J. P. Morgan May Be A Bit Early On $125 Oil

Hey There Income Hunters,

 

Loving all the positive feedback coming from J.P. Morgan Chase & Co (Ticker: JPM). They have predicted an end to COVID, a strong economy, and $125 oil. 

 

Now, COVID has to end sooner or later, but choosing just days before the Fed announces an even more aggressive quantitative easing taper is not a good timing for a bet on oil, or an expectation of accelerated economic growth.

 

History tells you things will get worse before they get better once the Fed tightening is in play. 

 

Today, we’ll take a look at SPDR S&P 500 ETF (Ticker: SPY), and we’ll examine how the Fed’s tightening pivot changes the trading strategy of stocks.  

 

SPDR S&P 500 ETF (Ticker: SPY)

 

The rally in SPY this week basically reversed the down trade of the 10 days prior. 

 

The interesting part as always is the internal indicators that give us clues to money flow. The graph below illustrates the price, volume, and volatility on the way down, and now back up. 

 

 

Three observations on the internals:

 

      • On November 22, SPY made a new all-time high while Relative Strength Index (RSI) made a lower high … This Price/RSI divergence has been very reliable, and sure enough SPY rolled over and traded down. 
      • SPY bottomed on December 1 as implied volatility (IV) reached almost an 80% premium over actual vol. The IV premium is a great signal that put-buying drove the market lower, and you should buy the dip.
      • Now SPY has rallied back towards the highs, implied vol fell back to realized vol, and the volume has been very low on the move back up.

My point being: Let the internals tell you what to do … not the headlines.

My Power Income Trader (PIT) system has dictated the strategy to apply based on the Fed pivot to a tightening stance for the coming months.

I have caught the past couple of moves down, and continue to sell against rallies in SPY and take profits on the moves down.

The PIT system helps me assess Policy, Growth, and Inflation to attack the hot sectors of the market from the angle of trading where money is flowing.

Now SPY is back near the highs as we head into next week’s Federal Open Market Committee (FOMC) meeting … Great time to sell.

Technical Setup for SPY

The chart below illustrates the continued weakness in relative strength. 

A spike to new highs will trigger another bearish price/RSI divergence. As I mentioned above, this is a powerful indicator of how weak the internals are for SPY. 

Right now we are seeing largely FAANG stocks holding up the index, as many stocks are actually making new 52-week lows.

The Fed taper will bring out real selling, so selling rallies will be a great strategy in the months ahead, at least until Powell flips. But we will have clues for when the Powell flip/flop is in play. 

Bring It Home

Putting policy at the top of your analysis is critical when the Fed is in play. 

This policy shift is a major game changer, and the majority of investors don’t understand the damage it can cause if the Fed overdoes it.

I’ll have more on this next week before the Fed’s announcement on Wednesday. 

Get ready for a wild ride into the holiday, when liquidity is sparse and price movements are large.

Have a great weekend and as always …

Live and Trade With Passion My Friends,

Griff

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