Analysis, Perspective, Trading
Is That You Santa Claus? The Fed and Trade Talks Deliver Early Christmas to Wall
By Joe Duarte on December 2, 2018
my fingers crossed as the market’s technical indicators suggest that
we may have a tradable bottom in place. And the initial response to the
trade truce between the U.S. and China certainly was positive, which bears
out my improving outlook, in the short term.
In fact, the party seemed to start early as U.S. stocks delivered
a nice rally to end November on an up note after the Federal Reserve
made it clear that interest rate increases may slow down or pause after
the expected December 2018 rate increase. Of course, we have to trade
day by day, and anything could change instantly. Thus, as the old country
song by Johnny Lee, “Looking for Love in all the Wrong Places” notes,
we may all end up “playing a fool’s game hopin’ to win and telling
those sweet lies and losing again,” at the slightest hint that something
is not panning out quite right.
One thing is much clearer at the moment. If the Federal Reserve actually
stops raising interest rates after December and the China trade situation
actually sorts itself out, 2019 may actually be a decent year for stocks.
Hopeful Signs in Key Indicator Appeared Prior to the Good
The NYSE Advance Decline line (NYAD) has been the most accurate indicator
of the market’s trend since the presidential election in 2016. In September,
NYAD, correctly predicted the October swoon, and now, barring a reversal
to the down side the indicator is suggesting that a tradable bottom
may be in place.
Specifically, NYAD did not make a new low when the markets, especially
the Nasdaq 100 Index (NDX) made new lows recently, which is a positive
divergence likely reversing the negative divergence the line displayed
in September. Furthermore RSI and ROC have reversed their down side
trajectories confirming that the odds of the down trend having been
arrested are above the 50-50 mark. A complete confirmation of the trend
reversal would be signaled if the ROC rises above the zero line and
NYAD can make a clean breakout above its 200-day moving average and
there are no reversals below those two key chart points.
W Bottoms are Everywhere
The S & P 500 (SPX) seems to be in the final stages of a W bottom
and is now poised to break back above its 200-day moving average, a
factor that would be reassuring to those betting on higher prices for
stocks over the intermediate term.
A positive development was the increase in volume and the improvement
in breadth on the last two trading days of the week that ended on 11/30/18.
Also encouraging is the reversal in the Accumulation Distribution,
On Balance Volume (OBV) and the Rate of Change (ROC) indicators for
the index which show that money is moving back into the market.
Even the Nasdaq 100 showed signs of life at the end of the week as
money seemed to be moving back into select tech names such as Iridium
(NSDQ: IRDM) and Texas Instruments (NSDQ: TXN). Iridium recently gave
an upbeat conference call after its earnings, and Texas Instruments
is as well run a technology as there is. Of course there was a bounce
in the FANG stocks (FNGU), which helped, but overall it was the chip
stocks and the software stocks such as Microsoft (NDSQ: MSFT) which
saw the biggest money flows, a fact that suggests that there may be
a leadership shift in the works for technology.
So Far So Good
The Federal Reserve may have seen the light the U.S. China trade
standoff seems to have called a truce. Of course there is still plenty
to worry about as the fallout from the U.S. midterms and the ongoing
saga with the Muller investigation can still deliver interesting surprises.
Nevertheless, it’s now prudent to trim any short positions left in
portfolios and to shift the burden of proof to the bears in this market.
As a result, it now makes sense to start building small to intermediate
size long positions in legacy tech stocks and other areas of the market
which are either extremely oversold or are showing signs of excellent
relative strength. It’s also a great time to consider options in these
same areas of the market.
All bets are off, though, if there is anything falls short of expectations
with the trade talks between the U.S. and the Fed decides to resume
their rate hikes. In that case, we may all have to start looking for
love on the short side once again.
I own TXN and IRDM as of this writing.
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
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