Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Uncertainty Remains But Near Term Bottom Plausible
Duarte in the Money Options
The speed and magnitude of the current selloff has led to the
development of an indicator setup which, as I describe below in detail,
suggests that the market is ripe for a reversal. And although more
volatility is possible in the last two days before the election, I
would also not discount the possibility of a Brexit like scenario where
the futures collapse on election night and rally significantly soon
As Europe shuts down, fears of another extended COVID-19 lockdown
in the U.S. are on the rise, but with shifting data and regional variations
on infections, some positive developments on the treatment front, and
a hard to explain low number of regular flu cases being reported, COVID
is an increasingly tough call at the moment. More likely, the lack
of a stimulus package from Congress delivered what might have been
at least a technical knockdown (TKO) for stocks in the short term.
But that story may have already fizzled out, and if history is any
clue as to what the future may hold, it is plausible that this selloff
will be just another opportunity to buy a profitable dip at some point,
perhaps in the not too distant future.
When that dip comes, is certainly anyone’s guess, but it could come
as soon as November 4 or even sooner. Indeed, the only real certainty
is that the recovery in stocks is likely to start when there is some
type of news event that the algos find enticing such as a stimulus
package, a favorable outcome to the election – whatever that is, or
a perceived decrease in the COVID-19 threat.
It’s All up to the Machines and their Handlers
Of course, we should not get ahead of ourselves, as it is just as
plausible that the market finally plunges into a bear market. After
all, artificial intelligence is just that; artificial. The truth is
that we are dealing with machines programmed to respond to headlines
and front run trades at the exchanges in a fashion designed by their
programmers; people who bring their own biases along with the highs
and lows of their lives into the office and, like anyone who’s ever
had a bad day at work let it may get the best of them and…oops!
So the bottom line is that none of what we’ve seen so far should
be surprising to anyone who’s traded the market over the last decade,
the period of time when the machines have finally taken over the majority
of daily trading.
Indeed, as I noted last week in this space, there were clearly signs
that a big move in stocks was coming. And while I noted that the odds
favored an upside move, I also noted: “it makes sense to be prudent,
to consider multiple trading outcomes and to be patient while at the
same time being prepared for what is likely to be a significant market
move as the election nears,” while adding “those investors who are
not willing to take some chances should not be investing or at least
being very choosy in where they put their money and how much they wish
to risk on any given position.”
Taking Stock of the Moment
Of course, every time there is a massive selloff, the instinctual
response may be to panic, especially when the market is making new
lows on a regular basis. And while I take the market’s action seriously
and I’m acting accordingly, it’s equally important to review trading
principles and to stay disciplined. So here are the major ones to consider:
- Don’t fight the Fed. The Federal Reserve continues
to pump $130 billion per month into the market. Certainly that may
not be enough in the short term. But it’s not chump change either,
which means that at some point, when things calm down, the market
will again recognize the Fed’s actions and stocks will be more attractive.
- Don’t Fight the Market’s Momentum. With the NYSE
Advance Decline line (NYAD, see below) delivering a sell signal as
of 10/27/27, it’s not a good idea to be very aggressive just yet,
although if you wish to be aggressive you can use declines to add
to positions that are holding up which are showing relative strength.
- Use prudent sell stops. By placing sell stops
at 5-8% below your initial purchase price and continually ratcheting
them up as a stock advances you are more likely to preserve profits
or get out of a position that is not working out in its early stages.
- Manage each stock individually . As the market
falls, it becomes most important to see how stocks in a portfolio
behave. If the stocks you own are not falling with the market, there
is no reason to sell them as long as they remain above their sell
- Always plan for the next buying opportunity .
Market declines are the best opportunities to build your shopping
list for the next rally. Thus as your current stocks get stopped
out, let the cash in your account build up as that will be your ammunition
for the next buying opportunity.
- Build your shopping list now . While others panic
and worry, use this opportunity to build your shopping list for the
next up leg.
Critter Solutions King Rollins Capitalizes on Good Management
and a Just in Time New Business Line
As the stock market was crashing and burning on 10/28/2020 shares
of exterminator giant Rollins Inc. (ROL) were moving steadily higher
after a nifty beat of its earnings and revenues expectations. Moreover,
the beat came as much from the company’s cost cutting initiatives,
and lower fuel expenses, as it did from the steadily growing new business
brand it created in response to COVID-19 – Vitalclean.
And while Vitalclean specializes in keeping businesses clean from
the pandemic, Rollins’ main business, exterminator services – think
Orkin and other general pest control brands including those involved
with attic critters: rats, possums and the like - is growing its footprint
in the residential segment as stay at home workers are more conscious
of their surroundings and their attics.
The stock is slightly overbought, and it did pull back from its breakout
slightly to end the week of 10/29/2020, but Accumulation Distribution
(ADI) and On Balance Volume remain positive and the company’s future
guidance was solid . So even if ROL goes into a consolidation pattern
it’s probably worth using the consolidation as an opportunity to own
some shares or add to the position in a measured way given the market
Have you put your shopping list together? Maybe I can help. I have
added two new stocks this week which are benefitting from the changing
trends in society due to COVID-19 while showing some excellent relative
strength in a tough market. Get a FREE look at these stocks and the
entire Joe Duarte in the Money Options portfolio by taking a FREE trial
to my service. Click here.
Bollinger Bands Suggest Selloff has Gone Too Far
Last week, I noted that the Bollinger Bands surrounding the NYAD
Advance Decline line were predicting a major move in stocks as they
were moving toward their 20-day moving average; usually a sign that
volatility is coiling up and that something is about to happen. Certainly,
that was a correct call.
But now, the same Bollinger Bands are telling us that the selling
has gone too far. Specifically, the NYAD moved outside the lower band,
which at first indicates that the direction of the move is accelerating.
However, and more important, is the fact that once this happens, it’s
usually a prelude to a trend reversal, as the trend goes too far in
one direction and eventually reverts to the mean. In this case, this
is a signal that the selling is nearer to exhaustion than to the start
of the trend.
A similar picture is now evident in the S & P 500 (SPX) and the
Nasdaq 100 (NDX) indexes. Nevertheless, this observation, while useful
is no guarantee that the selling will stop tomorrow or even in a week.
We simply know that based on the indicator’s design and its past history
and accuracy, the selling is now well on its way and ripe for some
sort of reversal at some point.
In other words, we are now in that grey market zone where psychology
and momentum wax and wane and traders are more likely to trade on emotion
rather than discipline. What that means is that we may still see more
selling in the next few days or perhaps longer but that the market
is now closer to being ripe for a reversal than it was even a few weeks
The bottom line is that, just as I noted last week, investors should
now be focusing on the direction of the next move, not of the recent
past. Still, it’s important to note that the market is not completely
oversold yet as the RSI for NYAD, SPX, and NDX has not hit the 30 mark.
Moreover, the long term test for the bull market is what happens at
the 200-day moving averages for NYAD, SPX, and NDX.
This is a great time to have your own set of go to indicators at
your fingertips. To learn how to build your own NYSE Advance Decline
line like I do and how to use it, check out my latest Your Daily Five
video: “How to build my Favorite Indicator.” Click here.
Near Term Bottom Plausible
As the selling goes on and the fear reaches a crescendo so do the
odds of any major decline being closer to its end also rise. Nevertheless,
it’s never a bottom until the market stops falling. And, of course,
although we have indicators that will guide us in making decisions
as to when a real bottom is in, it’s most prudent to act cautiously.
So while it feels as if we may be getting close to a bottom, we don’t
know if and when such a bottom and a subsequent trading opportunity
will actually materialize. Thus, the best we can do is to manage our
portfolio via our trading rules, using sell stops, hedging when appropriate
and letting our cash build up so that we are ready for when that bottom
does appear and the uptrend returns.
I own shares in ROL as of this writing but may be stopped out at
any time due to changing market conditions.
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
Everything Investing in your 20s and 30s and six other trading
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The
Everything Investing in your 20s & 30s at Amazon and The
Everything Investing in your 20s & 30s at Barnes and Noble.
Washington Post Color of Money Book of the Month is now available.
To receive Joe’s exclusive stock, option, and ETF recommendations,
in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.
JoeDuarteInTheMoneyOptions.com is independently
operated and solely funded by subscriber fees. This web site and
the content provided is meant for educational purposes only and
is not a solicitation to buy or sell any securities or investments.
All sources of information are believed to be accurate, or as otherwise
stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com
have no financial interest in any of the sources used. For independent
investment advice consult your financial advisor. The analysis
and conclusions reached on JoeDuarteInTheMoneyOptions.com are the
sole property of Dr. Joe Duarte.