Analysis, Perspective, Trading Strategy
In this Market Stick with what’s working and shorten Time Frames
By Joe Duarte on January 27, 2019
Clash, a highly popular punk band from the 80s had a big hit with “Should
I Stay or Should I go,” a tale of indecision where a guy who can’t seem to
figure his girlfriend’s wishes for the evening begs for clarification of his
Welcome to the current stock market where investors are experiencing
a daily intraday whipsaw as traders, human and algo, try to figure
out whether the political stalemate in Washington is more meaningful
to asset prices than the fact that the global central banks are not
likely to raise interest rates anytime soon.
Historically, we seem to be at that inflection point in the economic
cycle where a slowing economy is supposed to affect corporate earnings
and the market is looking to the Federal Reserve to lower interest
rates. Certainly the central bank of China has begun an easing cycle
which is having a positive effect on stocks in the Pacific Basin and
Asia in general. This is being reflected in the generally positive
action in emerging market ETFs (EWZ, EWA, EWM).
So this week with its full schedule of economic data, including Friday’s
employment report, a full slate of earnings including Apple and Microsoft,
and a Fed meeting to start the week, should be an interesting set of
trading sessions. “Should I stay or should I go?”
This brings me to the final leg of the proverbial stool, the trade
spat between China and the U.S. Indeed, this seems to be the most important
factor at the moment, at least based on the fact that the robot traders
buy the market on positive trade headlines and do the opposite when
the news on the situation is negative.
All of this makes me wonder if we are not witnessing a mirror image/complete
reversal of the October bear market, especially since last week started
on a down note but the “buy the dip” crowd resurfaced in a big way.
Indeed, the only thing we know so far is that there has been aggressive
money flow into biotech (IBB) and the semiconductor stocks such as
TXN, AMAT, and MU, which hit the afterburners last week.
Stuck in the Middle No More
Nowhere was the market’s indecision and tendency toward volatility
more visible last week than in the activity of the New York Stock Exchange
Advance Decline line (NYAD) who’s uncanny ability to predict the general
trend of the market has been unrivaled since the 2016 presidential
As the NYAD chart clearly shows, activity that had been range bound
led to a breakout to the up side as the 200-day moving average for
NYAD seems to have now become support rather than resistance. If this
particular technical factor is not reversed, the odds favor higher
stock prices over the next few weeks and perhaps longer.
Momentum Reversal for Indexes
Both the S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes reversed
the weakness they displayed earlier in the week and closed just below
their recent January 2019 highs.
Both indexes have crossed above their 50-day moving averages and
seem to be setting up for a test of their 200-day moving averages.
However, the Accumulation Distribution (ADI) and On Balance Volume
(OBV) indicators suggest that money is moving aggressively back into
the market. This confirms the positive action in the NYAD.
Thus until proven otherwise, the burden of proof
has once again shifted to the bears as the algos and the hedge funds
seem once again to be buying every dip.
Go with the Flow and Trade in Short Bursts
In this market the trading action is more than ever dependent on
headlines and the way robot traders respond to those headlines. This
is a mixed blessing of sorts as it creates volatility on an intraday
basis and volatility creates opportunities for the nimble. But taking
a more macro perspective, it’s clear that the algos will accelerate
the major trend in the market. And that trend, at the moment is up
as the lure of easy money is again becoming a money magnet for stock
Therefore those who trade for a living are more likely to survive if
they keep the general trend of monetary policy in mind. It may also be
useful to use trading targets and sell stops for profit taking and to
consider moving more assets into day trading or shorter term strategies.
By following these simple tenets traders could stay for a while and go
while the getting is still good.
More than anything stick with what’s working: emerging markets, biotech,
I own EWM, EWA, and EWZ 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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