Today, I want to take a minute to update you on the tight sideways box the markets are trapped in as they decide if the Trump administration and Congress combination can make meaningful changes early in the term.
Then I'm going to treat you to a bold, profitable prediction.
So let's get right to it with the charts, and a quick look at our five-week trading box and price activity that just keeps getting more compressed...
Inside the box, we can see that that the Dow Jones Industrial Average has gone 27 straight days of trading within 20,000 - without going over.
And we can also see the Bollinger Bands contracting to give us a good old-fashioned band squeeze. (Bollinger Bands are designed to capture 95% of the price action of the past 20 trading days. If the price action is extensive, the bands are wide. When price volatility dries up, the bands narrow.)
In essence, the market has settled into a true "wait and see" attitude.
For more on my thoughts about market direction from here, I'll share a conversation I had with my good friend and master stock picker William Patalon, III, the Executive Editor of Money Morning.
Here's an edited transcript of our talk, which took place a few days before Inauguration Day...
William Patalon, III: So, D.R., last year (Sept. 12, in fact), you held a webinar for your Stealth Profits Trader folks and predicted a "market melt-up" - you know, an actual stock market rally, when most folks were talking about a full-blown "market meltdown." Turns out, the so-called "melt-up" rally you predicted is what we got - not the meltdown the masses were fearing.
Before we talk about your newest market prediction, because you're making a new prediction here - and I want to highlight to folks how substantive and well-thought-out your "market calls" are - let's take a couple of minutes to share the "thought process" that went into that prediction.
D.R. Barton, Jr.: The really interesting thing, Bill, is that I made that "market melt-up" call the day after the Dow Jones had its second-worst drop of 2016 - almost 400 points - and many people thought the summer doldrums were turning into a full-fledged fall walloping. On Thursday, Sept. 8, Mario Draghi, head of the European Central Bank (ECB), said there would be no significant new stimulus from that body. The U.S. stock market opened down a bit the next day - Friday, Sept. 9 - only to have Boston Fed President Eric Rosengren say in a speech that he thought interest rates should be moved up in the United States - a move that investors were dreading.
WPIII: And a move, incidentally, that Rosengren was publically opposed to before his change in stance.
DRB: That's right, Bill. Well, we saw the impact - fallout - from that: The market plummeted for the rest of the day, closing on its lows. The only thing that stopped the selling was the closing bell...
WPIII: Then came the weekend... and waiting.
DRB: Exactly. That weekend was pretty intense - with many wondering if we were staring down the barrel of a market meltdown...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
WPIII: So Monday comes...
DRB: I watched everything carefully and conducted my usual analyses. But after a Monday rebound, and some additional analysis, I assured my subscribers that night in the webinar you mentioned that this was a temporary downtick that investors needed to buy into.
WPIII: Although I know I'm really oversimplifying it, that's really the crux of your strategy - the one you refer to as "The Hooke." You're looking for those "temporary downticks" from long-term uptrends - because you're able to ID the specific instances where the sell-offs really are temporary, meaning the uptrend is destined to resume.
DRB: That's right, Bill. My system uses key indicators that let me identify which downtrends are temporary and which are going to be prolonged. My system told me this one was temporary. And it turned out that prediction was correct. My subscribers captured 10 triple-digit wins through the end of the year by buying pullbacks and exploiting the next up move.
WPIII: Very good. Next, you also predicted a "Trump Rally" in stocks. Tell me about that a bit and how it played out.
DRB: That one I know you're very familiar with, Bill, because you were right there with me - thanks to the instantaneous magic of email, texting, and the like.
And that election night was a lot of fun. Not because of who won, but because it played out like a great ball game, with highs and lows, twists and turns, and multiple changes in momentum. You and I were putting the finishing touches on my upcoming book, as I recall, and we dropped everything to watch that great electoral "tug-of-war" play out. We exchanged texts and emails into the wee hours of the morning. And what was most interesting was watching the futures market respond to every new piece of election night news. Down, up, big down, and then finally a surge up.
Here's a comment I shared via email with you, time-stamped 3:03 a.m. Eastern Wednesday morning (best I can tell, it was comment number 11 or 12 that we exchanged that night):
"The market-reaction shock (move down) followed by full recovery plus 1%+ gain shows the strength of our country and government. George Washington was the first to peacefully give power to another under rule of law (U.S. Constitution) and now even a disappointed Clinton peacefully transitioned power from the Dems to a most-reviled opponent. The markets say, 'Hooray for democracy.'"
Importantly, Donald Trump also soft-pedaled his previously hawkish trade stance in his acceptance speech. The markets gobbled that up like candy, and the Republican-induced sugar high in the markets was on. From there, it was clear that stocks that would benefit from the Trump agenda (specifically, reduced regulation and increased infrastructure and defense spending) would see a flourish to the upside - bank, infrastructure, and defense stocks cruised to the upside; the "FANG" stocks got a kick in the pants.
[By "FANG" stocks, I meant Facebook Inc. (Nasdaq: FB), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX) and Alphabet Inc. (Nasdaq: GOOGL).]
WPIII: Now we get to the "good stuff." Everyone generally believes that this rally we got - so hot, and so unexpected - has now stalled. What's the basis for that expectation?
DRB: The technical charts, for one thing. As I'm writing this, we've had 20 straight days where the Dow has come within 1% of 20,000...
WPIII: What all the pundits refer to as "the psychologically important 20,000 level."
(Both men laugh.)
DRB: Right... right... very good, Bill (laughing again). So we've come within 1% of that milestone - but haven't been able to pierce it.
WPIII: And that's why so many investors see a sell-off - that "failure to launch" and break through that resistance.
DRB: Correct.
WPIII: So now you see a "new breakout"... to the upside. What will it look like, what kind of magnitude are we talking about, what's your timing expectation... and what will be the key "trigger" or "triggers?"
DRB: Early in the post-election rally, we were seeing the U.S. markets moving up, but the rest of the world just wasn't following. Now we've had the FTSE, the United Kingdom equivalent of the Dow, make nine straight all-time highs. Both G7 countries (the world's largest economies) and the world's emerging markets are rallying, while the U.S. markets move sideways at the top of the page. The fact that the global markets are playing catch-up says that the U.S. doesn't have to "go it alone." And that's good news for global stock markets.
Because of the strong move we've seen since the election, I don't anticipate a monster rally from here. But after a pullback, I think our next move will be for more upside - more like a continued melt-up (3% to 7% above the highs) than a rocket launch...
WPIII: What I find interesting here is that the ideal way to play this rally isn't to buy in when it starts. Instead, you're going to use your trading system to tell folks to play this a different way. Explain that a bit.
DRB: In general, I hate buying breakouts. Historically, that's been a low-probability play. I've seen data that new 20-day highs drop 5% before they gain 5% about 60% of the time. For that reason, I really like buying pullbacks on strong stocks, sectors, or indexes.
WPIII: As a lifelong "contrarian investor" myself - a colleague and I wrote a best-selling book on this a few years back - I was totally taken with your strategy: waiting for the sell-off to buy in to magnify your gains on the rebound. Perhaps you could expand upon this a bit?
DRB: It's pretty simple, Bill: If we have to wait for a breakout, then you buy at 1% above current highs. A 7% total move means you net 6%. If, on the other hand, you buy after we get a 3% pullback, followed by a 7% bump above current highs, that's a great recipe for double-digit gains in the broader indexes.
WPIII: You had some interesting insights on which sectors might be the biggest beneficiaries of this rally. Tell me which ones you're looking at here.
DRB: I like the way tech has played catch-up recently. We're rotating from small caps being the place to be to tech leading the pack. And I think the pullback in defense stocks - an area I know you like long term - is one to be bought. Same for banks - buy the outperformers on pullbacks.
WPIII: Are there sectors to avoid... at least as trades or in the short run?
DRB: I think the president-elect has been pretty clear - he's going to go after pharma. Every tweet, or every comment, will nail that sector. Just look at what happened as a result of President-elect Trump's press conference on Wednesday.
I'm also beginning to doubt that healthcare stocks are not the layup that they seemed to be immediately following the election. Until we see what alternatives are floated for replacing Obamacare, this sector seems like a coin flip to me.
WPIII: Technical trading - your specialty - can be daunting to individual investors. But part of your "process" is to use an overarching "narrative" to "set the scene" for the market environment you and your trading system will be operating in. This narrative is always so well chosen - and so carefully explained - that it brings such great clarity to all that you do. And I truly believe that this "clarity" is a big part of why you're so accessible to investors of all types and experience levels.
So let's talk about the new narrative: What will be the underlying narratives that will be behind this breakout?
DRB: Legislatively speaking, I'm anticipating a successful first 100 days for the new Republican White House-Congress combo. We'll know this period has been successful if regulatory pressures have been scaled back and headway has been made on healthcare reform and infrastructure spending initiatives. If that happens, then deflationary fears will be vanquished and the Fed can get interest rates back into "rational" level over time, since the economy will finally be expanding.
WPIII: Is there anything else we should cover here?
DRB: Keep your trading/investing simple and consistent with the narrative: Until broad index movement tells us differently, pullbacks are to be bought in stocks.
WPIII: Thanks, D.R.
Follow Money Morning on Facebook and Twitter.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.