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Respect the Choppy Stock Market

Serge Berger

Last week, we had another slow-moving stock market with little to write home about in the broader sense. Volatility remains eerily low despite increasing geopolitical tensions, natural disasters, the goings-on in Washington and potential for the usual seasonal weakness for stocks in the autumn period. But, as a former mentor used to remind me — one can learn much by just watching and thus being adequately prepared for when things get more interesting again.

Respect the Choppy Stock Market

As a reminder, trading in choppy markets is one of the easiest ways to lose money and your mind.

The number theme I have reiterated to my clients globally (clubhouse members and others) through daily videos, email, texts and webinars over the past month and a half has been to respect this choppy stock market environment and to take a step back.

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If we can learn how not to lose (much) money (a big part of this is learning when NOT TO TRADE), then making money just becomes a natural positive side effect.

In my experience and for any seasoned trader and investor, avoiding market chop and not fighting trends and sitting out when the getting is not good — that is called winning.

So you know, I continue liking the relative strength in healthcare and biotechnology stocks as represented by the Health Care SPDR (ETF) (NYSEARCA:XLV) and the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) exchange traded funds (ETFs) — as discussed last week here and here.

Due to the very choppy stock market environment as of late, clients keep asking me what level I am watching in the S&P 500’s SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that would signal a potential corrective period and spike in volatility.

Stock Charts


Click to Enlarge

Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day

On the above chart, I plotted the SPY ETF, which off the early 2016 lows has ascended in what we refer to as a rising wedge pattern. While this pattern is not bearish in and of itself, it does give us very-well-defined areas of technical support to focus on.



To me, the line in the sand is the blue 100-day simple moving average, which currently comes in around the $243 mark. A break and hold below this moving average would also snap the SPY ETF below the purple up-trend line and thus out of the rising wedge pattern. Such a move could in turn lead to a drop lower initially toward the mid $230s and the red 200-day moving average, or into the low $230s.

Should this occur, it would lead to a very normal, garden-variety 5%-7% pullback — ones we tend to see each year at least once (we have not yet seen one in 2017).

At the bottom of the chart in blue, I added the CBOE Volatility Index, or VIX, which remains very low but also displays a series of lower highs that ultimately begs to be broken. In my eye an uptick in seasonal volatility is just around the corner and a break-and-hold in the VIX above 16 could quickly see a move into the low-to-mid 20s.


Click to Enlarge

Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day

One part of the U.S. stock market that has seen some volatility over the past couple of weeks has been insurance stocks, at least the ones potentially affected by natural disasters such as hurricanes. The SPDR S&P Insurance ETF (NYSEARCA:KIE) shows that the selling over the past weeks has since pushed the ETF back to the very low end of the well-defined up-trend.

In fact, if we look closely we can see that the KIE ETF broke below its red 200-day moving average on a weekly closing basis. We are now in wait-and-see mode as to how the markets react to the aftermath of hurricane Irma, which struck Florida over the weekend, but any strong bullish reversal in the KIE ETF and its individual stock holdings could set up a nice opportunity to buy with very-well-defined stop-loss levels around the $84 mark.

Conclusion

In summary and as discussed last week, I still think that snapping up some portfolio protection either via puts in the broader stock indices or taking some profits seems like a reasonable move at this juncture. Trading opportunities, however, will provide themselves in both directions.

Check out Serge’s Trade of the Day for Sept. 11.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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