The bearishness is growing as stocks solidify their recent rally. But unless it proves otherwise, the market’s current price correction move is fairly normal, especially after the S&P 500 (SPX) has risen nearly 20% from his October 2022 low. . That said, if enough buyers don’t materialize soon enough, stocks could see a more severe setback as February progresses.
Certainly, an upcoming CPI release could set the stage for more sales. But regardless of whether the market is rising or falling, the primary reason stock prices fluctuate is what happens within the server farms that house the stock market. Because that’s where the mechanical traders that move the market sell their goods.
This article will go into detail on how this process works, as it is very important that all investors are fully aware of this.
For what it’s worth, I wouldn’t be surprised if the CPI were to flatten out again or be softer than expected. What’s more, if it works out, bond traders will get another chance to lower yields, likely reigniting the rally in equities.
Self-perpetuating loops: humans have questions. The robot just follows the program.
The problem with human investors is that suspicion is always there. Trading robots (algos), on the other hand, simply follow programmed instructions. So it is possible that the current rally will stall, in which case human traders will throw up their hands, CNBC will freak out, and experts will talk endlessly about why this happened. Rest assured, Argo doesn’t worry. they just trade.
Over the years, I’ve learned that mimicking algos is better for your mental health as a trader than trying to figure out what’s going on in the world. , learned to build trades on the same rules that govern the world of algorithms where only resistance matters: “if this happens, do this”.
Of course, order flow refers to what the market maker bot sees before every trade is executed. Buyer or seller dominance. Over time, order flow tends to be augmented by non-market maker bots based on price action at key support or resistance levels in the market.
For example, during periods when the number of sell orders exceeds the number of buy orders, the market maker’s algo will lower the bid/ask price by executing lower price trades. On the other hand, put a bearish trader to sell his options and sell stock index futures to hedge his account. This combination of orders from both traders and market makers helps drive prices down.
Think of Argo as a friendly bartender/host who is always there to give customers what they want. If the algorithm has more sellers than buyers, its programming tells it to sell and hedge the downside. I do not have any questions. This will drive the market down. When buy orders become dominant, the algo hedges by selling stocks to buyers, selling call options accordingly, and buying stock index futures. This will drive the market up. Whatever the situation, Algo will fulfill most orders. Also, unlike some bartenders, Argo doesn’t tell customers they’ve had enough and hails a cab. Instead, they wait for the order stream to change and repeat the tested and money-making maneuvers over time.
Human traders, by contrast, worry about whether price changes are meaningful. Their indecision often clouds their judgment and they often miss meaningful clues as to what is really going on. It causes scary things like panic buying and bailouts when the market turns out to be bottom.
My point in bringing this up is that the best way to see what the algorithm is doing is to focus on the price chart. So what happens in the world matters to me, but when I put on my trader’s hat (I actually wear a trader’s hat), I shut out all the noise and say, ‘If this happens Try to focus on “do this.” Because in the market it really matters what the algorithm does depending on how the order flow reacts to the support and resistance levels.
Big Picture and VBP
Everyone’s portfolio reacts differently to market conditions. But if you’re an active trader with a medium-term timeframe, you’ve probably seen the recent portfolio net value consolidation.
Don’t be surprised.
The S&P 500 (SPX) has risen significantly from its October lows and is set to pause. Importantly, SPX is trading above his 50- and 200-day moving averages, especially since non-market maker bots are seeing this. It also trades within the key support level band of 4050-4100. See below for more information on SPX and other markets.
Similarly, the climb stalled just below 4200. This represents an increase of about 20% from the October low. A closer look at the SPX bars also shows that there is a Volume by Price (VBP) bar on the left side of the chart, the top of which is just below his 4200.
VBP is an underestimated metric. Still, its usefulness for quantifying the interest of the trading crowd to price levels is immense. In other words, the bigger the bar, the more important the price level as a support/resistance level. This is because it is an area where buyers are buying and sellers are actively selling. The larger the bar, the more important the price area.
Pay particular attention to the three VBP bars in the SPX chart below. Because they are between 4050 and 4200. This is no coincidence. That’s where the bulls and bears are fighting over the market’s next direction. You can see that the algo pays attention to order flow in this price range. The bot knows this, so many of its decisions (and gives this instruction if it happens) are based on his VBP bar. In other words, if the price moves above or below his VBP bar, the price trend is likely to continue.
Again, this is because the bot stacks with pre-programmed orders when the price moves above or below these key price ranges. Equally important is what happens when the price breaks below key VBP levels.
and remember. There is no doubt about bots. They just follow their instructions. In other words, it doesn’t matter what anyone’s opinion, including mine, is about whether it’s in a bull market or not. Only price action does. And price action is primarily influenced by order flow, support, resistance, and the “if this happens, do this” directive that governs the bot.
Bond Yields Ripe for a Reversal
US Treasury yields have been rising recently, with the US 10-Year Note (TNX) up close to 3.75%. This is bad for stocks.
However, TNX is now above the upper bound of the Bollinger Bands. That means the time is ripe for a pullback towards his 50- and 20-day moving averages just above 3.5%. In addition, TNX is also bucking the trendline to return to the top of his 2022 yield. A more significant level is his 3.4% yield, which is a 200-day moving average. That means next week could be a defining day for bonds. So a welcome surprise in the CPI could reignite the rally in both bonds and stocks.
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Support pending for now: NYAD, SPX, and NDX are all above their 20-day moving averages.
The New York Stock Exchange Preliminary Fall Line (NYAD) has found support at the 20-day moving average after reversing its recent uptrend at the same resistance level it reversed in August 2022. , which is normal technical behavior.
The Nasdaq 100 Index (NDX) has found support above the 12,200 area and the 20-day moving average. This means that the uptrend remains intact. A move below the 200-day moving average is highly negative.
The bottom line is that focusing on what’s working while watching how the market reacts to the news is likely the best strategy for the rest of 2023. .
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Uptrend Continues: NYAD, SPX, and NDX Are All Above the 200-Day Moving Averages
The Nasdaq 100 Index (NDX) is moving too fast and has been ahead in recent days. On February 3, 2023, Bollinger closed the deal at the top of his band. This is usually a sign of a reversal or adjustment. A regression to the 200-day moving average and the 12,000-day moving average may not be out of the question. A break below the 200-day moving average will be very negative. For now, we see normal technical behavior.
On the bullish side, note that the On Balance Volume (OBV) is rising as the Cumulative Distribution (ADI) accelerates. This combination of indicators shows an increase in short seller bailouts (ADI) and buyer entry (OBV).
Meanwhile, the CBOE Volatility Index (VIX) is above 20, showing strong resistance at 22.50. Stocks tend to fall when the VIX rises. This is because rising put volumes indicate market makers are selling stock index futures to hedge public put sales. A drop in the VIX is bullish because it means less put option buying, which ultimately leads to call buying. This allows market makers to hedge by buying stock index futures, increasing the likelihood that stock prices will rise.
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With the Eurodollar Index (XED) closing near 95 on 10 February 2023, liquidity, the lifeblood of the market, may have bottomed out after the recent selloff. Note that the market’s recent rally from the October low corresponds to this liquidity plateau. Also notice how the continued decline in XED responded to the 2022 bearish trend.
The S&P 500 (SPX) fell below 4100 but remained above 4050 and its 20-, 50- and 200-day moving averages. A move above 4200 would be 20% away from the October 2022 bottom. A break below the 20- and 50-day averages will test the 200-day line.
Similar to NDX, the Accumulation/Distribution (ADI) On Balance Volume (OBV) combination suggests that money continues to flow into equities.
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Joe Duarte
In-the-money options
Joe Duarte is a former money manager, active trader and widely recognized independent stock market analyst since 1987. dummy trading optionsrated 2018 TOP Option Book by Benzinga.com And now, in addition to the 3rd edition, Everything to Invest in Your 20s and 30s Books and six other trading books.
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Joe Duarte is a former money manager, active trader and widely recognized independent stock market analyst since 1987. His publications include his 2018, 2019 and his 2020 best-selling Trading Options for Dummies and TOP Options Book by Benzinga.com. , Trading Review.Net 2020 and dummy market timing. His latest best-selling book, The Everything Investing Guide in your 20’s & 30’s, is The Washington Post’s Color of Money Book of the Month. To receive Joe’s exclusive stocks, options, and his ETF recommendations in your mailbox weekly, visit Joe Duarte In The Money Options website.learn more