Trade What You See – Not What You Feel

My indicator is telling me the market will go higher.

PRE-OPEN MARKET COMMENTS FRIDAY – Fed Chairman Powell will speak at Jackson Hole at 10 am ET. The market is waiting for this speech and it will remind us that the Fed is going to keep tightening at a steady pace. They do not have evidence that the economy is weakening and inflation is running hot globally.

This is the last time we will hear from the Fed for a few weeks. After a 12% rally in a month, I expected to see some nervous jitters and profit taking ahead of the event. When the market rallied on heavy volume yesterday, that theory was put to the test.

Here is a laundry list of reasons why we are going to drop.

1. China’s economy is so weak that the PBOC is easing when the rest of the world is tightening. Credit concerns are surfacing.

2. The market gets nervous in August and September when the Fed is in recess and those are historically weak months.    

3. Inflation is still running hot and another 75 basis point rate hike is possible in September.

4. The rate hikes we have seen in the last few quarters have still not filtered through the economy.

The list is long and what we believe is going to happen often creates a market bias and it blinds us from what is actually happening. Price action (and not what you believe) is what really matters. The two do not always align and that creates conflict for traders. I personally believe that the market is due for a pullback, but my proprietary indicator is telling me something different. It works on a short term and a longer term basis.

The vast majority of the time, it correctly predicts what is going to happen. When it does not correctly predict a move, it is also providing us with information. It means that the current trend is strong and that the next signal will be good.

Yesterday, we had a very nice looking “gap and go” formation on a five minute basis. We had stacked green candles and the trend strength looked great.  My personal belief that we were going higher prevented me from taking the sell signal and it turned out to be a great one.  I should have trusted the signal. Later in the day, a sell signal was generated and the market did not drop. That is a divergence and it signaled that the next bullish signal would be a good one. We use the 1OP indicator for day trading, but it also works on a longer term basis.

Right now it is telling me that no matter what I believe is going to happen, the market is going to rally. You can see the signals in the daily chart below and how it has performed. We just came off of a bearish cycle that did not produce (benign) and we have a bullish cross. This could be a bull flag on SPY and just based on the indicator I believe we are going to challenge the 200-day MA in the next week or two.

The point to all of this is to trust price and to trust what your indicators are telling you.

I believe that we will see some profit taking after a nice run Thursday. Once support has been formed and Powell is done speaking I expect to see a rally.

Support is at $417.50 and resistance is at $421.50