-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Cherry Red Camaros and the Highway to the Danger Zone

By Joe Duarte on September 4, 2018

In the 1980’s pop hit “Highway to the Danger Zone,” found on the “Top Gun” soundtrack, the now nearly forgotten Kenny Loggins sang: You'll never say hello to you. Until you get it on the red line overload you'll never know what you can do. Until you get it up as high as you can go. Out along the edges, always where I burn to be. The further on the edge, the hotter the intensity.”

We live in interesting times as each day brings us closer to the next day where something huge seems to be ready to happen. Yet it never seems to fully happen as each day just blends into the next. Meanwhile as we wait for the inevitable, the news, the politics, and the bull market steadily grind on in a seemingly never ending cycle of higher crescendos from which there is nothing but yet another high in intensity – “always where I burn to be.”

Moreover, just when you think it’s about over, here we go again – “further on the edge.” It’s as if we are trapped in a never ending album rock loop. You know you’re in the “danger zone.” You feel as if you’re the “band on the run.” You know you “can’t drive 55” – “higher and higher baby” – “red line overload.”

So we enter the month of September in the second year of the Presidential Cycle; the month which is supposed to finally deliver a meaningful correction for the stock market based on history. And, although the emerging markets are burning down along with Rio’s historical museum, and the currency markets are going nuclear, the jury is still out on whether there will be a contagion or whether business as usual will remain the norm.

Are we about to hit the wall or will this be yet another opportunity to buy the proverbial dip? Only the bots know. And all we can do is to wait and see what they do next.

Uptrend Remains Intact

For the umpteenth time in recent history the New York Stock Exchange advance decline (NYAD), the most accurate indicator of the market’s trend since the 2016 presidential election is pointing toward higher stock prices. After its recent breakout and making a new high midweek, NYAD pulled back but remained well within reach of yet another new high.

More important, NYAD is still not overbought while the ROC, which measures momentum is still rising, suggesting that there is more to come.

Cherry Red Camaro - Indexes Throttling Up

The wall of worry is in near panic mode with hedge funds imploding as wrong way bets are coming due but the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes, channeling a cherry red Camaro, seem to be throttling up and getting ready to move higher.

We may be in the early stages of what could be a significant move to the up side in stocks. Indeed, here are three significant changes in the market:

1) Volume is ticking up.

2) On Balance Volume (OBV) and Accumulation Distribution (ADI) for SPX and NDX have broken out to the up side.

3) ROC is on the rise with room to move higher which suggests upside momentum is building.

Momentum Builds as Bears Ratchet Up Bets

Unless something changes it seems as if the stock market is setting up for another fake out. And this time may be different as bears, whose wrong way bets are crippling their pocketbooks may finally throw in the towel, given the bullish turn in key technical indicators just as the wall of worry is rising to new highs.

I want to be clear. I don’t make predictions anymore. This is just an analysis of where things ended at the end of August. Indeed, I am as amazed by this market as any other trader. But it is a well documented phenomenon that if and when the bears finally cave in to the bullish trend, the odds of a real bear market rise. I may be wrong, but it surely feels as if that’s where we may be headed.

So I just trade small, hedge my bets, use options whenever possible, and see what happens next. Just the same, even if stocks embark on a once in a lifetime rally which carries us into the November elections don’t throw caution to the wind. I read somewhere that Kenny Loggins is penniless and now a drives a beat up Honda Civic. I don’t know if that’s true or not. But if it is true, it’s worth noting what can happen if you take a wrong turn on the highway to the danger zone.

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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