Analysis, Perspective, Trading Strategy
Elvis Has Left the Building but We’ve Still got the Bots
By Joe Duarte on August 5, 2018
Who needs Elvis when you’ve
got trading bots?
Last week, in this space I noted the stock market had the feel of
an Elvis exit from the concert stage where the King had left the building
while the band played on and the fans waited for an encore. My point
was that since the FAANG stocks hit the skids, it was plausible that
the stock market might follow suit and a full blown correction would
materialize. Well, that didn’t happen, at least not yet. So unless
things change, just as in the King’s heyday fans knew there would always
be another opportunity to catch him at another tour stop; it seems
the stock market is betting that this bull market still has some life
left in it.
Of course, there is no replacing the king. And we all know how that
story turned out eventually, although it sure was good while it lasted.
Yet in the present market, unlike in the past, trading isn’t about
sound trade management and discipline. Instead, stock trading has been
reduced to an exercise guided only by the minute by minute analysis
of trading headlines by robotic trading algorithms with very short
memories and what the programs tell the machines to do based solely
on that information. Thus, for those of us who trade for a living,
if yet another rally does materialize, it will be time to cross our
fingers yet again and hope that this isn’t the bull’s last hurrah.
And if it is the last gasp, we can only hope that prudent hedging;
small position size and careful risk management is enough to save us
from catastrophic losses.
NYAD Traces Bullish Pattern
It’s hard to argue with the New York Stock Exchange Advance Decline
line (NYAD) given the fact that it has, like no other indicator, predicted
the correct direction of the stock market since the election of Donald
Trump. That’s now roughly a 20 month record of being right on the money,
which in the annals of the stock market is downright uncanny. So, when
I looked at NYAD at the end of the most recent trading week I was happy
to see that it is again tracing a bullish consolidation pattern which,
if it resolves as it has the other two times it has appeared since
November 2016, will likely mean that we are about to get yet another
up leg in the market.
More specifically, NYAD has been moving sideways over the last month
and accordingly, the Bollinger Bands have been shrinking. Just that
latter occurrence suggests that a big move is coming in the not too
distant future. However, further scrutiny shows we saw the same pattern,
especially the fact that NYAD held above its 20-day moving average
at the same time the Bollinger Bands shrunk, on two previous occasions
since November 2016 - December 2017 and May 2018. The good news is
the market rallied both times after this same consolidation pattern
in NYAD broke to the up side.
FAANG Crash Brought Out the Dip Buyers Again
A familiar story played out again, as the late July FAANG stock crash
led to yet another episode of what has become a worn out Wall Street
acronym: BTFD – Buy-the-Friggin’-Dip. So here we are again with the
potential for another up leg in stocks.
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes are again
sporting signs of accumulation with both the Accumulation Distribution
(ADI) and On Balance Volume (OBV) indicators failing to break down
last week and hinting that they may actually break out to the upside.
If that happens and the market makes a new high I would expect an acceleration
of the uptrend, at least for a few more weeks.
There is still low volume on the rallies, though, which suggests
that either we are being set up for a nasty reversal since there aren’t
enough buyers in the market, or perhaps a lot more trading is going
on behind the curtains of the dark pools where only the shadows know
what the real best bid is. And although it’s good to consider the why’s
of the situation, it really doesn’t matter. For the rest of us, it’s
all about the trend anyway. And the trend looks ready to move up again.
Don’t Fight Momentum and Keep your Eye on the Fed
The late Marty Zweig had two golden trading rules:
1) Don’t fight the Fed and
2) Don’t fight market momentum
And while these are sound trading rules which have stood the test
of time, it’s hard to reconcile them at this point. For one, the Fed
will be raising interest rates for a good while into the future. And
for another, the market doesn’t seem to care.
What it all means is that at some point, whenever that is, something
will give. And if history is any clue to the future, the Fed will win
the battle. Thus, if history holds up, when we reach that point where
interest rates hit whatever level spooks the collective market consciousness,
prices will tumble. Of course, since the bots don’t care and history
is being rewritten as we trade, none of that old stuff may mean anything
But, if history is still relevant, and I suspect it is, we don’t
seem to be there-there yet, at the breaking point. So we trade the
long side cautiously with small lots of stocks, options, and hedges
while we watch the exits and hope the door doesn’t close on us when
the panic starts.
Joe Duarte is an active trader and author of Trading
Options for Dummies , now in its third edition and The
Everything Investing in your 20s and 30s. To receive Joe’s exclusive
stock, option, and ETF recommendations, including trade results,
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