Analysis, Perspective, Trading Strategy
At the Edge of Chaos: V Bottom, New High in Advance Decline Line Suggest Uptrend Acceleration
Duarte in the Money Options
The “V” bottom that I thought was possible, as I noted in this space
in my 9/27/2020 column has materialized, and although the U.S. stock
market is still volatile with large swings being influenced by daily
news reports, especially politically related items, the uptrend until
proven otherwise is back.
It’s Still All about the Fed and the Stimulus Packages
Of course, no matter where the news cycle is, when it comes to the
stock market, there is only one real explanation for the upward bias;
the Federal Reserve continues to put money into the banking system
as it keeps interest rates near zero for at least the next two years.
Even more important, regardless of the rhetoric in Washington, there
is still the potential for yet another round of stimulus whether in
a composite package or perhaps as separate bills or even through executive
What it all boils down to is that as long as the Fed pumps money
into the system, and there is some semblance of fiscal stimulus, investors
who stay patient, pick well vetted stocks, protect them with well placed
sell stops and give them enough room to bounce around inside a broad
upward leaning channel will more likely than not be rewarded.
Agilent Breaks Out on COVID Uncertainty as Texas Instruments
Joins Semiconductor Rally
Shares of research equipment and chemical lab reagent company Agilent
Technologies (NYSE: A) delivered a quiet yet solid breakout last week
as Texas Instruments (NSDQ: TXN) joined the chip sector rally on news
of Advanced Micro Devices (NSDQ: AMD)’s reported buyout of Xilinx (NSDQ:
XLNX). Moreover, the common thread that binds the breakouts is the
ongoing search to find treatments and to develop a reliable vaccine
for the COVID-19 virus .
Certainly, the market is learning that a pandemic does not operate
via an on and off switch. In fact, pandemics, as are all disease processes
are purely chaotic non linear entities, meaning that they are by nature
predictably unpredictable. That said, Chaos eventually reaches the
point where Complexity moves in and things get somewhat organized.
Unfortunately, the recent worldwide rise in viral cases, regardless
of whether their outcome results in death, is proof that COVID-19 isn’t
going anywhere for the next few months and perhaps longer.
At the same time, even though as President Trump’s presumptive recovery
shows, there are some viable treatments for the virus. At the same
time no one really knows what the long term results of any “cure” or
“recovery” are at the moment. In other words, given the fact that COVID-19
could have long term effects along with the potential for repeat infections,
the search for treatments will remain an active pursuit, likely after
the initial vaccine becomes available.
Moreover, as there is no way to predict what will happen when the
traditional flu season kicks in for 2020 and what that will mean for
COVID-19, the odds of Agilent shares moving steadily higher remain
fairly good as the demand for their products and services will remain
steady or perhaps even rise dramatically should the pandemic spike
significantly higher. This could be even more dramatic if there is
an above average flu season simultaneously. Indeed, what that means
is that investors are starting to price in what could be a much better
than expected quarter when the company reports on 11/23.
Meanwhile TXN, which showed relative strength over the last few weeks
when the market was very uncertain also broke out last week. As I noted
above, the unifying fundamental reason for the breakouts in these two
stocks is COVID-19. And while Agilent’s medical connection is quite
obvious, many don’t realize the reach of TI’s chip portfolio whose
products are included in just about every type of technological device
What that means is that as the COVID uncertainly remains in place,
so will the demand for technology at all levels due to the work at
home and related technical trends. Moreover, TI is a huge player in
the automotive and industrial sector, which means that as electric
cars gain market share and robotics increase their presence in the
industrial sector, TI’s long term prospects remain sound.
Finally we can see by both charts that the technicals are improving
with Accumulation/Distribution (ADI) and On Balance Volume (OBV) turning
up after the respective recent price consolidations in both stocks.
NYAD Makes New Highs Confirming Renewed Strength of Long
The New York Stock Exchange Advance Decline Line (NYAD) made a new
high on October 8 and October 9, confirming the reversal of the brief
Duarte 50-50 Sell Signal in late September. Even more significant,
stocks have picked up momentum and moved steadily higher.
The S & P 500 (SPX) and the Nasdaq 100 (NDX) indexes are still
well below their recent highs, but their recovery is fairly evident
and is a sign that money is moving back into stocks.
Especially encouraging is the nice uptick in both the Accumulation
Distribution (ADI) and On Balance Volume (OBV) for both indices.
In fact, the potential for a wave of mergers in the semiconductor
sector, if it materializes beyond the reported deal between Advanced
Micro Devices (AMD) and Xilinx (XLNX) should provide another excuse
to move money into the technology sector over the short to intermediate
I’ve recently recommended two tech stocks which are showing bullish
signs of being accumulated. In the current climate, it is always possible
that if a merger craze develops these two stocks could be targets.
Check them out via a FREE trial to Joe Duarte in the Money Options.com.
I sometimes get subscriber mail that shares their concern when the
market gets volatile. And I get it. Crazy markets, such as what we
saw in late September are frustrating.
Yet, while it’s easy to get impatient in a volatile market, it’s
just as important to look back and see how your investment plan has
worked during volatile periods in the past. Moreover, it’s most important
to see whether your account has more money in it now than what you
had at the end of the prior year.
If you’ve survived volatile markets in the past, and your account
shows a profit compared to what you had at the end of last year, then
you’re on the right track. If you don’t meet those criteria, then you
should consider revisiting your trading plan, whether that is a self
directed program or whether you subscribe to one or more investment
Be that as it may, as I’ve noted here many times, the key to the current
market is whether the Fed keeps pumping money into the banking system
and whether there is some sort of stimulus package for the real economy.
And until that changes, or the New York Stock Exchange Advance Decline
line (NYAD) tells us otherwise, the trend remains up. But just because
the trend remains up, it doesn’t mean that anyone should squander their
money, just throwing darts at the market.
As a result, it’s important to remember that every stock I pick is
meticulously vetted and that sell stops are carefully placed in order
to cut losses when a stock breaks down beyond repair. The same is true
for my options picks, which are not just picked for profit potential,
but also developed based on the type of market which is currently unfolding
and for their ability to help manage portfolio risk.
And in the current market, as I’ve noted here, there are some excellent
opportunities to use the Buy-Write covered call option strategy. Above
all, if there are no good stocks to pick, then there is no need to
take risk in any market, whether the Fed is dropping money out of helicopters
or not. The bottom line is that regardless of what Trump and Pelosi
agree to or not regarding stimulus or anything else – sorry looking
price charts should be a warning to all investors to be prudent.
Finally, investment is risky and sometimes even the legendary investors,
of whose club I do not count myself as a member, lose money. So when
frustration sets in, always remember that the key to success as an
investor is to manage risk, pick stocks when the odds are overwhelmingly
in your favor and in that way you can stay in the game over the long
term in order to realize profits.
I own shares of A, AMD, and TXN as of this writing.
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
Options Book for 2018 by Benzinga.com - now in its third edition, The
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