Chart Advisor: Chasing Downside Bets

By Tom Bruni, CMT

1/ Pressing Upside Bets

2/ Sellers Start Selling

3/ Pressing Downside Bets

4/ Buyers Battle Back

5/ When All Seems Lost…

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1/

Pressing Upside Bets

With the bull run continuing across risk assets, many market participants are feeling left behind, succumbing to “FOMO” and pushing prices even higher. During this time, technical analysts can offer a friendly reminder to always think about where an asset has come from and where it has the potential to go.

One way to measure this is by looking at a stock’s price relative to its 200-day simple moving average. That technical indicator measures a stock’s long-term trend to where prices eventually tend to revert if they get too stretched from it.

Below is a solid example of this using Palantir Technologies ($PLTR). The stock recently broke out to new all-time highs via a “breakaway gap” through its 2021 highs, a very bullish sign. However, the stock is now more than 110% above its 200-day moving average, exhibiting how “stretched” it is relative to its longer-term trend. This represents a potentially higher-risk environment for shares, as prices could “mean revert” to their long-term trend.

This condition can resolve itself as a correction where prices fall to the moving average, or over time, where price growth slows and allows the moving average to catch up. The bulls would prefer the latter outcome, but for now, they’re pushing through any potential downside risk and paying higher and higher prices for the red-hot stock.

2/

Sellers Start Selling

One asset that was recently in a similarly stretched position relative to its 200-day moving average is gold ($GLD). The precious metal broke out of a three-year base earlier this year and has been running higher aggressively, getting as much as 20% above its trend. 

With short-term momentum fading, traders and investors are eying several potential levels. The first is trendline support and the 50-day moving average near 2,625, while its long-term breakout level is between 2,050 and 2,100.

Clearly, the market is still in an uptrend, but now buyers must decide how quickly they will step in and “buy the dip.” On Stocktwits, retail investors and traders are currently ‘bearish’ on gold as the focus shifts towards assets (like crypto) with more upside momentum, suggesting more potential downside ahead.

3/

Pressing Downside Bets

Chasing prices to the upside isn’t the only thing happening; traders and investors are chasing to the downside as well. Vaccine maker Moderna ($MRNA) is a good example, as it hits 52-week lows and stretches nearly 60% from its 200-day moving average.

Much like Palantir, one side of the market is clearly dominating this stock and is pressing their bets further. Eventually, shares will revisit their long-term trend, but sellers are betting on a consolidation rather than a major rally in prices.

With Stocktwits community sentiment hitting ‘bullish’ levels today, it appears some retail investors and traders have noticed how stretched the rubber band has gotten and are betting on a squeeze to the upside.

4/

Buyers Battle Back

Meanwhile, much like gold, Sprinklr, Inc. ($CXM) is an example of a stock where the winning side of the market is punished for pressing its bets. Shares recently reclaimed their 2022 lows after falling 30% below their 200-day moving average, a level that’s provided support in the past.

The productivity software small-cap stock currently has 7% of its float short, but the Stocktwits community is not yet betting on a short squeeze. Sentiment remains ‘bearish’ despite shares rallying almost 10% today. Still, some say shorts are vulnerable to more pain ahead as buyers bet on further mean reversion.

5/

When All Seems Lost…

So, if it’s tough to press bets in extended stocks or assets, what is a trader or investor to do in these assets? The answer may be to wait for a more attractive risk-to-reward opportunity, even if it takes a while to present itself.

A great example of this in action is Bitcoin following its breakout in late 2021. The cryptocurrency rallied over 400% in the year after the breakout, leaving many to believe they’d never be able to get in at lower prices again. Flash forward a little more than a year and prices had corrected nearly 80%, bringing them right back to the original breakout level.

Now, that’s not to say that will happen again this time. But the point is that market opportunities present themselves all of the time, just not in the timeframe we’d like them to. Still, it’s important to remain patient and wait for a risk-to-reward opportunity that aligns with our long-term goals, risk tolerance, and overall investment objectives. 

This perspective is important to keep, especially in today’s environment where it feels like you’re missing the boat on the next greatest trade or investment. Maybe you will, but history tells us that the boat will either tend to make another pass…or another better boat will emerge. You just need to be patient. Stay safe out there, folks, and speculate responsibly!

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Originally posted 12th November 2024

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