Strategy: Rebound or Breakdown?

June 18, 2022, 12:24 pm EDT

Rebound or Breakdown?

Rebound or breakdown? Perhaps, many people would like to know the answer to this question. On the one hand, a 10-12% drop in the past 8 sessions for all major indexes formed oversold conditions so a rebound should come soon. On the other hand, 0.75% rate hikes and deterioration of economic data (CPI, PPI, Consumer confidence) gave enough evidence that a major breakdown is coming. 

Our answer depends on whether the timeframe is short-term (1-2 weeks) or medium-long term (weeks or months later). 

Indeed, a rebound could come for short-term traders after the bloody slides in the stock markets. Here are some areas to consider:

  • Travel / Cruises: RCL,CCL, NCLH, BKNG, ABNB
  • Airlines: AAL, DAL, ALK
  • Biotech: BIIB, SGEN

Please note that this short-term trading involves high risk. But, using their recent lows as the sell-stop level should control the maximum loss.

However, a breakdown and a major downtrend are more likely to occur in the second half of 2022. The recession could arrive as early as Q2 2022 or the current quarter if Q2 GDP falls below the zero line again. It could stir up another wave of sell-off when the number is revealed. Simply checking bitcoin behavior (18961, down another -7% as of now) we can see risky assets are going through the bubble bursting process. As our 06/12 article indicated that the next downside target for bitcoin is 11700. Cryptocurrency behavior is a preview of what is going to happen to the stock markets. Therefore, we think that a major breakdown and downtrend could arrive at any moment from the next 1-2 weeks to the next 6 months. 

We will prepare bearish bets (bearish ETF / short / put options) during the rebound wave. Of course, bearish bets are only suitable for traders who can manage the risk so it is not for everyone. The bottom line is to reduce portfolio holdings so the damage is minimal during the bear markets. The new bull will come again. Meantime, it is important to preserve the cash until that time. 

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