Analysis, Perspective, Trading Strategy
Shallow Pullbacks and Dip Buying Likely to Remain in the Short Term
By Joe Duarte on March 17, 2019
trading heads – algos- surely prevailed last week as the market rebounded.
Arguably, there may be some options expirations related reasons for the rally.
Thus, what happens in the days ahead will be just as important as last week’s
bounce in stocks.
Nevertheless, in my March 10 posting of this column while advising
to stay patient and pragmatic while trading this market I wrote “what
used to take weeks to develop now often occurs in hours or days. Thus,
in order to survive traders must act rapidly. So while this market
could be headed down in a hurry, the flip side is that at some point,
we will be able to buy stocks at lower prices and perhaps in a shorter
period of time than anyone expects.”
Thus, I was not surprised to see the S & P 500 (SPX) bounce back
after the four day, three percent decline from the past week while
the NYSE Advance Decline line (NYAD) – see below for more details –
made a new high, suggesting that the short term trend has turned to
the up side for now. Of course, things may reverse again in the next
few days or weeks. After all, this remains a headline triggered robot
algorithm guided market.
My point, however, is that from a very macro standpoint, despite
the volatility we may see from time to time, this market is still responding
to the notion that interest rates won’t be rising anytime soon and
that the U.S.-China trade talks have not broken down. Of course, the
market is hoping that the trade talks will turn out to be very positive
and that the global economy will respond to lower interest rates and
a trade fix. Both points are definitely arguable, although not in this
- Calendar : The Federal Reserve meets as does
the Bank of England. Europe and the U.S. will release PMI data while
the U.S. will see regional Federal Reserve district data out of Philadelphia.
Another Brexit vote is expected.
- Big Picture : The third year of the Presidential
Cycle (2019) is traditionally bullish for stocks. But seasonality
alone can’t hold up stocks if central banks don’t respond to conditions
quickly enough and if the global economy does not respond to lower
interest rates or accommodative monetary policy as it materializes.
- Monetary Policy : Central banks are no longer
raising interest rates and markets are increasingly impatient as
economic data continues to show weakness. Meanwhile, the big three:
the Federal Reserve, the ECB, and the People’s Bank of China are
not showing signs of being in a hurry to ease policy aggressively
enough anytime soon because they are essentially out of options.
- Risk : Headline risk remains. Think U.S.-China
trade war, global tariffs, slowing economic data, politics. Of the
four, it seems politics is starting to get near some sort of boiling
- Market Behavior : Volatility is likely to depend
on headlines. Expect swift and until proven otherwise shallow pullbacks
with buying of the dips.
- What to do : Stay cool. Trade the market.
Market Breadth Makes New Highs
It’s hard to be bearish when the New York Stock Exchange Advance
Decline line (NYAD) makes a new high. In fact, given this indicator’s
solid record of predicting the future market trend, it’s hard to consider
that the future holds anything but higher prices in the short to intermediate
Of course, given the general headline climate, it’s also reasonable
to expect sudden short term reversals in the price trend. Accordingly,
it’s important the “buy the dip” mentality remains in place. Yet, as
long as the NYAD remains above its 20 and 50-day moving averages, the
likelihood of a decline such as the one we saw in Q4 2018 seem low.
For their own parts, the S & P 500 (SPX) and
the Nasdaq 100 (NDX) indexes continued to move higher after a four
day 3% decline in the week that ended on 3/15. Moreover, both indexes
closed above key resistance levels – 7200 for NDX and 2800 for SPX-
albeit in lower volume than I would like to have seen.
Furthermore, both indexes closed the week above
their upper Bollinger Band, a sign that trading might have gotten a
bit ahead of itself for the moment. So for now, it’s all about the
market staying above recent support and what happens when 2900 on SPX
It’s How Things Develop that’s Crucial
The market bounced back from a shallow, although scary three percent
pullback and is becoming slightly overbought. That means that how stocks
work out their overbought status is the next big trading worry.
The best scenario would be a slow and steady sideways consolidation.
But there is no guarantee that this will occur, which means that we
could see another three to five percent decline come on rapidly starting
next week. For now, however, the 20 and 50 day moving averages have
proven to be support, so they get the benefit of the doubt.
Moreover, staying cool and managing each stock individual position
on its own merits is the best approach to this market. If there are
opportunities to short individual stocks and sectors, it’s not a bad
idea to consider. Finally using options for high priced stocks will
reduce risk while the opportunities for Buy-Write strategies and building
positions in high yielding dividend plays is on the rise.
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
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