It has been an interesting week with stocks, commodities and currencies having a knee-jerk reaction to the Federal Open Market Committee minutes released Tuesday afternoon. In short, the
clearly said there must be more quantitative easing before things will get better. It was this news that triggered a rally in both stocks and commodities.
Quantitative easing is a fast way to devalue the dollar, and the Fed is doing a great job at that. As long as the dollar continues to decline the stock market will keep rising.
This week kicked off earnings season with
beating analysts' estimates. We usually see the market trade up the first week of earnings and then start to sell off by the end of earnings season.
Both Intel and JPMorgan sold off on strong volume Wednesday despite the good earnings and Wednesday's broad market rally. This just goes to show the market hasn't forgot about "buy the rumor, sell the news." The big, smart money sold into the morning gaps exiting at a premium price. Is this a foreshadowing for what is to come?
Take a look at the chart which shows the falling dollar and how it is helping to boost stocks and commodities.
While earnings season is trying to steal the spotlight, the fact is that everything for the past two months has been about the U.S. dollar. If you put a chart of the dollar and the
together they trade almost tick for tick in reverse directions. The amount of money getting pumped into the market can't last and it will lead to a huge volume reversal day in due time. Until this happens, the market will trade higher.
Taking a look at the
SPDR S&P 500
ETF daily chart, the five-, 10- and 14-day simple moving averages tend to act as buy zones.
The market was choppy from April until about two months ago. Now we are seeing the market smooth out and traders are switching to more of a trend-trading strategy and not so much looking for extreme sentiment levels which typically signal short-term tops and bottoms.
Focusing on buying at these moving averages has been providing good support thus far. Stops should be set on a closing basis, meaning if the market is to close below the moving average then exiting the position is a safe play. It's always best to layer your stops in trending markets. So stops below the five, 10-, 14- and even the 20-day simple moving average will provide you with enough wiggle room to ride a trend.
The market is in a strong uptrend and until we get a major reversal day buying the market is the way to go. The market, as we all know, is way overbought so if you decide to take a position on your own be sure to keep it small. I would also like to note that financial stocks were the worst performers Wednesday so that could be telling us there could be some profit-taking in the next day or two.
Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.