In his iconic book, The Intelligent Investor, which became the definitive text on value investing, Benjamin Graham wrote:
"The market is a voting machine, on which countless individuals register choices that are partly the product of reason and partly the product of emotion."
But even with the most reasonable, there can still be disagreements, although the emotional outcome is not always good for the momentum in the market. Yesterday's equity progress is said to be the result of rising interest rates that began to decline, dispelling concerns about rising inflation. Funnily enough, today's rally is happening – wait for it – as yields are on the rise as accelerating prices would boost economic growth as corporate profit increases, creating more jobs.
On The Street, however, such contradictions are often the prelude to a big step, which occurs when one way of thinking wins the discussion and the opposition is convinced and both join forces.
The current stock rally is supported by reflation bets, which favor value stocks, those stocks that underperformed last year amid lockdowns, while tech stocks benefited from the stay-at-home climate. It is therefore no surprise that of the major US benchmarks, only the sideways are now moving.
NDX Daily
On Tuesday, the technically heavy index has temporarily fallen below the upward trend line since March. The price rebounded after the Fed assured investors it will not hike interest rates in an environment where near-zero rates have pushed tech stock valuations up to dotcom bubble levels.
Nevertheless, despite Tuesday's rebound, which reduced most of that day's losses at the end of the day, and despite continued slow progress on Wednesday, we can witness the index's latest attempt to higher before a correction.
Tuesday's lows again tested the January lows, which, in addition to a drop below the trend line – for the first time since it was readjusted after the index fell below a steeper upward trend line in September – paint a picture of an H & S top, named for the shape trade takes in the midst of a gradual reversal, which fits the pattern that would correspond to a market argument.
The left shoulder and head are rising along with the prevailing trend supporting the technical index, but the head's inability to hold its gains illustrates the shift in equilibrium. If the right shoulder were to form at a point lower than the head and produce a lower peak followed by a downward breakdown of the neckline – the trendline connecting the lows of the range – and form an even lower peak, it will have completed a reversal. Should this happen, it would be clear that the market would agree that tech stocks should suffer as investors rotate capital into value sectors as part of reflation trading.
The MACD's short MA failed to maintain its dominance over the long MA as recent prices have broken down, suggesting that prices will in fact rise. RSI has fallen below its late January low and is showing waning momentum.
Yesterday, the momentum-based indicator found resistance at the level of the previous low. Finally, that previous January 29 low was lower than the previous January 6, making a negative difference to the rising lows in price.
In fact, RSI lows have been declining since December, against the rising price over the same period, showing a lack of participation. A market that is rising due to little selling resistance could fall if this occurs.
Trading Strategies
Conservative traders should wait for the right shoulder to form below the head, followed by a drop below the neckline, with a minimum of 3 days (at preferably including a weekend) and 3% filter, to avoid a bear trap. Then they would wait for the likely return dip and wait for confirmation of cartridge resistance.
Moderate traders would wait for the downward break, but are satisfied with a 2-day penetration of 2%, then wait for a short push to push the price to a better entry point, if not for confirmation of the reversal .
Aggressive traders could go short after a 1-day, 1% downside break without waiting for any additional evidence that the pattern represents an argument won by reflation traders, provided they read this post carefully and consider the risk & # 39; s understand and be willing to accept them. A cohesive trading plan is critical to successful trading. Here's just an example:
Trading Example – Set Short Position
Entry level: 12,700
Stop-Loss: 13,000
Risk: 300 points
Target: 11,800
Reward: 900 points
Risk: Reward Ratio: 1: 3
Author's Note: This example is intended to demonstrate the components of a basic trading plan. Since we do not know the future, we cannot know whether "countless individuals (will) register choices" accordingly. In the same vein, we do not even know whether reason or emotion will prevail. Or even whatever the reason might be. Or the emotion. If it's not clear yet, we don't really know anything. We only navigate the tangle based on our interpretation of previous movements based on our experience. Your budget, timing and temperament will affect your trading success and your style should include that. Until you figure out how to do it, act in small steps, to learn, not to gain much, otherwise you will definitely lose a lot. Have fun trading!
