-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Buckle Up for the Meatloaf Market: What’s it Gonna Be Boy?

Editor Joe Duarte in the Money Options

In the iconic rite of passage classic rock megahit “Paradise by the Dashboard Light,” the key phrase “what’s it gonna be boy?” poses a question about a life defining decision with repercussions “’til the end of time.”

And today, it seems as if Wall Street’s algo based trading machines are about to face an equally pertinent defining moment. You see, the key question facing the algos, is whether they are going to continue to blow off the increasingly dangerous reality of the world in which we all live and continue their high frequency trading escapades which relentlessly push stock prices higher and higher.

The stock market, via robot fueled algorithm trading, has been defying and rewriting financial history for the past nineteen months. During this very profitable period of time, rising interest rates, burgeoning tariffs, trade wars, and increasingly volatile geopolitics, a combination of external influences which have in the past roiled the financial markets have become little more than temporary diversions for stock prices while offering routine opportunities to buy the dips and ride the algo tide to new highs.

So now we come to the latest fork in the road; the so called Turkey contagion – the “what’s it gonna be boy?” moment - where the potential for the implosion of Turkey’s economy, at least based on breathless reporting from diverse financial news outlets, is expected to morph into the latest financial market calamity. To be honest, I’m not sure Turkey’s problems are going to be any more than just another blip for the algo dip buyers. Of course much remains to be seen and things could unravel in a hurry. But based on last week’s action in the stock market, the bots are doing the same things they’ve been doing for the past 19 months. Sure, the indexes moved lower. But under the hood, there were plenty of stocks which did just fine.

But if history is a guide, if and when the stock market finally breaks, no one will escape fully unscathed. Consequently, from a trading standpoint, those of us who have been using small trading positions, hedging with options and ETFs, and keeping prudent levels of cash on hand should be in a better position to survive any change in the pervasive algo programs which could become apparent if the situation in Turkey does indeed spread elsewhere.

Market Breadth at Decision Point

The New York Stock Exchange Advance Decline line (NYAD) has been the most accurate indicator since Donald Trump was elected president. Indeed, over the past 19 months, NYAD has correctly kept those of us who follow it on the right side of the market’s trend, which is why its current configuration is cautionary.

Specifically, there are two aspects of this week’s NYAD which may prove to be significant if the market finally rolls over and delivers a sizeable move to the down side.

1) The breakout in NYAD after its recent consolidation pattern is on the verge of failure. If NYAD breaks decisively below its 20 day moving average and begins to trace a lower high and lower low pattern, it may be signaling an end to the intermediate term uptrend.

2) Note the lower highs and the rolling over of both the RSI and ROC indicators. Together, these may be marking a loss of momentum.

Long Term Index Uptrend Remains Intact

Despite any short term warning signals, until things change drastically, the very big picture is that the long term index uptrend remains intact. However, the outlook for the next few weeks is starting to cloud. Thus in order to be prepared for any eventuality it’s time to start pinpointing crucial support levels and to see what the robots do if and when prices reach them.

The likely make or break point for the S & P 500 (SPX) is likely to be near the 2780 area, its 50-day moving average. The decision point for the Nasdaq 100 (NDX) is likely to be near the 7250 area, its 50-day line.

The Accumulation Distribution (ADI) and On Balance (OBV) indicators for NDX are a bit more positive than those for SPX. However, ROC, which measures momentum, is a bit dicey for both indexes as it has rolled over after Friday’s failure of the recent rally attempt. It’s also important to note that volume in both NDX and SPX continues to shrink, a fact that will likely increase volatility.

What if Turkey Doesn’t Matter?

The robot traders and passive investors are about to be tested. We are in the midst of an ideological war between the old guard, hedge funds, mutual funds, and grizzly trading veterans, and the new guard; the bots. The old guard, used to the old ways of Wall Street and the days where geopolitics, interest rates, and trade wars actually affected share prices are hunkering down. Thus, it is a reasonable assumption that the low volume is a result of their absence from the trading day.

The bots seem to be saying that all that stuff doesn’t really matter and that only the results of their algo strategies and HFT are worth noting. In other words, while the old guard worries about Turkey, the bots will trade the headlines in the short term, but in the longer term may just shrug off Turkey as another far flung place whose currency doesn’t really matter to anyone but the Turks.

Wouldn’t that be something?

I’ll say it yet again. Trade small lots, hedge all bets, and keep cash levels to where you get a nice dividend from your money market fund at the end of the month.

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, visit www.joeduarteinthemoneyoptions.com.



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