There is no question that what we saw on Friday was a complete shock to the overall stock market. Despite what Monday-morning Quarterbacks were saying on Twitter, the market had absolutely priced in the possibility of a no vote at 100%. This is the very first stock market “black swan” event that I have ever been a part of that the overall market got completely wrong ahead of the event. Every other major disaster I have ever been a part of in my trading career from 1996 to now has come with a market already downtrending into the “black swan” event. The fact that the market can get something so wrong when it usually is the best at forecasting major world events is definitely a wake-up call to investors.

Now that the event has passed we have to take an honest look at the carnage left behind. When I do this objectively it becomes clear to me that the damage is severe and that the technical condition of this overall market has taken a drastic 180 degree turn. All of those well formed consolidation patterns that were forming out there and were giving a signal that this market was ready to rip higher have all been hit with price/volume moves on Friday that has either left them broken or on the brink of a breakdown. Very few sectors were left behind but there were a few like Utilies, REITs, and Metals that were spared.

There is no way to spin the action on Friday, on my end, other than partial shock. I am not shocked that there was a Brexit. When I first heard about this vote, I had a feeling that Leave would win. However, the market was telegraphing that my opinion was wrong and that a Remain vote was all but given. The book-makers, the pundits, and the market all got it wrong. Those that said they knew it, did not. You can not predict any event in the future. The market is the best at predicting the future but as we saw even it gets it wrong. This is why it is always operative to invest unemotionally with rules and to keep your risk profile always under watch.

Unfortunately, for me, my risk profile was substantially raised heading into this event due to all the great technical long signals I received ahead of the vote. Everything was working. Everything was looking great. Then Friday happened. It could not have been predicted, no matter what anyone says. The good news for us, following the sell off, was that it simply was not as bad as I thought it was going to be. I wrestled with the thoughts of canceling all my stop orders in case a flash crash shocked the system taking me out of my positions before ripping right back to where they were on Thursday. Once that thought passed, I decided to stay course and obey my stops.

Much to my personal surprise the market did not gap down as much as I thought it would and to an even greater surprise I did not have a lot of sell stops trigger early on. This all gave me a false sense of hope as I then watched the market trade higher initially off the early morning lows. Now, to maintain my bullish bias and to believe that this sell off due to the vote was a short-term event I needed to see the market rally early on, hold those lows, and continue to rally throughout the day. This did not happen. Instead the market made new lows, attempted a lame bounce attempt after lame bounce attempt, and proceeded to close near its lows. Not good.

Now what? Well it is painfully obvious that our market models right after switching from NEUTRAL to BUY on Thursday are right back to NEUTRAL on the DJIA RUT and SPX. More shockingly the Nasdaq and Nasdaq 100 in a matter of three sessions (the first time ever) have switched from NEUTRAL to BUY to SELL. Even more concerning for the bulls, just like in 2015, our DJ-Transportation Avg. model is switching to a SELL signal. This happened in May last year ahead of the August sell off in the market and I would think that the switch in this model to SELL on Friday is a harbinger of things to come with the rest of the market.

So what is next? First off, new long signals are on complete hold unless absolutely everything lines up fundamentally and technically for me. There are about 20 or so criteria I look at before deciding to take a new long and while in an uptrend it is not important for everything to be lined up now that we are under operational SELL signals everything must pass to become a new long. Nothing can fail. This means new long signals are going to be few and far from here on out until the market stages some sort of bottoming price action followed by a Follow-Through Day session. Second off, the stocks that remain on our books will have all of their stops raised to the points where profits can be taken or small losses or breakeven can be realized.

Systems are never perfect and sometimes black swan events throw everything off. The good news is that we have been nearly fully invested for quite some time so the damage on Friday while very large on a one day basis from account highs to Friday lows was not debilitating. A lot of work the past two months was wiped in one day, yes. However, for the year, my accounts still have gains and the good news is that there is bound to be some wild volatility over the next couple of weeks which will allow for some excellent daytrading opportunities. Now that a lot of cash has been freed up and more is probably going to be over the next couple of weeks based on the way this market, sectors, and individual stocks in leading and big-cap names look, it is time to focus on daytrading opportunities.

My best recommendation right now, if you are looking for alpha, is to focus on the intraday opportunities that smaller low priced stocks offer in the early morning hours. We post a morning watchlist of all the stocks we are watching for early morning breakouts or early morning fading. I also recommend focusing on the lower priced stocks moving up greater than 3% in the pre market session on well above average normal volume. I am looking for float rotations or extreme activity on social media websites for the best intraday trading opportunities. If you are looking for alpha on an EOD trend following basis, it appears that is not going to happen–at least on the long side–any time soon. The damage that was done on Friday is going to take a long time to repair. It is not going to be an overnight repair job and if it is then that places us at an even greater risk of a bigger failure.

I am also going to start looking for new short sell signals on an EOD trend following basis, now that the market appears to have broken wide open. If the market finds a floor and has a new Follow-Through Day obviously I will go back to focusing on new long positions. But as of right now, it makes sense based on the charts I reviewed this weekend to start looking for short sell opportunities. Remember, we are still in a seasonally very weak time for the market historically. October is still a few months away when seasonality returns in favor of the bulls. I have always said that when the market and individual stock charts confirm the historical seasonal trend that it is a situation that you should never fight. When a market is under a counter-seasonal trends it is fine but must always be taken with some caution. When a market is following the seasonal trend it must always be obeyed and never fought.

While it appears all hope is lost, the fat lady has still not officially sung just yet. Since that is the case, I will continue to obey my signals as they are generated. When everything is lined up, I will take a signal either long or short. It’s going to be wild and volatile for a while. I do not expect any trend to develop over the next few weeks and if one does the odds are significantly greater on the short side than the long side following Friday’s bloodbath. Make sure you have your stops where you want them and make sure that if you take any long signal on an EOD basis you know exactly where your cut loss levels are.

This is not the time to be a hero. Cash is king for now. Cash will probably be king for quite some time. Especially if you are focused on going long only. This is going to take some time to heal, even if we do bottom sooner than later. Have a great rest of your weekend and I wish you all the best of luck during the upcoming week. For further analysis, make sure you watch the video below. Aloha.

Video length: 00:10:02

TOP CURRENT HOLDINGS – PERCENT RETURN SINCE SIGNAL DATE – SIGNAL DATE

CLR long – +131% – 2/11/16
GRAM long – +65% – 4/1/16
EBIO long – +57% – 5/26/16
HBP long – +43% – 3/28/16
SIMO long – +28% – 3/11/16
LABD long – +27% – 6/9/16