Last Monday the market made a capitulation low because in the following three trading days the shorts failed to take out the Monday low despite trying very hard in doing so. Following Apple’s earnings release on Thursday after the market close, the shorts finally gave up and the longs reversed the downside energy on Friday.
Even though the indices have reversed the down draft based on last Friday’s intraday trading structure and the daily cycle oscillators formations, this is by no means that the Fed induced correction is over. This is only the first selling wave. After the reaction rally, which is typically weak, reluctant and lack of broad participation, then the second selling wave will descend upon us. Normally the second selling wave will be more vicious than the first selling wave. We want to go long at the second selling wave low.
Below is the daily S&P 500 chart that shows the formation of the first and second selling waves. This is a price and time forecast based on past market data. The market may not do exactly as what is showing here, but it is our expectation. When the market is not doing what we are expecting, we can react with stoploss orders. It is best to have a trading plan than not have one.
You can see that:
1. The first selling wave of 12% is done from 1/4-1/24/2022
2. The reaction rally is about 62% retracement of the first selling wave that will last about one month. In this month, the market will be choppy with lots of confusion, but the first selling wave low will hold and be tested at least one time before it is taken out.
3. The second selling wave is an equal swing from the reaction rally high. The second selling wave is projected to end the day before the Fed meeting on March 15-16. The market is expecting the Fed to raise interest rates in the March meeting. The speculation is about how high the interest rates will go, a quarter point raise or 50 basis point???
Again, this is a framework of the correction based on past market data. You need to be flexible with the formation because the market never does exactly as people forecast, but will not be too far from it.
Although we are not certain that the market will play out exactly as what we forecast here in short term, but we are certain that this is not a start of a long secular bear market. This bubble in innovation stocks is not a DOTCOM bubble that will take 15 years to break out. This crash in innovation stocks is a correction that will only take 24-36 months to work itself out. There is a major difference between 15 years and 24-36 months!
In the roaring 20’s, the DOW rallied 1191% in 26 years, from 1903 to 1929. In comparison, the DOW rallied 870% in 13 years, from 2009 to 2021. So in historical context, we are not dealing with a 1929 styled super bubble at the moment. So please ignore the bubble talk in the scary media.
We are in a very parallel time to the roaring 20’s because of all the technological innovations that was induced by the advent of Internet. The roaring 20’s actually began with the combustion engine and the 1903 was a panic low just as the 2009 panic low.
We still own KPTI stock. KPTI stock has been trading very firm against the broad market and biotech XBI ETF since the beginning of the year, year to date it has gained 32.8%. KPTI released preliminary Q4 results on January 10th and convinced the shorts to take it a little easy. There is a pending catalyst for KPTI to go a lot higher soon if the top line clinical data of SIENDO trial is positive. Based on the information released by the company, if the top line data release is around mid February, then result is very good that will fundamentally change the company’s valuation. Anyway, we are still long the stock and have added more when the price was lower. We took a bet that the cancer drug Selinxor is more valuable than what the shorts have been selling.