Another day, another all-time high seems to have been the prevailing theme lately. Sticking with working strategies and themes may seem challenging, but fighting the tape is not the answer.
It can feel counterintuitive for traders to go with the trend sometimes. I know! A trader may see a chart going from the bottom left of the chart to the upper right-hand corner and wants to take the other side of the trade badly, even though it is counter-trend. Logic might dictate that whatever market you are following should be selling off, and it continues roaring higher like a roaring bull. While I am not trying to be oversimplified here, I want to reiterate that the trend is indeed your friend .
Even when many technical indicators might indicate that a market is overbought (or oversold), a market will oftentimes continue moving in the same direction, leaving many counter-trend traders in its wake. This is the reason that buying pullbacks in a bull market has been the focus here, opposed to trying to pick tops. It is never easy picking tops and bottoms in any market.
This is the major reason that I like to revisit what has been working.
Looking back at the US equity markets over the last couple of weeks, the theme seemed to be bipolar at face value; but has it really? If we take out the fundamental development of the Fed changing stance on interest rates, has the price action been anything more than typical?
Figure 1 - S&P 500 Index May 18, 2021 - June 29, 2021, 10:00 AM, Daily Candles Source stockcharts.com
I know it felt like the sky was falling when the Fed changed its stance on future interest rate guidance. In reality, the pullback was pedestrian on the day of the event, and the subsequent market digestion brought the S&P 500 to the 50-day SMA (slightly below) for a short period. There is nothing so spectacular about that. It is just the sign of a healthy bull market.
Looking at the pullback that we saw two weeks ago, it was approximately 2.24%. It felt like it was a larger selloff than that, right? That is what happens when the markets are fired up with emotion, and everyone has their take on what is going to happen next.
In reality, if a trader had a plan to buy the pullback at a predefined level, the news of the projected interest rate hikes was just a vanilla buying opportunity. Our readers were prepared, as we have been analyzing what has been working recently: buying the $SPX at the 50-day moving average as detailed on several occasions - including the June 10th publication . It was on our shopping list, and waiting for the pullback was indeed the right move.
It takes discipline, patience, and execution.
As the S&P 500 has marched higher since touching the 50-day moving average, we currently have the daily RSI(14) sitting near 65-66 and the index trading near the psychologically round number of 4300. Many traders may use these metrics to take some chips off the table . However, is shorting the market there the right thing to do? Some traders may try, some may succeed, and some will lose. The important message of the day is to trade with the trend, and have a plan in place when conditions are right.
It is not to say that buying dips is the only way. For example, our Premium subscribers were alerted to TAN Invesco Solar ETF in our June 15th publication.
Figure 2 - TAN Invesco Solar ETF April 27, 2021 - June 29, 2021, Daily Candles Source stockcharts.com
On June 14th, TAN closed above its 50-day moving average for the first time in a long time. While this entry seems like more of a momentum-based entry, it is important to note that TAN had undergone a long period of consolidation and pullback .
Figure 3 - TAN Invesco Solar ETF May 8, 2020 - June 29, 2021, Daily Candles Source stockcharts.com
So, in this case, we identified a market with a good theme that has pulled back for an extended period. For a trigger, a close above the 50-day SMA made sense.
Let’s take a look in more detail at TAN for any premium subscribers that have open positions. Did I mention that TAN was the top-performing ETF of all unleveraged ETFs yesterday? It was up 6.29% on June 28, 2021.
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Thank you.
Rafael Zorabedian
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care
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This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits' employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.
