Analysis, Perspective, Trading Strategy
The Antidote to the Wash, Rinse, Repeat Market - Stay in the Moment and Follow
From Joe Duarte for June 4, 2018
Sometimes this market makes me feel like a dirty shirt in the wash, rinse,
repeat cycle. But I don’t want to be right. I just want to make money.
So, I’m getting used to living in a new world, a world where what I see
on my trading screen and what is really happening may not be coherent.
And I’ve come to the conclusion that it doesn’t really matter what I think
about the world or the markets. What I do know is that there are still
ways to make money if you can adjust to the new rules of engagement and
change along with them, as often as events call for such maneuvers.
All things considered, I want to be bearish but I can’t bring myself
to fully committing to the negative side of the trade. I also want to be
bullish, but I can’t sleep without thinking that something isn’t quite
right and that the market might crash at any moment. So I own stocks, I
hedge and I keep waiting for the other shoe to drop. But more than anything,
I stay in the moment.
Point for the Bulls - Breadth Hits Home Run
The New York Stock Exchange Advance Decline line (NYAD), the most accurate
indicator of the stock market’s trend since the 2016 presidential election
made a new high last week. Usually, especially in the last year and three
quarters this type of technical events means the trend for stocks is up.
So, based on that one very reliable indicator I’m bullish.
Furthermore, in an information vacuum it’s hard to fight the image of
a breakout in NYAD. Moreover, things get better when you note the ROC and
the RSI are both documenting that some strength was present in the market
last week and that stocks are far from being overbought.
Point for the Bears - Man Does Not Live by Price Alone
Regardless of whether you are a bull or a bear, you must agree with the
notion that bullish market breadth is a requirement for healthy intermediate
and long term price advances in the stock market. Indeed bullish breadth
combined with rising prices is as pure a definition of a bull market as
there is. And if we were in the proverbial information vacuum we would
see nothing but bullish action in the current breadth and price movements
of the S & P 500 (SPX) and the Nasdaq 100 Indexes (NDX).
Still, as anyone who’s seen what happens in sci-fi movies when space
walking astronauts open the visors on their EVA suits- think terrible death-
trading in information vacuums is not advisable. Moreover technical analysis
requires confirmation from price and momentum oscillators, especially those
indicators that are derived from raw volume. And that’s precisely where
things get a little bit uncomfortable in the current market.
If you look only at the price panel of the NDX and
SPX charts, you see bullish price action. Specifically, NDX has delivered
a minor breakout while SPX seems ready to follow. Furthermore, the Bollinger
Bands (elastic bands around prices) are closing in on the price bars. This
is an indication that a big move in prices is nearing. So far so good,
right? We have bullish price action and a big move is likely on the way.
But, and this is a big asterisk, volume is not bullish as the rally after
the positive employment report had very anemic volume while trading volume
was up on days in which the market closed lower last week. In addition,
things get more concerning when we note that the Accumulation Distribution
(ADI) and On Balance Volume (OBV) indicators for both NDX and SPX are flat
for the former and slightly negative for the latter. So although prices
and breadth are bullish, the oscillators are saying that there is no real
momentum in this market, which ultimately means that sellers are more active
Stay in the Moment and Follow the Money
Traders are facing a dilemma. Low volume markets are vulnerable to news
and this market is no exception. Making life a bit harder these days, there
is higher trading volume present when robot traders perceive the news to
be negative, such as what we saw on May 29 when the headlines suggested
a financial crisis was about to swallow Italy. By contrast when the U.S.
delivered what robots perceived as good news on June 1 upon the release
of the U.S. employment data, prices rallied, but they did so on lower volume
than on the prior day. Meanwhile price charts are turning increasingly
bullish, which means that if volume trends don’t change there could be
a meaningful decline in the next few weeks.
The problem is if you’re trading for a living or investing as part of
a savings plan there isn’t much of an alternative to the stock market at
the moment unless you have very deep pockets and low debt levels. So in
order to make the best of the current situation it helps to keep a few
things in mind.
1) Stay in the moment. Expect intraday volatility with wild point swings
in the indexes as the news cycle churns and the algorithms react.
2) Stay small and stick with what’s working - own small positions in
stocks with positive price patterns and sound fundamentals in order to
minimize heartache and acid reflux.
3) Hedge all bets via inverse ETFs and higher than normal cash levels
while looking to reduce risk with options and income producing option strategies.
4) Accept the drag on your portfolio from inverse bets. When the market
falls you’ll be glad you had them in place.
5) Don’t try to beat the market. Instead focus on gaining ground slowly
and take what they give you.
6) Be humble - Expect to be wrong and to pay the price but be thankful
if your hedges reduced your losses on a bad day or if you made it through
the trading day with more money than what you had when you turned on your
Hang in there - this is a new world. And for those of us who wish to
trade, the only plausible choice is to expect the unexpected and to be
as prepared as possible. Often this means we get caught in the wash, rinse,
repeat cycle as we wait for the next headline, the ensuing market move
and the consequences.
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