By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
A Positive Pattern
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:
- The chart shows that a potential inverse head and shoulders pattern is forming. An inverse head and shoulders pattern is a positive pattern. In the absence of news and macro developments, an inverse head and shoulder pattern works about 65% of the time.
- “S” on the chart denotes the shoulders. “H” denotes the head. “N” denotes the neckline.
- The chart shows that the market is right at the neckline. It is not yet known if the pattern will be successful.
- In The Arora Report analysis, the success of this pattern will come down to earnings. If earnings are better than expected, the pattern will be successful and vice versa.
- The chart shows that RSI is overbought. A pullback is natural when RSI gets this overbought this quickly. In the early trade, the market is seeing a shallow pullback.
- There are many scenarios possible. The highest probability scenario as of this writing is a short term rally in stocks and a short term rally in bonds going into the year-end. However, in addition to earnings, there are three important events ahead that may totally change the picture:
- Earnings
- The Fed meeting
- CPI and PPI reports
- Important earnings from Microsoft (MSFT) and Alphabet (GOOG) are ahead after the close.
- The latest polls for the election are leaning toward a Republican win.
- The stock market has gone up after the last 18 midterm elections, irrespective of who won. If Republicans win, the market is likely to celebrate with a bigger move higher.
- The seasonality is positive.
- When it is all said and done, what the Fed says will trump everything.
Germany
German Ifo Business Climate came at 84.3 vs. 83.3 consensus.
This better than expected number is responsible, along with overbought RSI, for a shallow pullback in the early trade. Remember that the momo crowd does not like good economic numbers. The momo crowd wants the economy to weaken to force the hands of the Fed and European Central Bank (ECB) to not fight inflation.
China
There are unconfirmed reports that China is ordering banks to buy stocks to prevent Chinese stocks from falling.
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 🔒 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 🔒 but can easily swing either way. 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 $1646, silver futures are at $18.83, and oil futures are at $84.43.
S&P 500 futures resistance levels are 3860, 3950 and 4000: support levels are 3770, 3630 and 3600.
DJIA futures are down 106 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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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 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.
