Hey There Income Hunter,
Two days this week the bulls attempted to build momentum higher and instead it was two days of smackdown by the bears.
Could the breakout above some power technical patterns – the powerful cup-and-handle formation, the 200-day moving average, the 50 dma and a head-and-shoulders bottom – be a fakeout?
Was all this talk of a soft landing and pause in interest rates just talk?
Well, I can give you a definite yes on the second question but the first question has yet to be answered …
Today, I’ll share the answer and the trade you should do right now!
What Is A Bull Trap?
A bull trap takes a lot of time and energy to be completed.
First, you have to have a reversal from a down trend. Then you need to take out every key resistance level on the way. Then you need to finally break the downtrend line itself. Then it’s clear sailing to a new trend higher …
Or at least that is what the bulls believe.
As you can see below the S&P 500 Index (Ticker: SPX) is sitting just above all the resistance levels it cleared on its way to breaking out …
Those same resistance levels have now become support, because all the buyers that missed the breakout are now given a second chance and will step in and buy.
So, this will turn into a major battle between the bulls and bears. I do not think we will have to wait long to get a resolution.
We have Fed speakers over the next few days that could break the standstill.
If it doesn’t happen this week, then next week we will get a lot of US Treasury bond supply and the monthly employment report.
The following week we will get the all important CPI report and then a massive monthly expiration (OpEx) that will surely force a break one way or the other.
What’s the Trade?
Sometimes you don’t have to make a one-way bet to make money in the markets and this may be one of those times.
The chart below shows the ratio between the iShares US Treasury 25+ maturity bond ETF (Ticker:TLT) and the Invesco QQQ Trust ETF (QQQ).
This ratio matches up long-term bonds with long-term mega cap growth stocks. The beauty of this ratio is that long-term interest rates are an input into calculating the valuation for the stocks.
The ratio has been grinding lower, meaning that TLT has gone down faster than QQQ’s with the ratio making a series of 40-year lows.
Notice that recently, as the ratio was putting a series of lower low, the relative strength index in the lower panel has been making a series of higher lows.
This is known as an RSI/price divergence and it’s a reliable indicator of trend reversal.
My gameplan this week was to first set up a bearish put spread in QQQs. Why? Because I think the probabilities favor a breakdown in SPX and QQQs.
I set up a QQQ put spread to expire next Friday, March 10. I will execute a bullish call spread on TLT and match the dollars at risk.
The bottom line is, the Fed and government are much more concerned about saving the bond market than the stock market.
And one of my trading rules is … Don’t fight the Fed.
Remember, plan your trade and trade your plan.
And always …
Live and Trade With Passion My Friend,
Griff