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From WW III To Bear Market Lead By RNG

03/20/20 12:49:27 PM
by Billy Williams

Is this the beginning of global meltdown? And, will RNG lead the way?

Security:   RNG
Position:   Sell

The Bears have waited for 11 years to take control of the market and have wasted no time erasing the Bull's advance of the last year. More, the Bears have set all kind of records with the price declining at the fastest rate in history. Adding to that, a pandemic, an oil war, and a Great Wall of Worry that traders are grappling with are all on the horizon. What is the impact, and can the market claw its way out of it?

First, the elephant in the room is a new virus that has been introduced to the world-wide populace and has caught everyone off guard. The Coronavirus originated in China and details were kept quiet until some brave Chinese citizen came forward to warn us at great personal cost. The government kept quiet about it for a variety of reasons but now the cat is out of the bag... which is good... but no one fully understands the scope and damage that awaits us.

That is a huge worry for people everywhere and is spilling over into the market.

Parallel to that story, China is invested in every country at every corner of the globe and the fallout will spill over everywhere. Countries, like the U.S., whose companies relocated manufacturing into China will face the challenge of how to get their goods out and into the rest of the world. No product, no revenue. Simple as that.

We are all literally married at the hip to China which is why it is critical to get this handled as fast as possible. However, with a pandemic in effect, a travel ban to that country (and others) make business-as-usual impossible.

Figure 1: The SPX topped in mid-February and fell hard over the 4 weeks.
Graphic provided by:
And even if the goods were flowing in as usual, authorities warn everyone to avoid crowds, stay home, and avoid interacting with anyone out of fear of infection. This is because it is reported that the virus can inhabit a host for long periods of times without the host being aware but still spreading the virus to others. Knowing this, it's bad news for retail stores, shops, movie theaters, restaurants, and more who rely on a steady flow of customers to thrive. Without this flow of customers, earnings will be massively impacted leaving a cloud over the horizon about the state of the economic future.

Adding to this, an oil dispute between Russia and Saudi Arabia has sparked with Saudi Arabia deciding to go forward with plans to increase production. This puts a massive strain on oil producers, like shale oil producers which are going to be heavily hit, since the price oil is low, supply rising, and demand at record lows. These 3 factors add to the ever-growing cloud on future prospects for the oil market and are the key reasons that oil prices cratered 30% overnight recently.

With all of this and more in mind, price and volume reveal that big institutions are re-calibrating their portfolios to account for these fundamental changes. No doubt, hoping to minimize risk through diversification by moving the chess pieces around to gain a strategic advantage in the seismic shifts taking place.

As a trader, it is your job to take these changes into account and customize a strategy to take advantage of them.

That said, you are in a different market now.

Depending on your experience, the last real Bear market experienced was in 2008 and this may be new territory for you. If not, you need to think hard about your next trade and how to apply the changing landscape to your daily trading.

We are officially in Bear market territory now.

The downward moves are explosive and violent so you do not want to be on the wrong side of these moves. And, keep in mind that Bear markets typically last 9 months to 2 years on average. But, after experiencing a prolonged Bull market, and depending on the technical damage the market goes through, this Bear market could last longer.

So, where to from here?

Figure 2. The SPX fell apart leaving a huge price gap followed by several more. This type of price action reveals a lot of technical damage left behind as institutional sized traders sold their holdings in full force.
Graphic provided by:
The market is biased downward which means selling short and/or buying put options or using some strategy that favors the downside.

Look for stocks with negative fundamentals in earnings and who are vulnerable in times of trouble. Also, look for stocks about to pierce, or who have recently pierced, their 200-day SMA (simple moving average), which acts as the remaining firewall to bearish price action before a stock takes the long walk down in price.

RingCentral Inc (RNG) has stumbled recently has tested its 200-day SMA after trading off its highs.

The stock failed to make another high and traded lower in mid-February to 3-6-2020 where it took a dive.

If the stock bounces higher look to short the stock down to the 200-day SMA where you can cover and/or sell part of your position, then move your stops to break even and see if the stock trades lower giving you a chance to profit off a steeper decline.

Figure 3. RingCentral Inc is a software applications company whose fundamentals have stumbled in the current market environment. This is a high-priced stock that looks to have a lot of potential downside. Look for a pullback before entering a short.
Graphic provided by:
To minimize risk even further, you could buy put options slightly in-the-money to limit your exposure but still put yourself in a strong position to profit.

Looking back to the beginning of the New Year, the market was concerned about a potential World War III with Iran, and in less than two months we have one-upped that scenario several times.

As the Chinese saying goes, "May you live in interesting times."

In a couple of years, give or take, you will look back at this point in time of great change as a blessing or a curse, depending on what you do now to prepare for the future.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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