Another day, another all-time high seemed to be the prevailing trend recently. It may be difficult to stick to working tactics and themes, but fighting the tape is not the solution.
Going with the trend can feel paradoxical for traders at times. Yes, I am aware! When a trader sees a chart that goes from the bottom left to the upper right-hand corner, he or she may be compelled to take the other side of the trade, despite the fact that it is counter-trend. Logic would suggest that whatever market you’re watching should be selling off, yet it’s still screaming higher like a bull. While I’m not trying to be overly simplistic here, I do want to emphasize that the trend is your ally.
Even when multiple technical indicators show that a market is overbought (or oversold), the market will often continue to move in the same direction, leaving many counter-trend traders behind. This is why, rather than trying to pick tops, we’ve been focusing on buying pullbacks in a bull market. In any market, picking peaks and bottoms is difficult.
This is one of the main reasons why I prefer to go back over what has worked in the past.
Looking back at the last few weeks in the US equity markets, the theme appeared to be bipolar at first glance; but was it really? Has the price action been anything other than expected if we ignore the underlying development of the Fed shifting its stance on interest rates?
Figure 1: S&P 500 Index, Daily Candles, May 18, 2021 – June 29, 2021 Source stockcharts.com
When the Fed revised its stance on future interest rate guidance, it felt like the sky was falling. In truth, the pullback on the day of the event was minor, and market digestion pushed the S&P 500 to the 50-day SMA (just below) for a brief duration. That isn’t even close to being spectacular. It’s simply a symptom of a strong bull market.
It was roughly 2.24 percent when we observed the pullback two weeks ago. Isn’t it true that it felt like a bigger selloff than that? That’s what happens when the markets are roiled by emotion, and everyone has a different opinion on what will happen next.
In actuality, if a trader had a strategy in place to buy the retreat at a predetermined level, the news of impending interest rate hikes was just another buying opportunity. Our readers were prepared since we had been analyzing what had been working previously: purchasing the $SPX at the 50-day moving average, as we had described on multiple occasions, most recently on June 10th. We had it on our shopping list, and waiting for the pullback was the best decision we could have made.
Discipline, patience, and execution are required.
The daily RSI(14) is currently between 65-66, and the index is trading near the psychologically round number of 4300, as the S&P 500 has marched upward since touching the 50-day moving average. These measurements may be used by many traders to remove some chips from the table. Is it, however, a good idea to short the market there? Some traders will attempt it, some will succeed, and some will fail. The key lesson of the day is to trade with the trend and have a strategy in place when the conditions are favorable.
This isn’t to argue that buying dips is the only method to make money. In our June 15th newsletter, for example, we alerted Premium subscribers to TAN Invesco Solar ETF.
Figure 2: Daily Candles for the TAN Invesco Solar ETF from April 27, 2021 to June 29, 2021. stockcharts.com is a good place to start.
For the first time in a long time, TAN closed above its 50-day moving average on June 14th. While this entry appears to be based on momentum, it is crucial to note that TAN has been consolidating and pulling down for quite some time.
Figure 3: Daily Candles for the TAN Invesco Solar ETF from May 8, 2020 to June 29, 2021. Source stockcharts.com
So, in this example, we found a market with a strong theme that has been pulling down for a long time. A close above the 50-day SMA made sense as a trigger.
Let’s take a closer look at TAN to see if there are any premium subscribers with open positions. Did I mention that TAN was yesterday’s best-performing ETF among all unleveraged ETFs? On June 28, 2021, it was up 6.29 percent.
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Thank you for taking the time to read today’s free analysis. If you’d like to get daily premium follow-ups, I recommend signing up for my Stock Trading Alerts so you can take advantage of the trading action outlined – right when it happens. More information regarding current positions and levels to observe before opting to open any new ones or where to close existing ones can be found in the entire study.
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