Market Brought to You by the Letter ‘V’

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Market Brought to You by the Letter ‘V’

We awoke on Wednesday to a decidedly risk-off tone in global markets due to the second day of Chinese yuan devaluation. U.S. stocks were scared lower, taking a cue from the German DAX, which arguably has the largest exposure to China given the export-heavy stocks in the index.

As I called around trading desks from London to New York, I was struck by the bearish, if not all-out doom-and-gloom, tone of investors. I couldn’t help but think whether this would lead to yet another shakeout fakeout of the bears.

Sure enough, shortly after European equities closed for the day, U.S. stocks began a stampede higher led by energy. To put it in “Sesame Street” terms, Wednesday’s price action was brought to us by the letter “V.”

These V-shaped reversals have plagued the bears all year. Just as stocks looked ready to break lower, they bounced back sharply.

As I discussed earlier this week, investor sentiment in the near term is still too neutral if not outright bearish, which often prevents a lasting sell-off in stocks. Add to this the bullish tendencies of mid-August, as well as the favorable odds of a rally into next week’s options expiration, and we have a recipe for yet another V-shaped reversal.

Below is a chart of SPDR S&P 500 ETF Trust (SPY) and SPDR Dow Jones Industrial Average ETF (DIA) where I have marked the 2015 V-shaped reversals.

SPY DIA Chart
Click to Enlarge

The buy-the-dip mentality, which has made many traders good money over the past five years, is still strong. My contra-stream on Twitter consists of perma-bulls or traders that have only been in the game since 2010 and only know this strategy. These traders got loud again in Wednesday morning’s session and were once again rewarded. One day these dip buyers will be in for a nasty surprise. Until then, party on!

In this widely followed daily technical analysis piece I would be remiss not to at least briefly highlight the death cross that took place in the Dow Jones Industrial Average on Tuesday and has been extensively highlighted by the financial media. A death cross essentially takes place when the 50-day simple moving average (yellow line) breaks below the 200-day simple moving average (red line).

Despite its ominous name, however, this single-factor model/indicator has decidedly little empirical probability of being a major selling point for stocks. In fact, the market turned sharply higher shortly after the past two death crosses in 2010 and 2011.

And for those who want to look at the textbook definition of a death cross, note that a viable sell signal occurs when both moving averages are pointing lower. Currently, the 200-day is still on an upslope.

Dow Jones Industrial Average Chart
Click to Enlarge

Wednesday’s price action not only was a tale of two tapes, i.e., lower in the morning, higher in the afternoon, but we also saw meaningful divergence between the energy and the financial sectors.

On the chart below, we can see that energy (blue line) saved the day while the financials (red line) struggled.

XLE vs XLF Chart
Click to Enlarge

Such has been the story of 2015: Whenever one major sector gets sold another is sure to perk up and keep us snuggly in the 5%-wide trading range in the S&P 500.

Conclusion

Wednesday once again paid off for the dip buyers and V-shaped reversal hopefuls. The reason for the morning selling — further weakening in the Chinese yuan — just wasn’t enough to keep this market down. Besides, I don’t think I have ever witnessed a two-day 2% move in a currency lead to a major global risk-off event that lasts very long.

I continue to see the path of least resistance heading into next week’s options expiration day as up for stocks. As such, active investors can use Wednesday’s lows as a last stop-loss, below which we will likely open up the gates toward 2,000 on the S&P 500.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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As of this writing, Serge did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/daily-market-outlook-market-brought-to-you-by-the-letter-v/.

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