Joe Duarte’s Smart Money Trading Strategy Weekly

By Joe Duarte Editor Joe Duarte in the Money Options

Don’t Fall Asleep.  In this Market: Follow the Money.

August 11, 2024

Is the bottom in? I bet the machines know. All we can do is wait for their “all in” signal.

As I noted last week “On 8/2/24, I sent an alert to all my subscribers (JDIMO, Substack, and Buy Me a Coffee) to raise cash and wait for the smoke to clear in the markets.   As a follow up, I suggested that this selloff is puzzling, and that I wouldn’t be surprised if a buying opportunity materializes sooner than later.”

The jury is still out but there are encouraging signs.

Fear and Machines

Traditionally, after a market crashes, human investors panic. Their fear of losing money translates into volatility.  But in the present comparted to the past, since algorithms rule the roost and human fear is less influential, there are important differences to consider.

You see, machines don’t think. They just follow their “if this happens, do this” programming.  That means that, more often than not, when it looks as if the bottom is in, the odds are much higher than when humans ruled the roost. In other words, if the order flow says that the bottom is in, the bottom is in.

That’s because the machine market makers know whether money is flowing into our out of the market before anyone else does. They act accordingly in order to protect their accounts.  In addition, just a few milliseconds after the market makers know, high frequency traders (HFT) gain access to the order flow, and then, they follow the money.

Some may think it unfair that this is how things work. But I prefer practicality and accept the fact that by the time I start trading, mechanical traders with more money and better data, are acting.  And since their actions show up on price charts, that’s where I focus. 

Follow the Money

So, what’s our best choice? Follow the money.  And the machines have all the money and the data before we do.

One final note.  The algos change their minds based on the order flow. That means the down side trend can reassert itself quickly. 

Where Are They Doing?

As usual, I will discuss the action in the New York Stock Exchange Advance Decline line (NYAD), just below.  Yet, along with NYAD, a great way to discern what the bots are doing is by watching the trading action in the Invesco QQQ Trust (QQQ), as big money and HFT like this ETF.

We’ve been watching the $450 price point, noting that if it didn’t hold, the next important level to watch was the $430-$440 trading range, where a cluster of major technical indicators offered support.  I also noted if these levels held, the selling is likely over.  A sustained failure would indicate more selling is coming.  

As the chart shows, QQQ became oversold when the RSI hit 30, then found support just below $430 and the 200-day moving average and rallied back inside it its lower Bollinger Band.  The next test is at $455-$475 where the 20 and 50-day moving averages offer resistance.   If QQQ moves decidedly above the VBP bars between 420 and 450 the odds of a successful move above the 20 and 50 day MAs is more likely.

Both the ADI (scampering short sellers) and OBV lines (buyers coming in) have bottomed out, which means there is short covering and buying now.

The bottom line is that money is sneaking back into the market.

Stary calm and trade one position at a time:

• Expect the unexpected; THERE ARE NO SURPRISES – JUST EVENTS AND COINCIDENCES;
• Stick with what’s working – if any position holds up, keep it;
• If you get stopped out, move into strength;
• Use options to reduce capital exposure;
• Let the price charts do the talking; and as always
• Build and be ready to deploy that shopping list.

Following the Money

I am watching several key stocks which have recently been clobbered.  One is Amazon.com (AMZN), which got destroyed when it delivered softer than expected earnings.  But, before that, founder Jeff Bezos had sold $5 billion worth of his shares, delivering a double whammy to the shares. So far, the stock is oversold, but the recovery isn’t robust enough to get wild about, yet.  But, honestly, it’s pretty hard to kill this company, so I’m on it.

Specifically, I’m watching the 200-day moving average and what the stock does once it rises above this key resistance point.  It’s not going to be clear sailing above that, however, as there are three big VBP bars extending up to $185, which will make the ride bumpy.  ADI has recovered, as short sellers cover, but OBV is not too enthusiastic.  Maybe Jeff or Warren will buy on the dip. 

Microsoft isn’t faring much better, although it’s crept up above its 200-day line. In contrast to Amazon, Microsoft is still under selling pressure as both ADI and OBV are not particularly encouraging.

In contrast, the homebuilders, as in the iShares U.S. Home Construction ETF continue to hold their own as stabilizing interest rates (see below) and the long standing structural change in the housing sector continues to develop.  Here’s a great summary of the current situation.   And if you missed it, you can read about the connection between homebuilders and AI, here.

Meanwhile, the usually boring utilities, as in the Utilities Sector SPDR Fund (XLU) continue to consolidate, ahead of what seems to be a potentially explosive breakout as investors continue betting on a sustained rise in power demand.

Bond Yields Stabilize. Mortgages Make New Lows.

The U.S. Ten Year note yield (TNX), as I expected, bounced last week, but remained below 4%. This was normal behavior as TNX had fallen too far too fast.  Next week’s inflation data will likely settle the short to intermediate term trend in treasuries.

Mortgage rates, remained below 7% for the tenth straight week, but made a new low for the current cycle, averaging 6.5% for 30-year conventional loans.

REITs continue to act well.  The iShares U.S. Real Estate Market ETF (IYR) has just broken out to new highs, although along with utilities a consolidation is warranted. Look for sideways action here, not a decline.

For winning REITs and homebuilder stocks, grab a FREE Two Week trial to Joe Duarte in the Money Options.com. 

If you’re an ETF trader, consider, Joe Duarte’s Sector Selector.  It’s FREE with your monthly membership to Buy Me a Coffee.  Sign up here. 

AD Line Holds Up. Market Stabilizes.

As has been the case for the past few weeks, the New York Stock Exchange Advance Decline line (NYAD) is outperforming the major indexes.  Last week, NYAD remained above its 20-day moving average and is once again closing in on its recent highs.  This is very encouraging.

The Nasdaq 100 Index (NDX) found support at its 200-day moving average when RSI hit 30, as expected.  It’s now testing 18,500. A move above this area will likely take it back to the 50-day moving average where the real decision will be made.

The S&P 500 (SPX) rallied but remained below its former support band at the 5400-5500 area.  A test of the 200-day line may still be required before a tradable bottom sets up.

VIX Recovers After Blowout

The CBOE Volatility Index (VIX), has reversed its recent move to the 60 aera, signaling panic is receding. A move back below 20 would be reassuring. 

VIX rises when traders buy large volumes of put options.  Rising put option volume leads market makers to sell stock index futures to hedge their risk and leads markets lower.  A fall in VIX is bullish signaling lower put option volume, eventually leads to call buying which is bullish as it causes market makers to buy 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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