Big Mo Approaches - This Market May Be
Starting a Momentum Run
By Joe Duarte for September 5, 2017
If you were to build a wall of worry for the stock market to climb,
the current scenario fits the bill - nearly perfectly. Just as the bullish
robot traders decided to follow the usual “buy the dip” script last week
and the market showed a moderately credible bounce, North Korea decided
to run a nuclear test and to announce it has an ICBM capable hydrogen
bomb available for use. At the same time hurricane Harvey devastated
Houston, and hurricane Irma may deal the U.S. east coast a devastating
blow in the coming few days. Meanwhile, just to make things interesting,
Congress is due back in town with the potential for a government shutdown
looming as the fight over the debt ceiling is due to start.
I’ve been bearish for the past few weeks, but have also noted that
with the robots running the asylum, yet another dip buying rally with
possible new highs was not out of the realm of possibilities. Indeed,
that’s what happened last week with the robots following classic technical
analysis rules based on moving averages, overbought and oversold oscillators,
plus a healthy dose of fear registering on the CNN Greed and Fear Index
as hurricane Harvey dealt havoc to the South Texas coast.
So, if I were a cynic and the robots were to follow the script as
they have over the last year, we should see even more new highs as
the market climbs the proverbial wall of worry. Of course, there is
no certainty that this will happen, given the reality of the damage
caused by hurricane Harvey alone, not to mention what may happen on
the east coast in the next few days if hurricane Irma hits. So if North
Korea does indeed launch an attack on the U.S. I would be very surprised
to see the Dow Jones Industrial average break out to new highs; which
leaves Congress as the wildest of wildcards in the mix. Enough said.
New Highs on NYSE Advance Decline Line
All we know is history. But at least history was good last week, as trading
action ended with new highs on the NYSE Advance Decline
blow in the coming few days. Meanwhile, just to make things interesting,
Congress is due back in town with the potential for a government shutdown
looming as the fight over the debt ceiling is due to start.
I’ve been bearish for the past few weeks, but have also noted that
with the robots running the asylum, yet another dip buying rally with
possible new highs was not out of the realm of possibilities. Indeed,
that’s what happened last week with the robots following classic technical
analysis rules based on moving averages, overbought and oversold oscillators,
plus a healthy dose of fear registering on the CNN Greed and Fear Index
as hurricane Harvey dealt havoc to the South Texas coast.
So, if I were a cynic and the robots were to follow the script as
they have over the last year, we should see even more new highs as
the market climbs the proverbial wall of worry. Of course, there is
no certainty that this will happen, given the reality of the damage
caused by hurricane Harvey alone, not to mention what may happen on
the east coast in the next few days if hurricane Irma hits. So if North
Korea does indeed launch an attack on the U.S. I would be very surprised
to see the Dow Jones Industrial average break out to new highs; which
leaves Congress as the wildest of wildcards in the mix. Enough said.
New Highs on NYSE Advance Decline Line
All we know is history. But at least history was good last week,
as trading action ended with new highs on the NYSE Advance Decline
line. Under normal circumstances this would be a sign of further gains
ahead, since this is an indicator of a market with positive money flows.
But, of course, these are not normal times, so the path forward is
uncertain.

Nevertheless it was a clean, new, textbook high on the NYAD, with
the ROC indicator moving back above the zero line and the NYAD moving
well above its 50-day moving average after finding support at the lower
Bollinger Band the prior week– just the way the robots like it and
are programmed to execute. Similar patterns can be appreciated at the
November 2016, and the March, and June 2017 lows.
Fairly Credible Action in the S & P 500
And just as the NYAD made a new high, the S & P 500 (SPX) also
delivered a fairly credible performance last week, although it did
not deliver a new high as did the NYAD. This may become a significant
event. Despite that, three positive things did happen to the index:
1) On Balance Volume (OBV) improved significantly. 2) Accumulation
Distribution (ADI) steadied. And 3) The ROC line moved back above zero,
suggesting an improvement in momentum to the up side. When taken together,
what emerges is a pattern of money moving into the market with more
than just a little conviction. Still, SPX may not be totally out of
the woods here, and we may see some down side action in the next few
days, especially if volatility rises.

Game On: Biotech Breaks Out
The big news of the week was the breakout in the Nasdaq Biotech Index
(NBI) on news of the FDA approval of a new gene therapy treatment which
may become a major cog in the fight against cancer. The price tag of
over $400,000 per treatment didn’t seem to stop anyone from buying
biotech stocks, with the 3450 level on NBI now becoming an important
support level for the rally. I would expect a few days of backing and
filling here, but if biotech trading history is any clue as to the
future, we may see several more weeks to months of higher prices here,
especially if companies start to buy each other out, which is not out
of the unexpected range at this state of the cycle. Subscribers were
able to get in on the biotech trend early last week as my indicators
flashed a buy signal.
Construction Materials Roar
The market also priced in a lot of federal money to rebuild Houston,
as the Dow Jones U.S. Construction and Materials Index (DJUSCN) put
on a quite a show last week after the pictures form the Houston disaster
became widely disseminated. I’ve been constructive on this sector for
some time and subscribers of In the Money Options have already been
well rewarded here. But there may be more on the way, especially, if
hurricane Irma delivers a similar blow to the east coast of the U.S.
Of course, no one wants another calamity, yet from an investment standpoint,
the possibility of such an event must be considered.
The materials rally still has the potential to deliver a move on
the DJUSCN back to the top of the recent trading range, some 4-5% above
the closing price on September 1. A move above the 50 and the 200-day
moving averages would be very bullish for this sector at the moment.
No Time to be Paralyzed by Fear
I acknowledge that these are difficult times. Yet, managing investments
requires a pragmatic mindset. So from an investor’s viewpoint, despite
the mother of all walls of worry being in place, this is not a time
to fret or worry. Instead, it’s a time to be disciplined and observant,
to be honed in on the daily trading action and what I expect will be
another attempt to increase volatility by robot traders who will be
reacting to headlines about North Korea, the U.S. debt ceiling, and
hurricane Irma. Contrary to popular belief, though, volatility often
creates opportunities, which is why paying close attention to the daily
developments and attention to managing risk is the order of the day.
Stick with what’s working; consider taking profits on big winners,
and look for new opportunities as they present.
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