Powell launched Surge6 By now you already know what happened with Fed Chairman Powell today, but just to sum it up quickly: “Mr. Powell’s testimony before the House Financial Services Committee signaled that the Fed is likely to cut rates later this month. Minutes from the Fed’s June meeting were also released Wednesday, and showed many central bank officials saw a stronger case for a rate … Federal-funds futures, used by investors to bet on central-bank policy, show a 27% chance that the Fed will cut rates by half a percentage point at its July 31 meeting, up from 3.3% yesterday. The odds of a quarter-point cut stand at about 73%.” - WSJ We wrote yesterday that Surge6 was coming, but perhaps we would see a bit more selling with Dip5 first. Well, Powell’s testimony successfully launched $SPX $NDX $RUT into Surge6 immediately instead. Before we dive into to discern the under-the-hood messages from market internals, let’s digress a tiny bit and ask ourselves “Could we have foreseen this surge today?” Nah! Betting on the outcome of Powell’s comments today, or the outcome of the job report on 7/5, or the outcome of the G20 meeting on 6/28 is just rolling the dice. We are not in the business of rolling the dice. Our job is to identify the underlying messages from the market and do what it says. Market internals have been sending out messages since 6/3 that the Up Trend that started on 12/26/18 is still intact. Market internals have also been saying there’s no imminent threat of a major Pullback like the one in May either. So while there have been Dip4 and Dip5, they haven’t exactly been that big or that long. You know that old saying that you heard from your parents and teachers: “Don’t just sit there. Do something!” In this case, what market internals have really been saying all along is this: “Don't just do something. Sit there! ” Enjoy the ride up. Don’t try to jump in and out on these little dips. You will end up missing most of the ride. Market internals will give us advanced warning when major Pullback2 or a new Down Trend is about to happen. Market internals The collective message from volatility ($VIX $VXN), market breadth (NYSE NASDAQ A/D lines), and the buy/sell cycle indicator (CBOE equity put/call ratio) is this: “Be cautiously bullish”. Again, the Up Trend that started on 12/26/18 is still intact. $SPX $NDX $RUT are not about to start a Major Pullback similar to the one in May. But there’s no guarantee that the minor dips won’t start happening again. $VIX may still rise back up to 14.5 and $VXN to 18 tomorrow. This isn’t much, but it would mean a possible minor drop for $SPX $NDX $RUT again. Market breadth is rising again which is bullish, but not as fast as the way prices are rising. Finally, CBOE equity put/call ratio is now primed to rise up into minor sell territory rather than drop into more buying mode. So caution is warranted, but don’t go shorting the market right now. Support and resistance for $SPX $NDX $RUT during Surge6 As we discussed above, it’s going to be hard to discern exactly the time and size of the next series of minor dips that may occur between now and the next Major Pullback (Pullback2), or the start of Down Trend. Therefore, we are going to stay away from trying to label these. We don’t want to encourage you to exit long and enter short when these minor dips occur. We don’t think that’s a good strategy. Getting obsessed with the minor dips will lead to over-trading and potential losses. Having said that though, we will say that if minor selling does occur tomorrow Thursday, the indices are likely to find strong support in the following zones. $SPX: 2970 - 2980 $NDX: 7800 - 7850 $RUT: 1550 - 1555 Here are the resistance zones where we $SPX $NDX $RUT may encounter Major Pullback2. $SPX: 3025 - 3050 $NDX: 8000 - 8025 $RUT: 1600 - 1650 Trading plan Yesterday Tuesday we wrote: “At this point, we are not planning to sell our open positions. Dip5 is actually winding down, so we are holding through Dip5 and Surge6.” That turned out to be a good strategy. Our positions benefited from today’s unexpected surge. And we plan to continue holding until $SPX $NDX $RUT run into resistance in the above zones, or until market internals start sending out major bearish warnings. Here are our current open positions, when we bought them, and their sell updated targets. If you are long, just trail your stop-loss loosely upward. If you are in cash and want to enter long, wait for the pullback close to the above support zones to enter. If you are in cash and want to short the market, don’t! Disclaimer This information is intended to supplement your own research and trading systems. This is our trading plan designed to suit our own investment needs only. We are not making any investment recommendation to you or anyone else. If you choose to follow our trades, you may make money, or you may lose money. Note that we trade highly risky 3x leveraged ETFs. They suit our portfolio, but they may not be appropriate for you. Please read more about them before trading them.
2 Comments
Ann
7/11/2019 08:53:38 am
Hi Rich. You are welcome. Thank you so much for thoughtful comments. We are so glad to hear you enjoy our posts. Hope they have been helpful for your trading. We really appreciate you taking the time to write.
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