If Everybody’s Thinking Alike, then…

While September’s seasonality, OpEx, and 7th straight month without a 5% dip has speculators on edge, if all the big banks along with many other outlets and mediums are calling for a correction, then can the markets have one?

Of course.  Just enough time has to elapse since the calls of the last week for one to begin.  When speculators have forgotten about the chance for correction is when a 5% – 9% dip can do its thing.

In the meantime, here’s a couple of opportunities worth considering regardless of where larger markets go this month.

Cannabis could be establishing a base from which to provide a nice little reversal trade.  Let’s look at a weekly of MJ, the largest cannabis-themed ETF by AUM.

MJ Before Bell (9-13-2021)

MJ seems to be finding nice support here at $15.  If it can bounce here, then $21 looks like a solid resistance point.  Between those 2 price points in the shaded area above is a confluence of various charting overlays & indicators.  Should that bounce occur, there’s any number of ways to structure a trade within that range to take advantage.

The CAGR vector for revenues, margins, FCF, etc. across the MSOs is looking quite enticing.  If the trading gods can deliver some political magic with a positive announcement of some sort around legalization, then you never know how spicy a trade might get.

And from the intra-week YTD high established in the 2nd week of February, MJ is down over 50%.  Regardless of any wider market breadth issues, it seems like enough capital has fled the category and is ripe for capital to bounce back in.  Overhead supply looks heavy between $22 – $24 so I wouldn’t get too clever pushing a move at the top of that shaded area.

The other potential trade setting up is in once white-hot Brazil.  Heavy amounts of capital shifted into Brazil on the back of the commodity thesis earlier in 2021.  It’s been shaken out a bit as EWZ has corrected 20% (intra-week) since late June.

EWZ Before Bell (9-13-2021)

It’s easy to see that the yellow horizontal line represents an important price point for speculators.  And there’s a confluence of charty shit, yada, yada, including a couple of intra-week bounces with longish wicks established in the past 4 weeks.  The chart tells me that a bet on a 10% to potential 15%ish bounce might be in play.  That’s just based on price action, but geopolitics and FX may hold more sway.  Further assessment of risk is warranted, but a surf-able swell may be setting up.

Based on all the Wall St. banks jawboning about market weakness in the past 10 days, it appears the Fed is attempting to lubricate the transition into a tapering environment and get a little correction started.  Just have to control volatility as an asset class and steam can be released with relatively little pain.  But markets don’t work like that, right?  Trade accordingly.

Known Unknowns

                  Tight Spot

Speculators are on shaky ground.  We have known knowns, markets can either go up, sideways, or down from here.

We have our unknown unknowns, which are impossible to anticipate or plan for so you manage risk accordingly.

But we have our known unknowns to which I think it’s best to assign probabilities to, handicap if you will, in order to speculate through this tight spot.

Handicapping possible outcomes is no different than thinking in decision-trees.  Here’s a small example of where we could be at, but obviously one has to consider multiple trees and multiple outcomes.

Decision Trees I

From there, assign probabilities and ascertain next course of action with capital.

But with unknowns come fear.  Fear of loss.  Fear of being wrong.  Fear of career risk.  Fear of missing out.

My gut and the tape tells me it’s time for a correction.  The action last Thursday was the starting gun and we got off to a fast start.  I think big money pushes their shorts while also collecting profits on “longs” within the rally.

If this equities correction has legs, I think 15%-ish lower in the S&P 500 and 18%-ish lower in the NASDAQ is where we’ll find heavy support.  In my own handicapping, no new lows in this correction, but serious fear.

Don’t fight the Fed has been one lesson in this rally but but don’t fight retail, in the short-term, has been another.  None the less, I’d still assign the highest probability to that possibility on the far left in the diagram above.

And if we’re assigning letters to this one possibility, here’s your tilted-W.

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