Joe Duarte’s Smart Money Trading Strategy Weekly
By Joe Duarte Editor Joe Duarte in the Money Options
As QQQ Tumbles the Fed Gets Set to Stumble. Keeping a Cool Head in a Tough Market.
March 17, 2024
Upside momentum in the major indexes is waning, as the S&P 500 (SPX) and the Nasdaq 100 (NDX) are showing signs of wear and tear. Thus, the Fed’s next FOMC meeting may set the stage for a central bank stumble.
The problem is that the Fed is unlikely to lower interest rates anytime soon, unless inflation slows. The most recent CPI and PPI numbers suggest that, in fact, it’s perking up again. Moreover, consumers are starting to show signs of stress.
Specifically, the real world economy is showing increasing signs of stress. After his company missed on its recent revenue expectations, the CEO of homebuilder Lennar (LEN) Bruce Gross noted that a rise in debt in its potential customer’s balance sheet is increasing and that more of its buyers are starting to miss credit card payments.
And that means that Fed Chairman Powell’s post announcement press conference could be monumental.
Sellers Head for the Exit in QQQ
Last week, in this space I noted that shares in AI bellwether NVDA were starting to fray around the edges and that the action in the shares could lead to meaningful action in the rest of the market.
But NVDA is not alone. Check out the chart for bargain retailer Dollar Tree (DLTR) which fell apart when it missed its most recent earnings expectations and announced the closure of 600 stores, with more closures possible.
The stock crashed below its 200-day moving average on huge volume. Both the ADI and OBV lines are falling rapidly as money comes out of the stock (OVB) and short sellers increase the selling pressure (ADI).
Although it’s not a well-known fact, DLTR is a member of the Nasdaq 100 Index (NDX), thus it’s one of the holdings in the Invesco QQQ Trust (QQQ), which as the price chart shows looks headed for a test of its 50-day moving average. Note the aggressive downturn in the OBV line as sellers in QQQ head for the exit.
As a result, this is a great time to stick the sound trading principles which will keep investment accounts solvent:
- Stick with what’s working; if a position is holding up – keep it;
- Take profits in overextended sectors;
- Consider some short term hedges;
- Look for value in out of favor areas of the market that are showing signs of life;
- Protect your gains with sell stops and keep raising them as prices of your holdings rise; and
- Trade one day at a time.
Bond Yields Reverse – Mortgage Increase Likely to Follow
Over the last few weeks, I’ve been bullish on bond yields and related interest rates such as mortgages. I did recently note, that the 4% yield on the U.S. Ten Year Note (TNX) was a key support level, and that a failure to break below that level could prove troublesome.
It seems I was right. As a result of the worse than expected CPI and PPI numbers, bond traders reversed course and TNX is now testing the yield range between the 4.3% and 4.4%, after a bearish cross above the 200-day moving average in response to the resurgence of inflation.
As a result, the action in next week’s mortgage rates will be worth watching. The key is whether the average crosses back above 7%. Such a development would be very bearish for homebuilder stocks.
For its part, the S&P SPDR Homebuilders ETF (XHB) remains very resilient. Yet, the environment for the sector is evolving, as I described in detail in this post.
On the bullish side, the balance between supply and demand is bullish for homebuilders. On the other hand, if financial struggles continue to mount for consumers, the earnings and revenue momentum for homebuilders will slow. That’s not something that has registered with Wall Street yet. You can check out my latest homebuilder picks with a Free Two Week trial to my service, here.
You can see that the worries about the economy are starting to spread in the market. The price chart for the Consumer Discretionary Select Sector SPDR ETF (XLY) is now testing its 50-day moving average with both ADI and OBV heading lower as sellers leave the scene (OBV) and short sellers increase their presence (ADI).
Inflation is hurting everyone, but there is a solution. If you’re looking for a to generate a paycheck via actively trading stocks, check out my active trader focused Substack page here. New trades are posted on Mondays.
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.
Oil Stocks Break Out
As I’ve noted in recent posts, the oil market has been heating up. Nearby oil futures have crossed above the $80 barrier and the cash price for West Texas Intermediate has followed.
The rally in physical oil has now confirmed the rally oil stocks, and it looks as if we’re off to the races for now. The rationale embraced by the markets is that the conflict in the Middle East, the subsequent problems in the Red Sea, the increasing number of attacks on Russian refineries by Ukrainian drones, and the expectation of rising fuel demand for the summer driving season in the face of tight supplies will continue to drive prices higher.
You can see the bullish action in the Oil Index (XOI), which has now broken well above the previous resistance level at 2000.
We recently closed out nifty oil sector active trade including an option winner. Check the results out here. In addition to active trades, I have several open positions in the energy sector, including options trades. You can review them with a Free Two Week trial here.
NYAD Remains in Uptrend. NDX Takes a Beating.
The NYSE Advance Decline line (NYAD) made a new high on 3/8/24, and remains within striking distance. Short term support remains at the 20-day moving average.
The Nasdaq 100 Index (NDX) remains under pressure and looks set to test the 17,500 area. NDX closed above its upper Bollinger Band two weeks ago which usually leads to a reversal toward the 20-day moving average. Given that the 20-day has given way, the odds of a test of the 50-day are increasing.
The S&P 500 (SPX) looks set to test the support of its 20-day moving average and may eventually test the 5000 area or drop as far as the 50-day line. The OBV line has definitely shifted to a bearish look which suggests real sellers are gaining control.
VIX is Testing the 15 Area
The CBOE Volatility Index (VIX), is still below 15. If VIX reverses its recent upturn, more upside is possible for stocks. A sustained move above 15 will turn things increasingly bearish.
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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Everything Investing in your 20s and 30s and six other trading books.
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a The
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