You can’t keep a good market down… and despite everything that has been thrown at it… all-time highs are here again…
Not too shabby when you consider all this stuff going on:
- The European Central Bank (ECB) launched a major stimulus package and cut its interest rates, which should have an impact on assets tied to rates (like gold and silver)
- The Federal Reserve monetary policy meeting is next week — and traders are pricing in an 88.8% chance of a 0.25% rate cut.
- Leading nations are weakening their currencies against the U.S. dollar, which is set to have several implications on global imports and exports.
However, there is a simple way for you to profit from all the uncertainty… and I’m going to pinpoint to you how to do it…
But first, I want to share with you an important chart.
Take a glimpse at an hourly chart of the SPDR S&P 500 ETF (SPY).
For the last few weeks, I’ve referenced $294 in the SPY as a key resistance level and the Death Line at $282… and how those levels would decide the next trend in the stock market.
Well, we saw a massive break out and SPY is on its march to all-time highs.
However, with so much confusion surrounding the global economy, trade, interest rates and the strengthening of the dollar — I don’t believe this massive run-up is sustainable over the long term.
The U.S. Dollar and stocks shouldn’t behave like this…
Just take a look at the long-term chart in the U.S. Dollar.
Right now, the U.S. Dollar Index is approaching a key breakout level of 100…
Why is it important?
Well, generally speaking, when the dollar strengthens… the U.S. stock market performs poorly.
However, that is not the case at the moment…
In the past, we’ve seen stock market corrections when the dollar has surged like it is currently.
But that’s not the only thing that is off with the present stock market rally…
The bond market is acting kooky ahead of a potential rate cut
Just take a look at the hourly chart in the iShares 20+ Year Treasury Bond ETF (TLT) — an ETF that tracks long-term bonds.
We saw TLT fail to break out from a key resistance level of $148 — the upper blue horizontal line… and collapse shortly after.
Think about it…
And while the buyers of bonds have been relentless over the last few months…it appears like that trend is now shifting.
What’s more concerning?
Traders are pricing in a high chance for a rate cut next week… but based on how bonds and interest rates move, the price action at the moment isn’t making much sense.
Think about it… if rates are going lower, that’s great for bond prices and the market should be pricing this in.
It almost seems as if traders are being reactive right now… after they saw the 2-year and 10-year spread break back above the all-important 0 line.
Source: Federal Reserve
When traders are acting in this fashion… it’s like the blind leading the blind — just buying and selling with no real reason.
With that being said, I actually placed a short-term put spread trade in TLT. More specifically, I sold a put spread, betting that TLT will bounce very soon.
The Bulletproof Strategy for A Broken Market
When the market zigs… I zag.
In other words, I look for stocks that don’t necessarily move in the same direction as the overall market.
How do I do that?
- Be stock specific
- Focus on charts
- Pay attention to price action and volume
For example, I look for relative strength. If stocks are weak, I’m looking to buy strong stocks that our outperforming.
When a stock is weak, I will place bearish bets on it, regardless if the overall market trend is up.
That’s what my Bullseye Trade is all about — spotting and profiting off stocks that are doing their own thing.
Check out the hourly chart in Twitter Inc. (TWTR) — my most recent Bullseye winner.
Compare that chart to the SPY over the same period.
You can clearly see that TWTR was much stronger than the overall market and had a bullish pattern.
On the other hand, SPY was pulling back from a key resistance level at $294 (the blue horizontal line and was still in a downtrend.
With such a strong stock in relation to the overall market, I purchased call options in TWTR and played for the breakout…
I relied on the price action and the stock chart and not my bias on the market to jump in on this trade.
Just a few days later… I locked in a $4,200 winner on that TWTR trade!
Here’s a look at another recent Bullseye Trade…
Zoom Video Communications (ZM) was a recent IPO, and of course, it was moving opposite with the overall market.
With the ZM trade, I was just playing against the support and resistance (the blue lines in the chart above).
The lower blue horizontal line is the support level, while the upper blue line is the resistance level.
I figured the $90 level would hold and ZM would rally back to $95 ahead of its earnings…
… when it got close to $95… I decided to take profits, especially since the company was set to release earnings data in two days (it’s really risky to hold directional options positions into a volatile event like that).
When the market appears disconnected from reality don’t get frustrated.
The markets can stay irrational longer than you can stay solvent. Instead of fighting the trend, focus on stocks by being trade specific.
Also, rely on charts and price action and not your bias (what you think should happen).
So far, my Bullseye Trades have been ALL winners… and it’s proven to work when the market is crashing (like we saw in August)… choppy… or disconnected like we’re seeing now.