5/9/2020 Stocks up this week more than I expected, and the AAII sentiment indicator hits 7-year high for bearishness. I am looking to buy airline stocks for a swing trade, because I’m bullish for the next 2-4 weeks.

Good afternoon. The S&P500 closed about 3.5% higher this week and the Nasdaq closed nearly 6% higher, which is much higher than my neutral / slightly bearish prediction I had for this week. My target for the next 2-4 weeks is 320 for the SPY (S&P500) and all time highs for the QQQ (Nasdaq).

However, going long here without a tight stop near 280 wouldn’t make sense from a risk/reward perspective. In other words, I wouldn’t be a buyer at these prices even though I think we are more slightly more likely to move up than down in the next 2-4 weeks. My stop loss would be too close to the current price and I could get stopped out too easily. 

For a longer term swing trade (~6 months), I would be looking to go long in the 250-260 range, preferably on the lower end of that range, with a target near 300 and stop loss near 235. 

Since the AAII sentiment indicator is now at a 7-year high for bearishness (~53% bearish for then ext 6 months), I suspect we will continue to move higher over the next 2-4 weeks. We use this sentiment indicator as a contrarian signal for the market. Because I’m bullish in the short term now, I’ve been looking to enter the airline stocks like Southwest (LUV) and American Airlines (AAL) for a quick 2-4 week swing trade (possibly up to 3 month hold). 

Let’s look at the charts of SPY, QQQ, and LUV.

SPY weekly chart below. Like I noted above, I think we touch 320 in the next 2-4 weeks.  

SPY weekly 5_9_2020

QQQ weekly chart below. Although it is stronger than SPY right now, there is big bearish RSI divergence building up, so even if we do make it to all time highs, I doubt we will be able to hold those levels for more than a 3 weeks. 

QQQ Weekly 5_9_2020

Southwest airlines (LUV) daily chart below: 

I think all of the bad news (and more) has been priced into the airline stocks, so from a fundamental standpoint I would be long here. From a technical standpoint, we have made new lows while the RSI has been going up. This bullish RSI divergence makes it more likely that I will take a swing trade sometime soon. I’ll keep you all updated if I take a swing trade here. 

LUV daily 5_9_2020

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