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Analysis, Perspective, Trading Strategy
Shallow Pullbacks and Dip Buying Likely to Remain in the Short Term
Editor Joe
Duarte in the Money Options
Cooler trading heads – algos- surely prevailed last week
as the market rebounded. Arguably, there may be some options expirations
related reasons for the rally. Thus, what happens in the days ahead will
be just as important as last week’s bounce in stocks.
Nevertheless, in my March 10 posting of this column while advising to stay
patient and pragmatic while trading this market I wrote “what used to take
weeks to develop now often occurs in hours or days. Thus, in order to survive
traders must act rapidly. So while this market could be headed down in a
hurry, the flip side is that at some point, we will be able to buy stocks
at lower prices and perhaps in a shorter period of time than anyone expects.”
Thus, I was not surprised to see the S & P 500 (SPX) bounce back after
the four day, three percent decline from the past week while the NYSE Advance
Decline line (NYAD) – see below for more details – made a new high, suggesting
that the short term trend has turned to the up side for now. Of course, things
may reverse again in the next few days or weeks. After all, this remains
a headline triggered robot algorithm guided market.
My point, however, is that from a very macro standpoint, despite the volatility
we may see from time to time, this market is still responding to the notion
that interest rates won’t be rising anytime soon and that the U.S.-China
trade talks have not broken down. Of course, the market is hoping that the
trade talks will turn out to be very positive and that the global economy
will respond to lower interest rates and a trade fix. Both points are definitely
arguable, although not in this forum.
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Macro Bullets
- Calendar : The Federal Reserve meets as does
the Bank of England. Europe and the U.S. will release PMI data while
the U.S. will see regional Federal Reserve district data out of Philadelphia.
Another Brexit vote is expected.
- Big Picture : The third year of the Presidential
Cycle (2019) is traditionally bullish for stocks. But seasonality
alone can’t hold up stocks if central banks don’t respond to conditions
quickly enough and if the global economy does not respond to lower
interest rates or accommodative monetary policy as it materializes.
- Monetary Policy : Central banks are no longer
raising interest rates and markets are increasingly impatient as
economic data continues to show weakness. Meanwhile, the big three:
the Federal Reserve, the ECB, and the People’s Bank of China are
not showing signs of being in a hurry to ease policy aggressively
enough anytime soon because they are essentially out of options.
- Risk : Headline risk remains. Think U.S.-China
trade war, global tariffs, slowing economic data, politics. Of the
four, it seems politics is starting to get near some sort of boiling
point.
- Market Behavior : Volatility is likely to depend
on headlines. Expect swift and until proven otherwise shallow pullbacks
with buying of the dips.
- What to do : Stay cool. Trade the market.
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4. Joe
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option strategies
coupled with on-
point stock and ETF
picks focusing primarily
in the biotech, healthcare,
and technology sectors.
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Market Breadth Makes New Highs
It’s hard to be bearish when the New York Stock Exchange Advance Decline
line (NYAD) makes a new high. In fact, given this indicator’s solid record
of predicting the future market trend, it’s hard to consider that the future
holds anything but higher prices in the short to intermediate term.
Of course, given the general headline climate, it’s also reasonable to
expect sudden short term reversals in the price trend. Accordingly, it’s
important the “buy the dip” mentality remains in place. Yet, as long as the
NYAD remains above its 20 and 50-day moving averages, the likelihood of a
decline such as the one we saw in Q4 2018 seem low.
For their own parts, the S & P 500 (SPX) and the
Nasdaq 100 (NDX) indexes continued to move higher after a four day 3% decline
in the week that ended on 3/15. Moreover, both indexes closed above key resistance
levels – 7200 for NDX and 2800 for SPX- albeit in lower volume than I would
like to have seen.
Furthermore, both indexes closed the week above their
upper Bollinger Band, a sign that trading might have gotten a bit ahead of
itself for the moment. So for now, it’s all about the market staying above
recent support and what happens when 2900 on SPX approaches.
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bringing all his years of expertise
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3. Weekly
market analysis
and portfolio
updates gives
you the big
market picture.
4. Joe
has designed
and fully tested
a select group
of easy to follow
and deploy option
strategies coupled
with on- point
stock and ETF
picks focusing
primarily in
the biotech,
healthcare, and
technology sectors.
5. In
depth
individual
position
technical
and
fundamental
analysis.
6. Unlimited
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buy
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It’s How Things Develop that’s Crucial
The market bounced back from a shallow, although scary three percent pullback
and is becoming slightly overbought. That means that how stocks work out
their overbought status is the next big trading worry.
The best scenario would be a slow and steady sideways consolidation. But
there is no guarantee that this will occur, which means that we could see
another three to five percent decline come on rapidly starting next week.
For now, however, the 20 and 50 day moving averages have proven to be support,
so they get the benefit of the doubt.
Moreover, staying cool and managing each stock individual position on its
own merits is the best approach to this market. If there are opportunities
to short individual stocks and sectors, it’s not a bad idea to consider.
Finally using options for high priced stocks will reduce risk while the opportunities
for Buy-Write strategies and building positions in high yielding dividend
plays is on the rise.
Joe Duarte has been an active trader and widely recognized stock market
analyst since 1987. He is author of 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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