Weekly newsletter of Danny Merkel - Issue #100

Market Review:

If I had to summarize this week’s price action into a single word it would be “distribution”.

For example on Tuesday, equity futures exploded higher with the DJIA up something like 700 points. Yet by the time the market closed, most of those gains were surrendered and many ETFs - such as ARKK - actually closed lower on the day.

Referring to the chart below, we can see that ARKK initially gapped up on Tuesday but that strength was immediately and aggressively sold into, forming an ugly black candle on huge volume:

In my opinion, this price action shows that retail traders remain incredibly eager to catch a market bottom, yet the big money is simply not getting involved.

Without an infusion of big institutional money, ARKK has been lifelessly drifting sideways for the past 7 months.

One popular perspective is that this is just a bottoming process that is setting the stage for a new, powerful bull market. Another perspective, however, is that the 7-month consolidation is actually just a continuation pattern within a secular bear-market. Given that the long-term trend is down, I believe the odds favour the latter scenario.

The next chart shows a much longer-term monthly perspective on growth stocks. Trading under the symbol IWO, this fund tracks 1,109 names, so it offers a more complete picture than ARKK does.

Firstly, notice that IWO is at the same level today as it was in 2018. That right there is a sign that something is not quite right. In a vibrant, healthy market stocks tend to rise over a five year period and that is not happening now.

Second, price initially did find support at the 2018 high (black arrow) but has never been able to gain any traction from that point.

Monthly chart of IWO growth stock index (2011 - present)

And from this monthly perspective, the 7-month stalemate appears to me as a bearish continuation pattern. This would mean that bear market is roughly only half over and another brutal second wave lower is possible next year.

Leading the way lower at this moment is the largest and most popular growth stock of all: Tesla.

Monthly chart of TSLA (2011 - present)

My first take away in the chart above is how bullish TSLA once was back when it formed a beautifully constructive 5-year-base. During the next bull market - whenever that may be - keep this chart in mind.

Also, the best trades are when the daily, weekly and monthly charts are breaking out together. If you’re not looking at monthly charts, then you’re missing out on an important piece of the puzzle.

Moving on to today, though, the exact opposite is happening. Price is breaking down from a big bearish base. There is absolutely zero reason today to touch TSLA from a Trend Following perspective.

Trading Podcasts:

One of the best ways to level up your trading is to identify other great traders, those with a long track-record of success, and then learn as much as you can from them.

And one of the best ways to learn from such traders is through podcasts. Reflecting back on this year, the podcast that was most helpful to me is called The Michael Martin Show.

A student of the legendary Ed Seykota, Michael Martin possesses over 30 years of trading experience which he distills into short, concentrated podcasts each week.

Martin’s insights have proven so valuable that I’ve actually started delving into past episodes going back to 2015 and recently stumbled upon a 1 hour interview that he did with Peter Brandt.

The interview covered a lot of ground and I recommend listening to it in its entirety, but there was a single trading rule that Brandt mentioned that I found extremely powerful.

The trading rule is practical and systematic - anybody can follow it easily - and contains just a few words: