The futures plunged Friday from a high just shy of the threshold where we'd eagerly anticipated getting short. The trade would have entailed using a 'reverse ABC' (rABC) pattern in order to cut the roughly $3000 entry risk per contract in half. It was not to be, however, since sellers clobbered this vehicle before it achieved the loft that would have triggered the trade. The 623-point rally decline in the Dow that followed drew headlines, but it was pretty feeble in my estimation, having failed, even, to re-test the midpoint Hidden Pivot support at 2825.50 that became the launching pad for a 120-point rally. Will Friday's selloff intensify in the week ahead as the tariff-war's mounting costs to the global economy become all too clear? If so, we should see the S&Ps fall more than 100 points in a single day, and sometime soon. For now, though, if sellers breach the 2825.50 midpoint pivot decisively, the pattern's 2705.75 target will be in play. _______ UPDATE (Aug 27, 12:34 a.m.): The futures have been screwing the pooch for three weeks and just entered week four. We are waiting to get short when the face-saving trade deal that is coming triggers a short-covering rally.
I'll be away from the office for the next 12 days, enjoying summer's end with friends at the (South) Jersey Shore. The show will go on at Rick's Picks nonetheless, albeit in a lower gear. The Morning Line essays will cease temporarily, as will daily emails to readers and investors. But timely commentaries and trading recommendations via Facebook and You Tube will still be on offer whenever warranted. I use the phrase 'whenever warranted' with trepidation, since it sometimes seems as though Mr. Market enjoys doing really crazy things whenever I am away from my desk for more than a few days. This could be partially attributable to seasonality, with winter rallies and summer dives tracking the phases of the moon. But consider yourself warned that the dog days of summer are over, and that the stock market's animal spirits are undoubtedly ready to re-emerge, perhaps even before Labor Day. Updates for the Week Ahead I have updated my guidance for gold and the E-Mini S&Ps due to Friday's headline selloff on Wall Street. I hope you took seriously my warning about crazy things happening whenever I'm away from the office for more than a few days. If you don't subscribe but wish to view the latest updates and others that I will be publishing between now and Sep 4 when I return to my desk, consider taking a two-week free trial subscription by entering your name and email address above.
Here's the Fed at its most obtuse, as reported Wednesday in The Wall Street Journal: "Fed officials saw their move to cut rates last month as a recalibration rather than the start of a more aggressive easing cycle and were reluctant at their latest policy meeting to say how future moves would unfold." Are these guys kidding, or what? This press-release bilge is right out of academia's May Day Parade handbook, and it has Wall Street's "Kremlinologists" struggling desperately to decode "recalibration" and its implications for the U.S. economy. The word is intended to suggest that the quacks who determine monetary policy do so with scientific precision. In fact, they make it up as they go along and are now struggling to avoid blame when the stock market takes its inevitable fall. You have nothing to worry about guys. Trump's aggressive stance on tariffs will be the story for generations to come, just as Smoot-Hawley is still blamed for tripping the country into the Great Depression. Juicy Short Sale Ahead It was odd for the Dow Industrials to tack on 240 points in spite of the news, and perhaps even crazy to extend the rally moderately in off-hours trading Wednesday evening. The flurry of short-covering responsible for the rally is being attributed to strong earnings reports from Target and Lowe's. That was last quarter, though, and share buyers seem not to have considered what might happen next. Many companies, even those that have reported respectable numbers recently, are scaling back their forecasts. And just as profits are unlikely to expand much in Q3, the stock market is unlikely to hit new record highs, especially with corporate buybacks tapering off. Those highs lie about 5% above current levels for the Dow, and it's not rocket science to discern that the blue
Another session with rABC trades coming fast and furious on the lesser charts. There are two important takeaways: 1) If a nice-looking rABC set-up fails to produce a winner and gets stopped out, prepare immediately to try again, since your odds will actually IMPROVE on the second attempt; and, 2) rABC midpoint pivots can be used the same as conventional ABC midpoints for purposes of determining the likelihood of a D target being reached. This means that if the C-D leg of rABC blows past 'p', the 'D' target is likely to be achieved. You can 'convert' this knowledge into a mechanical set-up if you prefer to initiate the trade with a limit order rather than the stop orders that apply to rABC entries.
The futures signaled a weak 'mechanical' short on Friday, but it didn't look appetizing enough to recommend. The selloff in the final half-hour on Tuesday was not a healthy sign, nor was the tedious distribution that took place for most of the day when the broad average were down by about half of the day's loss. You can use a likely retest of the 2825.00 midpoint pivot as a minimum downside objective. As always, a decisive breach of this benchmark would portend more weakness to the D target -- in this case 2705.75. That would be quite a selloff, but we'll need a less stressful entry point to get with it. _______ UPDATE (Aug 21, 9:40 p.m.) I mentioned in today's commentary that the stock market would be a juicy short sale somewhere between here and July's top, so we may as well start looking for it. Here's a chart that shows a potential 'counterintuitive' short from a sweet spot defined by the red lines. This trade is intended for those who understand how to pare entry risk with an rABC pattern.
Trump is pulling out all of the stops to keep the economy humming as campaign season draws closer. On Tuesday he let Wall Street know he's considering capital gains cuts and other pro-business changes in the tax code to help fortify the U.S. economy against mounting recessions in Europe and China. His plan to index taxes to inflation will likely draw fire from the usual quarters, since those in higher tax brackets would reap most of the gains. Although even leftists undoubtedly recognize that inflation is one of the most pernicious and lucrative ways in which government steals from us, they're willing to go along with it if most of the theft seems to be from "the rich." The fallacy lies in failing to acknowledge that the "wealthy" on whom blue-state voters would inflict higher taxes are in fact merely affluent. They don't travel in chartered jets or spend summers cruising the Mediterranean. Rather, they are often working professional couples who borrow to put their kids through college like the rest of us, who live in houses bigger than they can afford, and who are challenged to save enough for retirement. Year-Three Goodies! We have market historian Yale Hirsch to thank for discovering and explaining the stock market's election cycle clearly enough so that it makes sense. Years one and two of a president's term are spent taking care of political promises that don't explicitly benefit "the rich." Year three is where the president starts giving away goodies, and that's why it is the strongest part of the cycle, followed by year four. Trump isn't taking any chances, and that is ample reason to give the ten-year-old bull market the benefit of the doubt. He will be bucking strong headwinds, to be sure. Besides the by-now palpable threat of a
A Microsoft tech -- escalated support, no less -- permanently and irretrievably deleted nearly everything of value on my hard drive. He was trying to fix a problem related to C++ coding in Windows 10. Without going too deeply into the details, I'll tell you that he trashed my User Account, evidently without quite understanding what was in it: hundreds of thousands of emails, all of my application settings and browser profiles. I can recover somewhat because I kept some of the data on my laptop, but the loss will take months of phone calls and emails to partially recoup. In the meantime, let me apologize for the brevity of Tuesday's updates. I've been on the phone with tech support for 15 hours and I am still not done. It's been a long day. Holiday Schedule Let me take this opportunity to inform readers that I will be on holiday from August 23 to September 4. Although I will update trading touts if urgently required and will provide timely guidance in the Trading Room and on Facebook/YouTube on the same basis, I will not be sending out Morning Line commentaries during my holiday. Fair warning: The stock market tends to do crazy things when I am away from my desk for more than a couple of days.
Are rates on the Ten-Year Note finally bottoming? Quite possibly, according to technical indicators that we monitor closely. T-Notes touched a low last week of 1.47% after plummeting almost relentlessly from 3.49% last November. GDP was running at around 3% back then, and almost no one other than a few hardcore deflationists, your editor among them, saw rates on the Ten-Year falling below 2%. Now, however, given the look of the charts, it would be wise to prepare for a possible rate rebound, even if it proves to be temporary. By our runes, a bounce from these levels would be logical because last week's low occurred almost precisely at a Hidden Pivot target first aired here some time ago. It was one of a series of lows forecast by Rick's Picks in 2019. The chart shows how rates bounced last Thursday from within 0.02 points of the 1.47% target. The Hidden Pivot support whence the bounce occurred clearly worked, but that doesn't necessarily mean it will hold indefinitely. In fact, given the clarity of the pattern associated with the support, if TNX were to decisively breach it in the next few days, that would strongly imply rates are headed significantly lower in the weeks and months ahead. Belated Boldness Meanwhile, some of Wall Street's best and brightest, having missed the huge rally in Treasurys, which produced capital gains of 15% or more for the few who saw it coming, are now venturing boldly forth to proclaim it is over. Some Investors Are Betting the Flight to Bonds Is Overdone was how The Wall Street Journal headlined their belated change of heart. We're inclined to bet with them for the time being, albeit with less bravado, shorting Treasurys and going long on yields. But to repeat: If TNX, which tracks rates
The futures flashed a 'mechanical' signal to get short on Friday that I characterized in the trading room as too dangerous to use. It is mainly a case of the C-D leg not falling quite to our sweet spot before rallying back up to the green line where we do this trade. But neither was the signal so unenticing that we should reflexively go against it by getting long for a pop above the point C high at 2944.25. Since news has been driving short-term swings, we'll steer clear of this vehicle until such time as it gives a textbook-perfect buy or sell.
When the correction begun around ten days ago from a 29.77 Hidden Pivot target ends, expect the next rally cycle to achieve a gain of about $4. Sellers somewhat dominated last week while failing to do much damage. Considering the menacing look of stochastic indicators on the daily chart, the selloff could have been much worse. Now, the stochastic divergence (see chart inset) has nearly corrected, with the indicator approaching an oversold zone that hasn't been penetrated in nearly four months. This attests to the strength of the uptrend and the enthusiasm of buyers. We can't rule out a downdraft that would shake out the weak hands, but for the moment things look mellow. We continue to hold 6th Sep 29/31 vertical spreads effectively for free, although subscribers have reported variations on this. ______ UPDATE Aug 20, 7:15): A diagonal put spread -- Long 30th Aug 28 puts, short 27th Sep 27 puts -- has comfortably offset the call spread. The first leg of this spread -- buy Aug 28 puts -- was posted in the Trading Room on August 7, and the position has provided insurance against a downdraft. The short side was legged on shortly afterward for 0.02 less than paid for the 28s, making the position nearly riskless. Note that the 28 put will be held 'naked' if GDX is above 28 come Friday when the 27s expire. _______ UPDATE (Aug 23, 10:59 a.m. ET): If GDX rolls over from these levels, or merely rallies half-heartedly, it will generate a third, diverging stochastic peak. (Click here for chart.) This implies that any selloff from these levels could be a doozy. I am at the airport but decided the update couldn't wait. I have a GDX 28/27 diagonal put spread on (see above), but I will not roll it
