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Analysis, Perspective, Trading Strategy
Buckle Up for the Meatloaf Market: What’s it Gonna Be Boy?
Editor Joe
Duarte in the Money Options
In the iconic rite of passage classic rock megahit “Paradise by the Dashboard
Light,” the key phrase “what’s it gonna be boy?” poses a question about a
life defining decision with repercussions “’til the end of time.”
And today, it seems as if Wall Street’s algo based trading machines are
about to face an equally pertinent defining moment. You see, the key question
facing the algos, is whether they are going to continue to blow off the increasingly
dangerous reality of the world in which we all live and continue their high
frequency trading escapades which relentlessly push stock prices higher and
higher.
The stock market, via robot fueled algorithm trading, has been defying
and rewriting financial history for the past nineteen months. During this
very profitable period of time, rising interest rates, burgeoning tariffs,
trade wars, and increasingly volatile geopolitics, a combination of external
influences which have in the past roiled the financial markets have become
little more than temporary diversions for stock prices while offering routine
opportunities to buy the dips and ride the algo tide to new highs.
So now we come to the latest fork in the road; the so called Turkey contagion
– the “what’s it gonna be boy?” moment - where the potential for the implosion
of Turkey’s economy, at least based on breathless reporting from diverse
financial news outlets, is expected to morph into the latest financial market
calamity. To be honest, I’m not sure Turkey’s problems are going to be any
more than just another blip for the algo dip buyers. Of course much remains
to be seen and things could unravel in a hurry. But based on last week’s
action in the stock market, the bots are doing the same things they’ve been
doing for the past 19 months. Sure, the indexes moved lower. But under the
hood, there were plenty of stocks which did just fine.
But if history is a guide, if and when the stock market finally breaks,
no one will escape fully unscathed. Consequently, from a trading standpoint,
those of us who have been using small trading positions, hedging with options
and ETFs, and keeping prudent levels of cash on hand should be in a better
position to survive any change in the pervasive algo programs which could
become apparent if the situation in Turkey does indeed spread elsewhere.
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Market Breadth at Decision Point
The New York Stock Exchange Advance Decline line (NYAD) has been the most
accurate indicator since Donald Trump was elected president. Indeed, over
the past 19 months, NYAD has correctly kept those of us who follow it on
the right side of the market’s trend, which is why its current configuration
is cautionary.
Specifically, there are two aspects of this week’s NYAD which may prove
to be significant if the market finally rolls over and delivers a sizeable
move to the down side.
1) The breakout in NYAD after its recent consolidation pattern is on the
verge of failure. If NYAD breaks decisively below its 20 day moving average
and begins to trace a lower high and lower low pattern, it may be signaling
an end to the intermediate term uptrend.
2) Note the lower highs and the rolling over of both the RSI and ROC indicators.
Together, these may be marking a loss of momentum.
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you
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4. Joe
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option strategies
coupled with on-
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picks focusing primarily
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and technology sectors.
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Long Term Index Uptrend Remains Intact
Despite any short term warning signals, until things change drastically,
the very big picture is that the long term index uptrend remains intact.
However, the outlook for the next few weeks is starting to cloud. Thus in
order to be prepared for any eventuality it’s time to start pinpointing crucial
support levels and to see what the robots do if and when prices reach them.
The likely make or break point for the S & P 500 (SPX) is likely to
be near the 2780 area, its 50-day moving average. The decision point for
the Nasdaq 100 (NDX) is likely to be near the 7250 area, its 50-day line.
The Accumulation Distribution (ADI) and On Balance (OBV) indicators for
NDX are a bit more positive than those for SPX. However, ROC, which measures
momentum, is a bit dicey for both indexes as it has rolled over after Friday’s
failure of the recent rally attempt. It’s also important to note that volume
in both NDX and SPX continues to shrink, a fact that will likely increase
volatility.
What if Turkey Doesn’t Matter?
The robot traders and passive investors are about to be tested. We are
in the midst of an ideological war between the old guard, hedge funds, mutual
funds, and grizzly trading veterans, and the new guard; the bots. The old
guard, used to the old ways of Wall Street and the days where geopolitics,
interest rates, and trade wars actually affected share prices are hunkering
down. Thus, it is a reasonable assumption that the low volume is a result
of their absence from the trading day.
SPECIAL
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1. Over Twenty-Seven
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2. Now Joe is
bringing all his years of expertise
to his new options focused web
site with two goals: Risk Management
and Profit Delivery.
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
intraday
buy
and
sell
alerts
as
called
for
by
market
and
individual
positions.
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The bots seem to be saying that all that stuff doesn’t really matter and
that only the results of their algo strategies and HFT are worth noting.
In other words, while the old guard worries about Turkey, the bots will trade
the headlines in the short term, but in the longer term may just shrug off
Turkey as another far flung place whose currency doesn’t really matter to
anyone but the Turks.
Wouldn’t that be something?
I’ll say it yet again. Trade small lots, hedge all bets, and keep cash
levels to where you get a nice dividend from your money market fund at the
end of the month.
Joe Duarte is an active trader and author of Trading
Options for Dummies , now in its third edition and The
Everything Investing in your 20s and 30s. To receive Joe’s exclusive
stock, option, and ETF recommendations, including trade results, visit www.joeduarteinthemoneyoptions.com.
JoeDuarteInTheMoneyOptions.com is independently
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the content provided is meant for educational purposes only and
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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.
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