Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Stocks Recover.  SPX 5000 is Now Support.  What We Can Learn from Bitcoin.

February 18, 2024

After another wild and wooly week, the still mostly unheralded S&P 500 5000 price point is now support as the market’s breadth remains near all-time highs.

What We Can Learn from Bitcoin

The best days in the markets seem to be those when there is no economic data released.

As best as I can tell, there’s a market which moves purely on the perception regarding the supply and demand of the traders who trade it – it’s called Bitcoin.  I say that because for years I’ve been looking for connections and intermarket relationships via which to trade the dratted thing.  Yet, all I can find is that it goes up and it goes down, based on whatever drives traders to buy, or sell it, which as best as I can tell is just pure chart analysis and related herd mentality.

And while I’m not railing against Bitcoin, I’m actually intrigued and fascinated by it, I wish the stock market was the same way. 

Here’s what I mean.  Stocks were in a huge momentum run until the CPI figures knocked the wind out of their sail, only to rebound smartly the next day when retail sales missed expectations.  Two days after retail sales, PPI was above expectations, and guess what? The market tanked again, albeit a bit less than it did on CPI.

Meanwhile, several Fed speakers played down the significance of one bad month’s set of numbers. Data.  Yuck!

Meanwhile, the Bitcoin rally ($BTCUSD) barely missed a beat, remaining in a nifty momentum run.  Of course, it can’t do this forever.  The RSI is well above 70 and the rate of rise is thus unsustainable, as Accumulation/Distribution (ADI) and On Balance Volume may have topped out.  So we may see BTC pull back in the short term - $44,000 may offer support.

My point, is that if the stock market was more like Bitcoin, meaning that it traded purely based on supply and demand, which is discernible through technical indicators, the odds of making money as a trader would likely be higher if one adhered to purely technical criteria.

Bond Yields Continue to Climb

The reason stock prices are increasingly volatile is, wait for it, the bond market.   That’s because at the current level of interest rates, it’s hard to buy houses, cars, food, and yes, it’s harder to trade stocks, unless you’ve got a big account.  All of which can be traced back to the Fed’s QT (draining funds from the banking system). According to the Fed’s most recent balance sheet report, the Fed has removed nearly $1.3 trillion from the banking sector via the sale of securities since May 2022.  That’s $1.3 trillion that’s no longer available to make loans, or to buy stocks.

On the other hand, because the Fed printed so much money during the pandemic, despite all the QT, there’s clearly enough money left in the system to buy stocks, and yes Bitcoin.  Still, even though $1.3 trillion is an important sum, it’s removal from the system has only reduced CPI to a 3% year over year growth.  The Fed, tells us it wants 2% growth.    And there’s the rub. Bond traders aren’t likely to be happy until that 2% growth rate is at least visible, or until the Fed signals that it has changed its inflation target.

After CPI and PPI, the U.S. Ten Year note yields (TNX) rose further above its 200-day moving average and the 4.1% area, which is becoming distant support now as we start considering a move above 4.4%.  This, no longer subtle development is becoming a clear signal that the bond market may be getting closer to a more aggressive pace of selling – remember what happened from April to October in 2023. 

If that happens, stocks could well fall aggressively.  To be honest, I don’t know what’s going to happen to Bitcoin.  But I’ll be watching it for sure.

Where Money is Flowing – Focusing on Energy

In this week’s money flow analysis, I focus on the energy sector.   There are two underlying themes which may support a rally in this area of the market. One, of course, is the situation in the Middle East, especially the ongoing military activity between the U.S. and the U.K. and Yemen based Houthi group.  Reports of daily attacks from both sides on the ocean and on land are ongoing.

The U.S. Oil Fund (USO) has quietly moved above $73 as West Texas Intermediate crude (WTIC) is testing the $80 area, which is currently trading at an important decision point, composed of the 200-day moving average and the uppermost bar of a VBP cluster which extends to $68.  VBP bar clusters show us where money is concentrated.  A move above or below such a chart formation indicates that a new trend has emerged.  Thus, a sustained move above $78-$80 would be meaningful for the oil market.

The Energy Select Sector SPDR ETF (XLE), which holds the large cap oil stocks (think XOM, CVX), is now above its 200-day and above a large VBP bar, which means the bulls are starting to surge.  You can check out intermediate to long term trend energy stock and options with a Free Two Week trial to my service, here. 

The bullish tone expressed in XLE is also evident in iShares U.S. Oil and Exploration & Production ETF (IEO), as a wave of mergers and acquisitions in the sector seems to be in early stages of development.

If you’re looking for a to generate a paycheck via actively trading stocks, including those in the energy sector, check out my active trader focused Substack page here.  For ideas on how to hedge against risk, my latest video offers details on the successful use of put options in real time.  Check it out here.

S&P 500 Finds Support at 5000.  Market Breadth Remains Constructive.

The NYSE Advance Decline line (NYAD) finally made a new high recently, confirming the move above 5000 by the S&P 500 (SPX). And even though stocks had a mini-crash after the worse than expected CPI, the market surprisingly recovered. In addition, NYAD is still well below the RSI 70 area, a sign that it is not overbought and that the rally can still move higher.

The Nasdaq 100 Index (NDX) is in a consolidation pattern, with the 18,000 proving to be resistance. 17,500 is short term support. 

The S&P 500 (SPX) remained above 5000. 4800-4950 is short term support.  ADI and OBV are still in bullish patterns.

VIX Remains Below 15

The CBOE Volatility Index (VIX) remained below 15. This, for now, remains a bullish factor for stocks.  If VIX remains subdued more upside is possible.  A decisive move above 15 will indicate that an increase in bearish sentiment and market volatility is under way.

A rising VIX means traders are buying large volumes of put options.  Rising put option volume from leads market makers to sell stock index futures to hedge their risk.  A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying which causes market makers to hedge by buying stock index futures raising the odds of higher stock prices.

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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 selling Trading 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 books.

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