STOCK BULLS EXCITED ABOUT HIGH VOLUME REVERSAL BUT WRONG ABOUT THE FED

By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

High Volume Reversal

Please click here for a chart of S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

  • In yesterday’s Afternoon Capsule, we wrote in bold letters,

A rally may ensue right here as most of the blind money is invested prior to the close.   

  • The foregoing call has proven spot on.  DJIA closed up 775 points with much of the rally occurring in the last hour.
  • The chart shows a reversal.
  • The chart shows the reversal was on higher volume.
  • The chart shows that the prior reversal was on February 24 on Russia’s invasion, and that reversal was also on higher volume.
  • The chart shows that there was another reversal on January 24 on higher volume.
  • The chart shows that both January 24 and February 24 reversals on higher volume led to tradable rallies.
  • The chart shows an Arora buy signal on March 11 right before the Fed meeting that led to a NASDAQ gain of 13.73%.
  • The Fed is meeting today and tomorrow.
  • Bullish gurus are looking at the chart and based on yesterday’s reversal on higher volume and the Fed meeting, they are predicting a massive rally.
  • In our analysis, the setup is ripe for a massive short squeeze resulting in a big rally. However, in our analysis, bullish gurus are likely wrong about the Fed.
    • Bullish gurus are expecting the Fed to walk back its prior hawkishness.
    • Start with Arora’s Second Law: Nobody knows with certainty what is going to happen next.
    • The probability is high that the Fed will be hawkish tomorrow.  The reason is that Powell and other Fed officials likely feel bad that they got the country into this mess of high inflation by first forecasting that there would not be any inflation and when inflation appeared, insisting that inflation was transitory.
  • A hawkish Fed is not conducive to a favorable risk reward.
    • Our system looks at both risk and reward in setups.
    • Most systems these days are focused only on the reward.  Even when they have a stop loss, they are not focused on probabilities.  For example, a stop loss of 7% with a 70% probability of hitting and a target gain of 10% with a probability of 30% is not a good trade.  In contrast, a stop of 7% with a 30% probability of hitting and a target gain of 10% with a 70% probability is a good trade.
  • Investors need to stay nimble and see what the Fed says and how the market reacts.
  • Keep in mind that the first market reaction is often wrong.  
  • Many subscribers bought TQQQ yesterday in response to the Afternoon Capsule. That trade is now highly profitable with 6 – 8% gain in a short time.  If you entered this trade, consider a combination of taking partial profits and raising stops.  No official signal was given because of high risk.  We wrote,

For super aggressive investors only, there is merit to buy now with a tight stop for a potential exit before 2pm on Wednesday.  There is a reasonable probability of a vicious short squeeze.

Australia

The Reserve Bank of Australia increased its base rate by 25 basis points to 0.35%. This is the first rate increase since November 2010.

Earnings Projections

Earnings projections so far in this earnings season are the weakest since the second quarter of 2020.  This is a big negative that investors should pay attention to.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 oil in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds are ticking up.

The dollar is weaker.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1862, silver futures are at $22.56, and oil futures are $103.94.

S&P 500 futures resistance levels are 4200, 4318 and 4400: support levels are 4000, 3950 and 3860.

 futures are up 21 points.

Protection Bands And What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.

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This post was just published on ZYX Buy Change Alert.

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Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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