Analysis, Perspective, Trading Strategy
Dazed and Confused: the Magical Mystery Market is Coming to take you Away
Duarte in the Money Options
Led Zeppelin, in an ode to something sinister once
played the chromatically inspired ditty “Dazed and Confused.” And while
the hallucinations which plausibly inspired that anthem by Plant-Page and
company may be intriguing to classic rock fans, it’s an apt description
of the current market as the bears are certain that the end is near at
the same time the CNN Greed and Fear Index is flashing a danger signal
for the market’s sentiment with a reading of 75. But as confusing as the
current events may be, you’ve got to wonder if this isn’t the proverbial
Beatles inspired Magical Mystery Market coming to take you away.
I’ve been at this stock market analysis, trading, and writing thing for
a long time. I’ve lived and traded through two gulf wars, countless invasions,
multiple other near global crises, at least two “run of the mill recessions”
and a Great Recession.
I’ve survived one and almost two Clintons, two Bushes, one Reagan, one
Obama and now Mr. Trump. I’m still standing after the booms, busts, and
market crashes and bull markets spawned by the policies and money gymnastics
of Greenspan, Bernanke, and Yellen and now Jerome Powell. I can even recall
when savings accounts paid 7% interest and yields were well above 9% for
the U.S. Thirty Year Treasury bond. But I’ve never seen anything such as
what we’re seeing now where the bull market keeps on climbing a wall of
worry that doesn’t stop rising and where traditional signals seem to mean
Last week in this space I noted that things were clearly different in
this general cycle of existence, inside and outside the market. Specifically,
I wrote: “ This time is different because the game has changed. The big
guys have been raked over the coals by the bots and the overkill money
printing by central banks and need to save their gigs. Furthermore, there
are still too many bears banging the table and too many things that are
holding up the wall of worry. Thus, until proven otherwise the odds favor
a continuation of this very nervous, highly selective and unforgettable
So I’m sticking with that analysis because there is still too much money
floating around the world looking for a home, and I’ve got nothing else
to hang my hat on at the moment. Moreover, while things could easily change
at the drop of a Bitcoin or whatever the hot crypto of the moment is, the
only thing I can do is trade the trend and focus on price action with the
usual caveats that regular readers have become familiar with: trade small,
hedge, and have one foot out the door at all times.
Is it a Divergence or my Imagination?
The Dow Jones Industrial Average (INDU) is firing on all cylinders having
made several new highs on the week that ended on 9/21/18 while the New
York Advance Decline line (NYAD), the most accurate indicator of the stock
market’s trend since the 2016 presidential election, remained in a rising
channel but as of 9/21/18 had yet to confirm the new high in the Dow or
the S & P500. Thus, it seems fair to raise the question of whether
this is a meaningful technical divergence which is forecasting a measureable
decline in stock prices.
Arguably the divergence argument is emerging at best but it is worth
watching carefully. The NYAD continues to trend higher, albeit sporting
a flatter slope than we’ve seen in previous rallies. It is certainly above
its 50 day moving average while RSI is not yet at an overbought or oversold
level. And the ROC is similarly neutral; all of which suggests the market
is in a wait and see posture but still sports a bullish bent.
When it comes to the other major indexes, it’s clear that money is coming
out of the big tech stocks in the Nasdaq 100 (NDX) which did not make a
new high this past week and where the On Balance Volume indicator (OBV)
has clearly rolled over. If this trend continues we may be in for a bumpy
ride in the tech sector, although NDX is closer to a new high than to a
The S & P 500 (SPX), for its own account, confirmed
the new high in the Dow Industrials and has a positive money flow appearance
with both OBV and ADI sloping higher while ROC continues to be neutral.
As a result, from a technical standpoint we have reasons
for caution but no data which overwhelmingly suggests that a major decline
is at hand.
Magical, Mysterious, and Certainly of Concern
I remain nervously and cautiously bullish – sort of – because the bears
are calling for a crash as the bulls are going crazy with delight, which
means that something should give.
Under normal circumstances this much bearish talk would be a very bullish
contrarian development. But we have some credible sentiment signals that
are flashing caution signs at the same time which gives the bears some
clout. If these were normal times we would experience either a stock market
crash or a price blow off where it becomes painfully obvious that the stock
market is no longer a measure of anything that resembles sanity.
But these are not normal times. Thus I don’t know which way things will
break although when they do many will claim credit for having predicted
the event, whatever it is. All I know is that I can’t shake the feeling
that at some point something very dramatic is likely to develop.
At this point the potential divergence of the NYAD and the major indexes
may be meaningful, or it may be just another installment of this bull market’s
penchant for algo triggered fake outs, especially if the line catches up
to the Dow and the S & P and if the market continues its gallop higher
over the next few weeks.
However, I feel compelled to note that if stocks start to retreat wholesale,
in retrospect, it may very well be that this very subtle technical development
involving the Dow Jones Industrial Average and the New York Stock Exchange
Advance Decline line might turn out to have been the proverbial S-E-L-L
No matter what I suggest we all shake off the daze and the confusion
and buckle up. For as the Beatles once crooned: The Magical Mystery Tour
is dying to take you away.
Joe Duarte has been an active trader and widely recognized stock market
analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading books.
To receive Joe’s exclusive stock, option, and ETF recommendations, in your
mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.