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Understanding chop

Although we’re looking at choppy distribution, where the market seems to be stuck in a range, I’m still looking bullish for the time being. The dominant psychology is the trend that was.

Don’t forget my saying, “respect the trend that was”. 

This is going to be a bit of the wind at its back from the trend that proceeded, which in this case was up. That means the oversold buys market going down to support are going to be the priority.

I’m going to anticipate this market will continue to be…

Choppy. 

I’m also going to anticipate that if there’s ever a time, that I’m interested in trading it, it’s going to be based on the lows. 

Let’s take a look at the ETF – XLE.

They said there’s a COVID vaccine so the expectation was that, well, there’s a vaccine, we’re all going back to work. That means there’s going to be demand in crude oil. This is perception and optimism, which is terrific, but it’s not necessarily rooted in the reality of the way people will respond. There’s a lot of people saying they’re not going to even take the vaccine. It’s a far stretch to say, well, the vaccines here and people are going to get back in their cars and get back to work. That’s just supposition.

How do we measure that, Gang?

In this case, we measure that by looking at traffic. TomTom Traffic Index has very interesting traffic data. I’d like to see traffic at least mimic what we saw in 2019, then I know the traffic narrative is real. Then there’s a good chance for the markets to continue higher. I think that XLE is benefiting from that. The second thing that XLE is benefiting from is just momentum chasing sector rotation. 

So, when the money’s coming out of work from home stocks, where’s it going?

Like electrical currency, we call money currency. All moves like a current — keep an eye on what the current may be and sector rotation. Also, don’t underestimate how much the overall tide is going to benefit the market. 

What are the ramifications more broadly for XLE?

Mostly on industrials, mostly on the Dow, not necessarily as directly on S&P, not at all on the NASDAQ. You have to remind yourself when you see the more down traded markets, your XLE, they’re the popular kid in class right now. You start to see the real popular kids in class, your NASDAQ, your SMH, your cloud, computing, transports, when those start to become favored again. 

We also need to understand relative outperformers. If we start to see money flow back into tech, don’t play a tech broadly, right? Don’t go hog wild into the NYSE, think about the relative outperforming sectors and break the NASDAQ down. 

The market moves in the direction of the trend that is (and the trend that was) that’s your high probability play. Don’t bet against the S&P. 

I don’t think the market’s overextended when it has the full force of the treasury and the federal reserve at its back. Same thing goes for when the market is heading lower, how much lower are we going to go? Where is the bottom, is not the question, nor where is the top.

The question is the backbone of the move. In other words, where’s the support within the uptrend? When the market retraces, where’s the support? That’s the backbone. Same thing for when the market is heading lower, stop asking yourself where the bottom is. 

Remember we’re in chop.

Ask yourself, what was the trend that preceded the chop? In this case, it was an uptrend focused on the oversold buys. Even though the markets might have a directional bias, keep in mind that you can get more granular. For example, you can trade the SMH, but you don’t have to trade the NASDAQ, QQQ. Look at relative outperforming stocks within the heavily weighted sectors.  

Don’t spend your time on the Home Depots, the McDonald’s, and the Lows of the world right now.  Look at where you have that clarity of the trend. When you have choppy markets, get more granular, don’t play broad sectors of broad indices. 

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