Analysis, Perspective, Trading Strategy
Market Jitters Ahead: Geopolitics, the Federal Reserve and the U.S. Economy are
on a Collision Course
By Joe Duarte on June 10, 2018
We are close to an important decision point as jittery
markets must sort out conflicting messages from economic data and geopolitics
on a week where the Federal Reserve is expected to raise interest rates.
Even those of us who are inclined to primarily read charts for investment
clues and decision making should not ignore the geopolitical machinations
of the moment; so unless you live under a rock you have to wonder what
the markets will do in the wake of the weird and downright nasty G-7
meeting over the weekend and its aftermath. Place that event in the
context of the potential fallout resulting from whatever happens at
the Trump-Kim summit. Then consider the ongoing situation regarding
the demise of the Iranian nuclear deal, the ongoing Muller probe and
the U.S. economy which continues to muscle along. Moreover for investors,
much of what happens in the next five days may have to do with how
the robot traders respond to new surprises and the emerging developments
related to trending situations along with what the Federal Reserve
says and does after its two day meeting which ends on June 13. And
for icing on the cake - June 14 is President Trump’s birthday.
Advance Decline Line Says No Worries
The world is a mess but the market is in the bull zone for now. In
what has become a frequent event on these pages, the New York Exchange
Advance Decline line (NYAD) made yet another new high last week. Certainly,
and until proven otherwise, NYAD remains the most accurate indicator
of the stock market’s trend, especially since the election of Donald
Trump in November 2016.
Specifically, NYAD made several new highs last week and ended the
week on a very strong note; perhaps too strong a note in the short
term as it crossed above the upper Bollinger Band, a sign that the
uptrend may have come too far too soon. Nevertheless, the supporting
indicators, the RSI, which measures the overbought and oversold nature
of the market’s trend and the ROC which measures the trend’s current
momentum, are nowhere near signaling that the upside momentum has been
snuffed out. This remains a bullish trend until proven otherwise.
Major Indexes Still Have Upside Potential with
As NYAD suggests, the trend remains up, albeit closer to being in
the middle of its lifetime than its beginning. Similarly the major
indexes, the S & P 500 (SPX) and the Nasdaq 100 (NDX) are also
in a position where further gains are possible over the next few weeks,
even if we have a short term consolidation.
Interestingly, SPX may get some benefit from steady performances
in the pharmaceuticals sector as well as a bounce in the energy stocks,
both of which were evident last week. As a result, this index is likely
to test the resistance level near 2800 before showing its hand over
the next few days to weeks.
The Nasdaq 100, on the other hand, ran into sellers
at the end of the week as the chip stocks rolled over fearing a downturn
in the cell phone market, especially related to Iphones. Furthermore,
it is still bothersome to see the On Balance Volume (OBV) indicator
remaining flat despite a general tendency of the Accumulation Distribution
indicator (ADI) toward higher ground. Thus the test for NDX is what
happens in the 7000-7200 trading range.
Expect Event Related Choppiness
The market could stall at any point, but it looked fairly good as
of Friday, June 7. Yet, it’s still the low volume summer trading season,
and there is a lot going on in the world. All of which means that computer
traders (bots) driven by headlines and short term technical parameters
will over react to any significant event, even if only for a few minutes
to a few hours. And that means a market that will churn, often if fairly
big point swings. Thus, investors who trade in small lots and manage
their risk will be around to trade on another day, especially if any
one position gets caught in a robotic selling wave. Above all it’s
a time to be glad with small profits and equally small losses if and
as they appear. Finally, consider incorporating the following survival
guide to any trading plan:
1) Expect intraday volatility and plan accordingly.
2) Manage risk by adapting a trader’s mindset
- Trade small lots
- Stick with what’s working
- Use options to reduce capital risk
- Set upside profit targets and use sell stops
3) Hedge your bets
- Use Inverse ETFs
- Apply income oriented option strategies such as spreads and buy-write
4) Be happy with the return of your money, not so much the return
on your money.
Joe Duarte is author of Trading
Options for Dummies, now in its third edition. He writes about
options and stocks at www.joeduarteinthemoneyoptions.com.
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sole property of Dr. Joe Duarte.