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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 techniques

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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