Picking a Sector in a "Sloppy" Market (w/ Frank Cappelleri) | Trade Ideas | Summary and Q&A

TL;DR

Chief market technician, Frank Cappelleri, discusses the market indicators that suggest a potential reversal in the health care providers ETF, highlighting a head and shoulders pattern and underperformance compared to other sectors.

Key Insights

• 🖤 The market's lack of bearish patterns and the absence of negative momentum suggest that the uptrend remains intact.
• 🔈 Low volatility and shrinking volume indicate potential for a substantial reversal in the market.
• 🤕 The health care providers ETF has underperformed compared to other sectors and has formed a head and shoulders pattern, indicating increased risk.
• 🥺 Bearish divergences between the health care providers ETF and other sectors may lead to a broader market correction.
• 😨 Investor sentiment has shifted from fear to enthusiasm, potentially indicating a market top.
• 😨 The health care providers ETF's relative performance versus the health care sector and the S&P 500 has been weak, signaling further downside risk.
• 😨 Despite recent weakness, the health care providers ETF has not reached oversold levels, suggesting a potential short-term bounce.

Transcript

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Questions & Answers

Q: How does Frank Cappelleri define a sloppy market?

According to Cappelleri, a sloppy market is characterized by resistance failures, downside follow-through, bearish pattern formations, and the hitting of bearish targets. However, the market has not yet reached step 4 of this process.

Q: What are some potential signs of a market reversal?

Cappelleri highlights low volatility, shrinking volume, and bearish divergences as potential warning signs that a market reversal may occur. These factors, combined with the health care providers ETF's underperformance and the formation of a head and shoulders pattern, indicate increased risk in the sector.

Q: How has investor sentiment towards risk changed?

Investor sentiment has evolved from fear and panic during the market decline in December 2018 to caution and later confidence as the market rallied. It is currently approaching enthusiasm and greed, indicating a potential top in the market.

Q: Are there any cracks in the health care sector?

While most areas of the health care sector have been performing well, the health care providers ETF and regional banks within the financial sector have shown signs of weakness. The recent decline in the health care providers ETF was the largest weekly decline in 10 years.

Summary & Key Takeaways

• Frank Cappelleri explains his previous analysis of the 10 steps for a sloppy market, with the market currently stuck on step 3.

• The market's lack of bearish patterns and inability to hit downside targets suggests that the uptrend remains intact.

• Cappelleri discusses potential warning signs, such as low volatility, shrinking volume, and bearish divergences, which could signal a substantial reversal in the market.