right now. This can be tricky, not impossible, but be tactical about it if that’s something you’re interested in. Shorting Visa could also be promising. Same thing with McDonalds on rallies.
You could also take a look at pullback opportunities.
I sent an alert out to our Futures Members yesterday about this — I told them to look at pullback buys in the ITB as well as Home Depot. If you’d like to also get those alerts, for just $7 you can start a trial for our Futures Membership here.
But I’ll dive into this a little deeper, so you can understand more of the thought behind these picks.
STEP THREE: Who Isn’t Participating in All Time Highs
Remember, Home Depot is an important stock within not only the Dow but also the ITB ETF. This is a good indication that there are some pullback buys in markets that did not participate in these all time highs. However, my analysis is telling me that Home Depot, along with the ITB, might play some catch up to the upside.
That gives a pretty good indication that this could be a strong place to look for pullback buys.
If that happens, personally, I’d like that trade a lot, Gang.
Someone else who hasn’t participated in the all time highs?
The transports (IYT).
If you’ve followed me really ever, you know I’m a big fan of Dow Theory. Dow talked a lot about transports, and about the ability to understand what transports are telling us about the larger average. Notice… transports didn’t close near their high of 200.
In fact, transports exhausted.
Why this matters?
This is one of the things we’re looking at for transports to potentially give us some inkling into which names to play (and maybe a little bit of timing) on a move to the downside. In fact, since transports exhausted, there could be an opportunity to short around 200.
So the question becomes again… “who to short?”
Immediately, it comes to mind a position we’re already interested in within the Futures Room…