Analysis, Perspective, Trading Strategy
The Market is oversold, so a Bounce in Stocks is Plausible. Let’s See How Things Go.
By Joe Duarte on May 12, 2019
the Twitter and media war between Trump and the Chinese over the weekend,
I thought a bounce in stocks was likely this week. But now it’s about whether
there will be a bounce at all or just as likely a resumption of the selling.
Moreover it’s more about whether the bounce, if it materializes, is credible
and manages to hold.
The problem is that the one thing the market was betting on, a trade
deal between the U.S. and China is now highly uncertain. Of course,
if there is a positive surprise somewhere along the way we may well
be off to the races again. But as things stand at the moment, there
is no certainty of that and perhaps no deal will ever actually get
done until after the 2020 election. Therefore investors are now more
than ever at the mercy of the algos, the headlines, and the egos of
politicians and bureaucrats in Washington and Beijing.
Last week, in this space, I noted: “I was reasonably positive on
the stock market until mid-day Sunday based on what seemed to be increasing
upside momentum and subtle but hopeful changes in the housing and restaurant
sector which suggested consumers are resting a bit easier at the moment.
But after President Trump’s tariff threat against China, we’ll have
to see how things develop.” And develop things did as the market sold
off aggressively before Friday’s predictable algo triggered reversal,
which I will detail below.
Interestingly some stocks managed to survive the onslaught. And these
are the stocks which, over time once the dust settles could be part
of the leadership for the next leg up in the market, whenever that
One of them, Leidos Holdings (NSDQ: LDOS), a software company specializing
in intelligence and other government contracts, which we’ve owned since
April 1 well before it broke out, has expanded its recent move making
a new high after a better than expected earnings report. Furthermore
the company seems to be well positioned for the future with CEO Roger
Krone citing increasing bookings and a rising backlog of orders in
the pipeline during the recent conference call.
Accordingly, it’s not likely a coincidence that LDOS managed to thrive
last week or that its book of business looks robust. Given its line
of business – spying software, likely for the NSA, the DOD, and God
knows whom else; LDOS seems to be a stock whose time has come given
the general state of global uncertainty.
As Pink Floyd once said: “Welcome my son, Welcome to Machine.”
Market Breadth Hits Oversold Levels
This may be for naught, given the rising war of words between China
and the U.S. over the weekend. But here goes anyway. The New York Stock
Exchange Advance Decline line (NYAD), the most accurate indicator of
the market’s trend since the presidential election of 2016 rolled over
last week and crashed below its lower Bollinger Band on an intraday
basis on May 9, 2019, mirroring the action of the prior week when the
line soared above the upper band and signaled a reversal to the down
side. However, NYAD managed to recover from that breach and ended the
week on a tentative, but nevertheless positive note.
Breaches of the upper or lower Bollinger bands
are important signals as they often mark the possibility of a trend
reversal, as the May 3, 2019 breach of the upper band clearly did.
Now, we have to wait and see what happens in response to the breach
of the lower band from May 9. A clue as to the future may hold is the
action in the RSI indicator for NYAD which is near the 50 area. Note
the support lines on RSI which show that when this indicator has held
above 50 since 2016, the odds favor a reversal to the up side.
Thus, based on this particular set of observations it is possible,
although not guaranteed that a significant amount of selling has already
taken place and thus, barring another major external event, the odds
of another up leg are likely better than even.
For their part, the S & P 500 (SPX) and the Nasdaq 100 (NDX)
did not fully break down either, which also added to the positive tone
after the selling last week.
In fact, despite the selling pressure, and even though both indexes
broke below the support of the 20-day moving averages they successfully
survived tests of their respective 50-day moving averages after they
breached their lower Bollinger Bands on an intraday basis, mirroring
the action in the NYAD.
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It’s not the bounce but the nature of the bounce
The stock market is poised for some sort of oversold rally attempt
in the next few days. And although a respite from the selling will
be welcome, it’s more about whether the bounce holds than whether it
happens. Thus, if any rally fails, it will likely mean that the selling
Subscribers to this service hedged their bets last week. Thus, if
the bounce fails they will have some protection as we make further
decisions. For the moment, it’s all about managing risk by sticking
with what’s working, hedging long positions, and letting the market
make your selling decisions via well placed sell stops.
Otherwise, I am compiling a potential buy list and will deploy the
best candidates in due time.
I have an open position in LDOS 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
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