Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Imminent Break in Duarte’s 50-50 Rule Could Signal Big Trouble for Stocks.
Duarte in the Money Options
traders just got a wakeup call and the Federal Reserve, warts and all,
seems to have been caught napping. As a result, the stock market is on the
verge of reversing its current association with Complexity, the positive forces
of the Universe and trading it in for a date with Chaos, the realm of Disorder.
Just six days into the official summer season, stock traders are
suddenly seeing cloudy skies. Not only did the long heralded seasonal
Saharan desert storm cloud that’s been clogging up the Caribbean of
late finally hit the U.S. creating hazy sunsets and COPD exacerbations,
but the stock market seems to have decided that it’s rallied far enough
for now and that the bears are going to get a go at things.
Moreover, from a technical standpoint, as I will elaborate below,
there is now the imminent danger of a highly accurate technical signal
which I developed, Duarte’s 50-50 rule which, delivering a sell signal,
which if triggered could lead to a significant decline in the stock
market. For more details read directly below.
“Excuse me, while I kiss the sky.” J. Hendrix.
The Pavlov Market
Certainly a bumpy market is not altogether surprising, as I noted
here two weeks ago and in the June 19, 2020 episode of Your
Daily Five. In addition, as I wrote in last week’s edition of this
column: “As the traditionally sleepy summer trading season rolls into
high gear, the combination of low volume and anemic liquidity from
the Federal Reserve may make for a bumpy market,” which is exactly
And while the conventional wisdom says it’s all about the algos freaking
out over COVID-19 headlines, the decline in stocks is just as much
about the reduction in the amount of Federal Reserve money being pumped
into the U.S. Treasury bond market creating a liquidity vacuum in the
stock market. In fact the Fed has gone from putting as much as $300
billion in a single day into the markets in mid-March, the act that
kicked off the recovery rally for stocks, to its paltry by comparison
$4 to $4.5 billion per day scheduled to be infused into the system
during the month of July.
Sure, $80 billion is a lot of money to print in a month. Moreover,
if you’re a purist, you’re asking why the Fed is papering over zombie
debt in the first place. And you would be right on both counts.
However, from a trading standpoint, $4.5 billion a day, regardless
of whether it is 1) ultimately right or wrong from a fiscal and philosophical
standpoint; or 2) whether it has potentially negative repercussions
for the future; is just not enough money to keep the stock market rallying
in the face of COVID-19 uncertainty.
Clearly, the algos have been conditioned by two major external factors.
Like Pavlov’s dogs salivated each time they were presented with treats
so do the algos react to every single headline and to the Fed’s market
Thus, because there is no escaping the digital Pavlovian dynamic in this
market, the bottom line is that either the Fed ponies up more helicopter
money or the odds of a resurgence of the bear market are rapidly on the
rise as the algos respond to the no bid market by lowering the bid-ask
spread as they simultaneously short stocks accelerating the down side.
Therefore, unless things change, the resulting reality could be another
seemingly endless cascade of selling begetting more selling.
So as the next algo fueled mess develops, we should all ask these
- How bad does it have to get for the Fed to deliver another bazooka?
- How big will it be this time?
- Will it work as it did last time? And finally,
- Is the stock market finally going to deliver a real bear?
The cynical answer is that only the Asleep at the Wheel Fed and the
Pavlov algos know.
Can Biotech Survive a Bear Market?
In preparing for this week’s column, as I reviewed the increasingly
negative situation in the stock market, I noticed that the biotech
sector, as in the IShares NASDAQ Biotechnology ETF (IBB), had a down
day on June 26. But unlike other sector ETFs in the market, IBB managed
to hold well above key support, and remained near its recent high.
Indeed, both facts are indicative of a sector which is showing relative
strength. Moreover, it makes sense to keep an eye on this general area
of the market as it is likely to play an increasingly significant role
not just in the fight against COVID-19 but also in the war on cancer,
the battle against rare diseases, and increasingly on more common diseases
where traditional treatments are running into limitations.
IBB is an ideal way to invest in biotech. For one thing it saves
the trouble of having to research individual companies in the sector.
And for another, its diversification among a fairly large group of
biotech stocks can cushion the downside that comes along with bad news
to any individual stock in the sector.
That said, I wouldn’t rush out and load up on IBB, or any other stock
or ETF at the moment because of market risk. Nevertheless, given the
recent momentum thrust in the biotech sector, in the wake of its outstanding
fundamentals, a pullback of 10% or more could deliver a nice buying
opportunity at some point in the future. This would be evident, especially
if IBB can stay above its 200 day moving average on a break below its
50-day moving average. An even better show of relative strength would
be if IBB could actually hold above its 50-day moving average, especially
if the market was to break down decisively.
I have identified one very attractive biotech stock, even in this
market. I am describing this stock in detail, including detailed company
fundamentals, key technical aspects of the trade, along with specific
entry and exit points to my current subscribers.
To gain access to this interesting pick, and the rest of my current
recommendations, including three inverse ETFs, which could rally in
a big way if the market crashes, consider a FREE
trial to JoeDuarteintheMoneyOptions.com.
Impending Sell Signal on NYAD 50-50 Rule
The New York Stock Exchange Advance Decline line (NYAD) has been
the most accurate indicator of the stock market’s trend since the election
of Donald Trump. The 50-50 signal is very simple. As long as NYAD remains
above its 50-day moving average at the same time that it remains above
the 50 level on the RSI indicator, the trend in NYAD, and the stock
market remain up. Moreover, breaks below the 50-50 areas are usually
followed by meaningful market declines
Unfortunately, after the market selloff on June 26, the NYAD 50-50
Rule is close to giving a sell signal as RSI broke below 50 while the
advance decline line is on the verge of breaking below its 50-day moving
average. Clearly, as the chart above illustrates, 50-50 sell signals
on the NYAD are meaningful, and are marked on the chart by red ellipses.
Note that the S & P 500 (SPX) fell 20% on the sell signal
that occurred in October 2019 and that the most recent 50-50 sell
signal triggered the 36% decline in SPX that ended in March 2020
when the Fed put $300 billion in to the markets in one day.
Moreover, highlighting further weakness in the market, the S & P
500 has broken below its 200-day moving average as well as triggering
a break below the 50 area on its RSI indicator. Nevertheless, it is
important to note that the NYAD gets the senior ruling as a 50-50 Rule
sell signal in this indicator has more weight on the general trend
of the market than the action in the major indexes.
For its own part, the Nasdaq 100 Index (NDX) is nowhere near a 50-50
sell signal, which suggests that technology stocks, even as they fall,
may not fare as badly as the more diversified sectors in the S & P
500. Moreover, some of the resilience in NDX is likely due to the muted
selloff in the biotech shares housed in the index.
Welcome to the “Cruel, Cruel, summer”
Last week I posed the question of whether this would be a “Summer
of Love,” or a “Cruel, Cruel, summer.” Well, with the stock market’s
technical posture rapidly deteriorating and the Federal Reserve stuck
in the mud, the odds favor a continuation of the downside action, at
least in the short term. As a result, active traders should have started
to raise cash, tighten sell stops and implementing hedges.
How low can this go? No one knows. The way this market has acted
over the last few months, it could well set a new high in a few days.
However, if the NYAD breaks below its 50-day moving average, a trip
to its 200-day moving average is well within the normal technical expectation.
That could translate into fairly steep losses for individual stocks
and the major indexes.
I certainly could be wrong and the market could find its sea legs
and move higher. Moreover, the Fed could slow this process, and may
be able to stop if they increase the amount of money they inject into
the bond market and the banking system. But, even if the Fed acts aggressively,
there are no guarantees. So it is now worth considering that if this
goes on for another few days, we may be in for a great deal of pain.
Welcome to the cruel, cruel summer.
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
Options for Dummies, rated a TOP
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