My Charting was correct. You need to take charting seriously

I have learned that self congratulations doesn’t go over well, so let me apologize to those who feel it is unsportsmanlike. I do have a reason other than vainglory, and that is – the charts work!

Yes, my gut said that the sharp sell off we had at the beginning of the month went too far, so maybe I had confirmation bias. That did give me some trepidation two weeks ago that the going against the big guys who were calling for deeper selling felt fraught at the time. However, I let the charts do the talking. Let me take a moment to explain why I feel charts are so important. Charting is the first thing that elevates someone who wants to graduate from being a casual trader to someone a bit more serious, in my opinion. Charting gives you a basis to make sense of where demand might be for a stock price wise. The difference between losses and gains in trading is understanding price. To riff off of Oscar Wilde, in stocks “if you don’t understand the price of everything your value might turn to nothing”…

Quite simply charts are a psychograph of investor sentiment, showing where traders will come in and create demand for a stock, and where they will add to supply. Knowing simple formations on a chart will give you a roadmap on how to trade. On the other hand, many of you feel that this is voodoo and nonsense, that may be so. While I don’t agree, especially looking at long-term charts that map out established directions, you need to understand that everybody is now a closet chartist. Let’s just agree that it’s the tail wagging the dog. Still wouldn’t you want to see what anyone who’s anyone is looking at?

Also in this case, my opinion was the minority report. People who make gazzilions opining on the charts were calling for a big spill in stocks. In fact they still are calling for a 20% drop, so that’s a further 10%-20% from here. That’s on the S&P 500. I have been focusing on the Nasdaq 100 the last few weeks since the big-cap tech names are moving the market. Names like Apple (AAPL) and Microsoft (MSFT) have fallen significantly. It’s those names and others in this cohort less trafficked like Adobe (ADBE) and (CRM) that I felt have found a level of support and that’s underpinning all tech stocks. At least that’s my thesis. Still, the Nasdaq 100 and the S&P 500 look and act very similarly. By using the charts as I saw them I stood my ground and acted accordingly and bought this dip.

This does not mean we are going straight up from here no way

In defense of the big boys on TV, perhaps their thesis is that we are going to sell off several weeks from now. That’s very possible, in fact, almost everyone is counting on the doomsday scenario. I’m referencing politics, something I do my best to ignore in these pages. My reasoning is that rarely do politics weigh on stocks day to day. The exception is something that introduces extreme uncertainty, like who is president, or whether the US will pay its bills, that has happened when both parties refuse to sign off on the budget. Back to the presidential election, since I’m as old as dirt. I remember that with Bush vs. Gore the market plummeted when it was an open question who will be POTUS. I suspect that market participants anticipate Nov. 3, and sell off the market. The big question is, why has the market soared as high as it has at this point? We all know that the most contentious election in decades is happening right before our eyes. The market doesn’t seem to care. Remember the prime directive, always try to be contrarian. Often the accepted wisdom does not bear out in the stock market. What am I saying is, I have come to believe that the market doesn’t care who is president. I believe that the market has discounted the risk, that Biden will win (meaning it doesn’t care). I believe that the market is counting on the Senate staying GOP, and that Mitch McConnell will stay in charge of the Senate. He will fight a rear guard action to protect the economy (or at least stocks), meaning that Bernie and AOC will be sorely disappointed. Of course, it doesn’t matter what I think the aggregate will of the market is “thinking,” but it’s a thesis to explain the elevated prices that stocks are going for is necessary. So let me try another tack.

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This time it IS different

Let me start with the warning that anytime you hear someone say this about stocks go get a five-pound bag of salt to season what’s about to be served. That said, this is the first time in modern history that so much liquidity is being dumped into the financial system and also that our elected officials pushed fiscal stimulus spending into the trillions. The market may very rationally say “who cares who’s gonna be president, cash for everyone, yippee!” Savings have gone through the roof, and inflation is virtually extinct, so why not bid up growth stocks?

Something really good is coming out of money being pumped into the economy

Check out this very positive and interesting article from the Wall Street Journal

I quote: “Applications for the employer identification numbers that entrepreneurs need to start a business have passed 3.2 million so far this year, compared with 2.7 million at the same point in 2019, according to the U.S. Census Bureau.” Moreover according to the article the number of businesses started that intend to be hiring others also is soaring. This speaks very well for an economic recovery, and also perhaps gives us another reason to be optimistic. The truth is, the equivalent of a forest fire has raged through our economic ecosystem. That means a lot of brush has been cleared out for the next generation. I’m not trying to make lemonade, this was a catastrophe, however, we may well see generational high growth numbers in 2021, as long as those idiots in DC get out the next fiscal bill. Now is not the time to play CPA and pull in the reins. We need to get over this last hump. Yes, the end of the pandemic is coming, and sooner than you think, at least in hospitalizations and death. So let’s look at the charts. I took the below two charts from my Sept. 13 piece. If you haven’t read it you might want to, and compare it to what I’m saying here. I haven’t done that because I don’t want to influence how I express myself here. I will read it after I send this in, so I can be mortified by inconsistencies. Still the charting below speaks for itself. The first chart is a simple six-month chart where I put in what I felt was strong support. I’m using the QQQ ETF, since that represents the Nasdaq 100 and is one of the most popular trading vehicles for big cap tech – see the line at 260, here.

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Here’s a quote that I pulled from the Sept. 13 piece

“This is where I think the Nasdaq 100 will likely find support, about less than 4% from where we are now. Now let me pull back and show where technicians are looking for the Nasdaq to fall, here.

I specifically pointed out that I was in the minority as per the popular financial programs and also what I was reading at the time. Chartists feel that all gains we’ve made from the March highs need to be given back. What I’m saying is, perhaps that does happen in a contested election or some other exogenous event, but I don’t see that happening now. In fact the charts tell me that we are rallying! See below. Once again the six-month but with recent trading activity, here.

Clearly the indexes held at the support line, and it held nearly to the penny at 260. It’s also making higher lows, which is starting to accelerate. Let’s look at a recent one month of the QQQ, here.

Here you see multiple tests of the bottom up at higher levels. I particularly like the “W” created in the last few days. I don’t think I need to draw if for you but Friday’s close broke the downtrend line. Can you see it? I want to start encouraging you to learn how to read charts. You also can see a reverse “head and shoulders” where the low point is the “head” put in on the 21st and the two higher “lows” on either side are the shoulders. Again, learn to pick out these formations, it will make you money.

Now some caveats

In any case, on the one hand I’m very happy that we broke the downtrend and on the other I’m concerned that market participants got ahead of themselves because there was chatter that there might be an agreement between the two parties on the next fiscal bill. Friday usually has the index selling off, in fact I was just hoping that even with a spike in the morning and early afternoon, I felt that closing flat would have been a win. I think a lot of the buying was in fact short covering out of fear that a deal will be announced. That’s not how it works, and I think we might sell off tomorrow.

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Producing Congressional bills is a drawn-out, highly-symbolic process

By now you have heard me reference the bill creation process as a “Kabuki” dance. The good news is Pelosi has signaled that the negotiations are back on. The bad news is she resubmitted the same $2 trillion plus bill that the GOP already rejected. They will reject it again, but this time they will raise the ante from their paltry budget that Pelosi called emaciated. They both need to look like they are pushing hard for their side. Both will make a huge show of rejections, then they will agree on something slightly below $2T. That way the GOP can claim that they aren’t subsidizing those kooky coastal states and their budgets and Pelosi can claim that $1.9T is 2 trillion and she delivered. Everyone wins except the next generation of taxpayers who will be paying this all off. That’s another discussion, and we should all pray that Powell is successful in reanimating inflation. In any case, if you hear both sides complaining about the offers but Trump doesn’t call Pelosi “crazy Nancy” and the Dems stop calling Trump or McConnell names, we could see a fiscal bill in the next few weeks.

That’s why I’m going out on a limb to say we are not heading into a crash

Yes, if there’s a dispute over the election results and it drags on for more than 10 days, then yes, the market may well drop 20% from here. I expect that will not happen. I expect that the GOP will look to kick it to the Supreme Court ASAP. The precedence is that the Supremes will favor the incumbent, and we have a massive rally. That said, I think you should all begin to build cash above the usual 25% in your trading account, in fact you should trade with 60% and keep 40% at the side, if we do have that massive sell off you should buy with both hands. Buy the tech stocks and favor the most blue chip names, or buy the QQQ. Let me end by putting a finer point of cash generation. I’m not saying you need to sell down 40% tomorrow. In fact I still think there’s room to ride this uptrend. At some point perhaps the end of this week or beginning of next,start reducing risk slowly, so that by the second week of October you are well on your way to a nice slug of cash. Be cool, my brothers and sisters of trading…

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.