12/14/2018 Stocks drop, but negative sentiment could lead to a bounce. Indexes are at the bottom of the trading range and offer a good short-term buying opportunity.

Greetings.

This week’s AAII sentiment reading was very bearish. We want to use this as a contrarian indicator, meaning we do the opposite of what the crowd does. If everyone is bearish, they have either already sold or are going short. That means it is more likely that we move up. Below is the screenshot of the AAII sentiment reading this week. Below that are weekly charts of the indexes with trading ideas. 

I’m still bearish on the market, but the short term looks like a great buying opportunity for a 2-3 week bounce play. We want to sell near or just below 280, and have a stop loss near 255. That’s a risk of 5 for a reward of 20. 4 to 1 risk reward. 

DIA has a very similar chart to the SPY. Buying here near 240 makes sense with a stop loss near 235 with a profit exit at 260 or just below. Risk reward is 4:1. 

Buy near 160, with a stop loss at 155 and a profit exit at or just below 175. Risk reward is 3:1.