I’ve said it before, and I will say it over and over again – the trend is your friend until the end.
We recently saw a dramatic example of this in Bitcoin (BTC).
The cryptocurrency swept to a new all-time high of $64,829.14 on Tuesday, following the Coinbase (NASDAQ:COIN) IPO. But after this “buy-the-rumor” rally, the inevitable “sell-the-news” drop followed on the weekend.
We see this sort of trend happen all the time, no matter what the asset is, and we can use it to position ourselves for future profits in all sorts of different investments.
When I say, “trend,” I’m talking about the 50-day moving average.
I’ve been looking at the 50-day moving average of different stocks across multiple sectors, and my technical data is showing me that the market will follow the same pattern we saw in BTC this past week.
To stay in the world of cryptocurrency, however, then click here to learn Tom Gentile’s three-point profit plan and how to take advantage of BTC’s dip.
Now, zooming out to other assets, stocks will rally higher over the new few weeks before crashing through an inevitable selloff.
Here’s what you need to do to protect your portfolio, and profit at the same time
How Does the Trend Apply to the Market?
Last week’s lightly traded volume market was no friend for stocks because it showed that there is a lack of buyer commitment. For the week, the big winners were the utilities and biotechnology sectors, while the regional banks and transportation stocks lost ground. Keep in mind that the regionals and transports have been two of the better performing sectors for the year so far.
All of that said, and the trend remained your friend last week. The S&P 500 and most other major indices found the strength to move higher later in the trading week.
All closed above their respective 50-day moving averages.
So, what does that mean?
Commitment is a key word to the volume issue, or lack thereof. Investors bid prices higher into the earnings season only to let them hang in the wind for a few weeks as they waited to get the first look at quarterly results.
This isn’t a new phenomenon, we see it often, but the magnitude of this lightly traded volume market is a little larger than usually.
Last week, we saw a day that traded less volume than the market did on Christmas Eve, a half day holiday.
The reason? Markets are sitting at all-time highs.
Let’s face it, nobody wants to be the one that bought high and sold low, and the market sitting at its all-time highs feels like that setup is happening every day. That’s one of the reasons that biotechnology sectors picked-up a little steam last week, the sector is among the worst performing for the year.
It’s a view that investors are starting to look for deals instead of paying premiums for a stock that is likely to do better over the next quarter.
What does it come down to?
Analysts are expecting to see somewhere above 20% growth in earnings this quarter. That’s a huge number. I would normal be telling you about how these types of quarters are usually a fundamental sign that a market top is ready to be formed, but not just yet.
We’re dealing with a different market. One that’s been through the wringer over the last twelve months and has come back with a little more elasticity than many could have imagined, me included.
How do you trade this market?
I hate to oversimplify it, but for now, you stick with “The trend is your friend,” and there are some things we can expect.
Over the next few weeks, we’re going to see the number of earnings reports increase dramatically. This week, companies like Chipotle (CMG), International Business Machine (IBM), CSX Corp. (CSX), Snapchat (SNAP) and Intel (INTC) will give their results to Wall Street. It’s a great “cross section” week as we’ll see a lot of different sectors represented.
The week following, we’ll see the gates open on technology earnings as two of the largest weeks of earnings season get into full swing.
That’s what you’re going to watch with me, those two weeks in time.
In fact, these two weeks are going to be the most telling weeks of earnings season.
Historically, the market rallies up-to and through these weeks only to see traders, not investors, “sell the news” taking stocks from their highs. It’s a trend that’s well-known, which is why its even more likely to happen.
The CBOE Volatility Index ($VIX) may be the most important indicator today.
The $VIX closed out the week just above $16, its lowest readings since February of last year, right before things went to hell in a hand bucket. This morning, the $VIX is bouncing off tat level to higher readings, which isn’t surprising as the level was holding as resistance for much of the week.
We’re going to see a pop above $18 on the $VIX as we head through the week. That spot should hold for the short-term if we start seeing some buying volume come into the market. From there we’ve got a short-term all-clear signal that would see the market rally through the next two weeks of earnings.
That’s where the catch comes in.
That two weeks period ends a strong seasonality trend which is when I expect to see more selling pressure come to bear on stocks.
My subscribers have added a hedge to the Nasdaq 100 Index ETF (QQQ) that will help to offset any volatility and “sell the news” pressure that the market should see. It’s a short-term hedge so that we will be able to see what is on the other side of this slew of earnings reports that will hit the market.
The use of trailing stop orders is another way to help hedge away some of the expected post-earnings volatility, as well.
I’ll be here to keep you up-to-date with the most important market patterns, so stay tuned for my next Straight-Up Profits eLetter.