Right now in my paid research services, we almost always trade market extremes; the more extreme the move, the bigger the profits - like the 200% gain we made on VIAB the other day.
But the kinds of extremes we play depend in large part on the market's "narrative," the prevailing sentiments driving stock prices - up or down. That's why we align the bulk of our trades with that narrative.
At the moment, we're mostly looking at strong stocks, in quality companies, caught up in broader mechanical pullbacks. When the stock "snaps back" we see gains on the price and even bigger profits on trades we make on those shares.
It sounds simple, and it's tough to argue with the profits. All this is happening because the market is telling us that it favors moves higher right now, and so a bullish overall stance is the right one to take.
But there are some troubling signs out there - some gray clouds out in the distance - that every investor needs to know about...
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These Charts Show What I'm Keeping My Eye On
Before we dive into these, there are three potential trouble spots that could (but might not necessarily) spill over into the broad markets.
The Tech Sector: The NASDAQ had a tough time last week - the weakest of the four big U.S. indexes. Is this just routine profit taking... or is there a bigger rotation underway? I think it's the former, which is a good sign, but we should be prepared for more downside there before the buying begins again.
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Bond Yields: U.S. and indeed global bond yields are spiking right now, and that's hurt stock prices.
The Black Stuff: Crude oil - we've seen a pullback to a key support level, the July highs. A bounce from here would likely push prices much higher. That's an extreme worth trading.
It's helpful to know these are out there, even if it's not necessarily time to pivot to a bearish bias.
Most new 52-week lows made in the NYSE:
New York Stock Exchange Advance-Decline Line:
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S&P 500 Advance-Decline Line:
The fact that the market made the most 52-week lows since February this past week and that the NYSE advance-decline line had a divergence at the recent all-time high are cause to pay attention to pullbacks to see if something bigger develops.
But one of the reasons that the NYSE A-D line is faltering is because of the big drop in bond funds that make up about one sixth of the stocks there. Naturally, the "operating company only" S&P 500 A-D line doesn't show this divergence.
So, these aren't bright green lights. But more importantly, neither are they warning signs that the market's going to suddenly roll over and drop 10% or more - healthy markets just don't do that from all-time highs.
The S&P 500 needs to hold at or above 2,800 right now, and so long as it does that, a bullish bias is the right, most profitable way to be.
The real net takeaway from all of this is that it's a good time to be cautious. I'm watching that 2,800 level, and I'll be in touch if it's time to change the outlook.
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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.