Editor's note: The stock market doesn't care about our biases... Every day, investors make poor decisions by reacting emotionally instead of reasoning things out. None of us can totally eliminate these biases. But Ten Stock Trader editor Greg Diamond says if you're aware of how your brain works, you can prevent your instincts from working against you. In today's Masters Series, adapted from the May 13 Weekly Market Outlook issue, Greg explains why remaining flexible is a critical skill for investors... lays out his "road map" of where interest rates are headed next... and details how you can use this information to profit moving forward...
Follow This 'Road Map' to the Next Big Move in Stocks By Greg Diamond, editor, Ten Stock Trader Dr. Van K. Tharp didn't think he was cut out for options trading. The noted research psychologist lost money so fast, and so often, that he was surely doing something wrong... But, unlike other investors, he wanted to find out why. Tharp decided to study top traders in order to create a model for success... In doing so, he developed an Investment Psychology Inventory to measure investment strengths and weaknesses. By teaching the winning traits of top traders, Tharp believed he could improve the performance of less successful investors. And, to him, it all came down to one's trading mindset... Too many people get stuck by the beliefs they hold, yet they continue to cling to [them]. My beliefs... are constantly evolving... because I value them according to their utility. This type of adaptable trading psychology is what drives investing success. Because, ultimately, the stock market doesn't care about our biases... what you and I think should happen. All we can do is react to the market, and that's a hard concept for some investors to accept. It's why I suggest you tune out the "noise." That means avoiding the various economists, analysts, and "experts" on TV who tell you what they think the market will do or won't do. As many of you know, I don't watch the mainstream financial media... Most of the talking heads take no risks, which means they have no skin in the game. Because of that, they don't provide any real value regarding the future of the market. Now, I don't live under a rock... When some investors speak (like Paul Tudor Jones or Stanley Druckenmiller), I listen. But for the most part, I stick to my own investing strategy and ignore the noise. Of course, I'm not always right, and there's no such thing as perfection in this business... We deal in probabilities. My strategy is built around finding the highest probabilities of what the market is likely to do and then trading it... without bias. Like Dr. Tharp, I allow my trading beliefs to evolve based on utility... I constantly update my game plans to ensure the best investing outcomes. Today, I'll discuss a road map I've been tracking for the S&P 500 Index, based on key interest-rate trends. Using this guide, we'll be able to profit from what's likely to happen in the market according to technical principles, not what we think will happen. Let's get started...
| Recommended Links: | |  CHART: Is Nvidia the Next Cisco? Just like Nvidia today, Cisco was the obvious darling during the dot-com bubble because it was a classic "picks and shovels" play. And much like today, 99% of investors and almost every Wall Street "expert" were caught up in the Cisco frenzy before it crashed 85% – ruining the retirements of countless Americans. Will Nvidia end up like Cisco? Check out this surprising chart for yourself right here. | |
 WARNING: Read This Before the Next Federal Reserve Meeting Investors are looking to the Fed with high hopes for interest-rate relief. Unfortunately, many have no idea there's another major story unfolding right now, one that could be worth $40 trillion. Now, one Wall Street millionaire just stepped forward with all the details, including how it could make early investors rich. Click here for details. | | |
Since the Federal Reserve began hiking interest rates in 2022, stocks have crashed and rallied while inflation has fluctuated. Although the Fed's next move is uncertain, we know that inflation will continue to impact the stock market going forward. And it should be no surprise that lower interest rates would benefit stocks, even if overall rates remain elevated from a historical perspective. With that in mind, I've been tracking the 10-year U.S. Treasury interest rate chart in relation to the overall stock market. This is my "road map" for stocks based on the future direction of interest rates... You can see the big drop in interest rates from October 2023 to December 2023 on the left side of the chart... As interest rates fell, stocks soared. This inverse correlation makes sense when you consider basic economic principles. (When rates fall, consumers and businesses spend more and debt is cheaper, which pushes stock prices up.) Since the start of 2024, interest rates have broadly risen, but not in a straight line. I've marked "support" and "resistance" levels with the black dashed lines above. There's nothing complicated about this setup from a technical-analysis standpoint... Interest rates simply drop to the support level and rally up to the resistance level... Stocks then react to those moves. Interest rates have again dropped to the support level, and we've clearly reached an inflection point... I've highlighted three possible scenarios that could unfold, in green, blue, and red on the right side of the chart. The green scenario is similar to what happened last fall... It marks a big move down in interest rates. This downturn, which would break the support level, could fuel a massive stock market rally. (I'll have more on that in a bit.) The blue scenario marks a short-term bounce where interest rates bottom out and then rally. But they would ultimately fail to make a new high given a likely reversal lower heading into the summer months. The red scenario would be similar to what we've seen this year in interest rates... Support would hold, and rates would rally back to the resistance level. Now let's compare this interest rate road map with the S&P 500 itself... Last week, I outlined a few scenarios in the S&P 500 and the VanEck Semiconductor Fund (SMH) similar to what I just highlighted in interest rates. To recap, if we see more strength with minimal volatility, we could add to our "core" positions. If we see more volatility, we could get aggressive, especially if a low occurs in the next few weeks. Now let's review the S&P 500 chart using the corresponding green, blue, and red scenarios to get the stock-investor perspective... I'll start with the most bullish setup, which I've marked in green... Using this S&P 500 chart along with the interest rate chart above, we can see that last October marked a low. The relative strength index ("RSI"), at the bottom of the S&P 500 chart, was "oversold" as stocks dropped and interest rates topped out... Then stocks exploded higher. Back in late April, a similar scenario unfolded... Stocks sold off into oversold levels on the RSI due to "panic selling." (I've circled this in red above.) If interest rates continue to decline, we could see a similar situation in stocks – a big rally, like the one marked with the green line. The blue scenario in the S&P 500 would line up with the blue scenario in interest rates... The S&P 500 would make a slight new all-time high, or reach a level just below it, and then drop into a short-term correction. But nothing would break this uptrend... Another rally would follow from there. The red scenario isn't likely to occur, but I must still consider it. While this may scare some bulls, I view it as a favorable setup to get aggressive in another panic-selling episode. If this scenario unfolds (and that's a big "if"), interest rates would spike over the next week or two. The S&P 500 would then run into a Fibonacci confluence zone (marked with the black box and red horizontal lines above) and likely set up positive divergence on the RSI, which is bullish. Again, this isn't very likely to happen, but if it does, I would remain bullish. Simply put, the next few weeks will be critical. Numerous inflation data points came out this week, and leading chipmaker Nvidia (NVDA) reports earnings next week... Inflation cooled for the first time in six months, but NVDA's earnings could miss analyst estimates and spook the rest of the market. Anything is possible. But no matter what happens, the market will react... And I'll trade the setups from a technical perspective... without bias. On top of that, our interest rate road map will help us pinpoint, and profit from, the next big move in stocks. Best, Greg Diamond, CMT
Editor's note: The uncertainty surrounding the Fed's ongoing battle with inflation isn't the only development we're monitoring right now. Greg believes a seismic shake-up is about to hit stocks this month. And investors who begin preparing now could earn huge gains in the weeks ahead... Greg says right now is the perfect time to start using technical-analysis principles for a chance to double or triple your money. So, he held an online presentation last week to share the ins and outs of his unique strategy. Learn more here... | 
No comments:
Post a Comment