Things look good, but is that a warning?

Free After-Hours Update:

The S&P500 continues inching higher and is at the highest levels since March. Long gone is the doom-and-gloom that dominated the market only a few weeks ago. Instead we are only a handful of points away from retaking 2,800 and erasing almost all of February’s stock crash.

I spent all spring reminding readers that risk is a function of height and it was far safer buying February’s crash than the calm that preceded it. The best opportunities come from buying heavily discounted stocks from fearful sellers. And just when people fear the worst is when the deals are the best. We saw a similar phenomena when the FAANG stocks tumbled in March following Facebook’s public relations disaster.

The thing about both the market’s crash and FAANG’s correction is countless people had begged for a pullback so they could get in or buy more. But when the market answered their prayers, most were too afraid to buy the dip and many more abandoned their favorite stocks. That is the curse of the “rational” trader, we are naturally drawn to stocks that are at premium prices and fear stocks that have been discounted.

Bears continue to pound the desk, insisting the market is going to crash for X, Y, and Z reasons (Fed rate-hikes, interest rates, and the Muller investigation). The problem with their argument is everyone knows about X, Y, and Z and rather than fearfully abandon their favorite stocks, confident owners shrug and keep holding for higher prices. While the cynics love to remind us that market’s peak on complacency, what they forget to mention is complacency can last for years. That’s because confident owners don’t sell and the resulting tight supply makes it really easy for stocks to rally on modest demand. Sound familiar?

Even though the market is acting well and the path of least resistance is definitely higher, we cannot forget risk is a function of height and the market moves in waves. If this is the highest we’ve been in several months, that also means this is the riskiest place to be adding new money in the same number of months. In addition, the strong move over the last week leaves us vulnerable to a subsequent down-wave. We are quickly approaching 2,800 resistance and we should at the very least expect the market to pause. We entered the slower summer season and many big money managers have flow off to their summer cottages. Without their big buying, we shouldn’t expect a large directional move. Things still look good for our medium-term stock positions and long-term investments and we should leave them alone, but for short-term swing-trades, this is a better place to be taking profits than adding new money.

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Bitcoin got pounded this weekend. I tried to warn people several weeks ago when BTC just slipped under $9k when I wrote the following:

Last week’s $9k support has turned into this week’s $8k support. And thus far it is giving every indication that $7k will become next week’s support. I hope you see the trend here. Cryptocurrencies are still very much in a downtrend and we should expect lower prices. It takes most bubbles between 6 and 24 months to finish bursting. If bitcoin is like most bubbles, that means the worst is still ahead of us and we should expect lower-lows over the next few months.

Then last week I wrote:

And unfortunately things don’t look any better now that we have dipped to $7k support. This cryptocurrency had a very ugly May and it looks like things will only get worse. This is a long-term downtrend and lower lows are still ahead of us. Breaking $7k support will trigger to another wave of selling, but the fear won’t strike in earnest until we undercut the $6k lows. Remember, double-bottoms are a common and powerful reversal pattern. But there is a reason why no one talks about triple-bottoms, because they are not a real thing. Hit bottom three times and you are headed much lower.

And on cue, Bitcoin crashed through support last weekend and is now hovering in the mid-$6k’s. $9k support failed. Then we broke $8k support. $7k was next. Anyone see a pattern here? What are the chances $6k will hold? I suspect by this time next week we will have our answer.

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Jani

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