Trick to Predict Market Moves

👀 Trick to Predict Market Moves

Welcome to today’s Rude Awakening!

For the first time in what seems like a LONG time, we had a down open in the marketplace.

Not a big down open, but the NASDAQ opened down 40 points, the S&P minis down about 17 points, but it is…

A Crack in Our Rally

We have seen a really strong and sustained rally for many trading days in a row now.

It’s been pushing and pushing up to new all-time highs.

Can we make the all-time highs? Remains to be seen.

Of course, there are only three things the market can do: go up, down, or stay the same.

This is a good time to talk about a new and important term regarding analyzing the marketplace, combining world news with chart patterns…

Secondary Reactions

As you know, as traders we are always looking for “tells” in the marketplace.

We try to determine what the market’s next move will be, based on national or global news and events.

The goal is to find an edge or advantage to predict market behaviors.

If we could see the future, we would be invincible as traders!

But, we can learn how to predict the future based on historical market behaviors and chart patterns.

As we look for these tells, we find it’s the secondary reaction to most market events that will give us an idea of where the market could be going.

For example…

We know that oil ALWAYS spikes on news that a hurricane is going to hit.

Then the question becomes, what happens when the hurricane does hit?

If oil doesn’t continue that upward movement, then we know we’ll probably have a pullback coming.

This would be the secondary reaction.

Another example…

When the Fed announces an upcoming interest rate cut, the dollar will immediately get beaten down. But what happens when the rate cut goes into effect? Whether it goes up, down, or sideways, this is the secondary reaction that indicates where momentum on the dollar really is.

We’re seeing a pattern develop based on a secondary reaction in recent market action.

Trump’s Tweet, Followed By…?

As we try to decipher whether we’re headed up, down, or sideways today and onward, we can look at recent events affecting the marketplace.

Take a look at this chart…

IMG 1

On the day Trump was diagnosed with coronavirus, unsurprisingly, we had a big down day.

But looking at the market’s secondary reaction after the initial shock of the news, we saw a massive reversal to the upside the next trading day.

Then, if you look at #3 on the chart, markets continued to push up, as bearish traders were forced to cover short positions.

As a quick refresher, covering a short means you have to buy back the stock you borrowed.

When markets have a big reversal to the downside, bears will short stock, hoping that prices continue to fall. When you short a stock, you borrow it at one price, hoping it will fall lower. If it does, once you sell it back at a lower price, you pocket that difference.

But, that’s not what happened here. When markets do not continue to fall, but instead have a massive reversal to the upside like we saw recently and as you can see in this chart, short sellers have to cover.

Those who shorted stock would have lost money, and all the buybacks help to push markets even higher.

Then, looking at #4, we had what we call an expansion bar, which shows us the bulls are unequivocally controlling the marketplace.

This brings us to today…

Two Important Things to Note

Now, we are looking at this vacuum…

Right between the pullback we’re seeing today, and this future all-time high.

All of this gives us a couple things to note…

  1. We are definitely in a bull market, and will continue to be so until directional change is implied otherwise.
  2. We have a vacuum to fill. And vacuums usually get filled.

Now, today’s trade opportunity in our Pro level service centered around a sector that has been knocking it out of the park, despite the pandemic.

I’m talking about the housing market, which is in extremely high demand right now.

Because of this, the SPDR S&P Homebuilders ETF (XHB) is absolutely killing it. So, we’ll look to set up a bullish trade idea on XHB with a very high probability of profit (POP, as I’ll usually refer to it) of almost 90%.

If you want to learn more about our Pro level trades, you will be able to sign up for our Rude Awakening Pro service very soon…

But for now, that’s it for today!

Have a great rest of your trading day, folks.

We’ll talk again tomorrow…

Regards,

Scott Stewart

Scott Stewart
Editor, Rude Awakening

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Scott Stewart

Scott Stewart has been trading for decades. He has acted as an analyst and educator on the stock market for just as long. As your Rich Dad's Weekly Cash Flow analyst, Scott works tirelessly to ensure you know everything you need to do when entering into new positions, and adjusting trades as you go along....

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