From Keith Harwood
Fundamental inputs are increasingly important for stocks. Every day, news comes out, and yesterday was a prime example as President Trump accused China of “genocide”. I won’t opine on whether or not the accusations are justified – that’s not my place nor my expertise. Instead, I’ll discuss the impact on the stock market. My reaction would be that this news has to be extremely negative for the Chinese macro-economy and thus Chinese stocks, right?
Let’s look at FXI (China Large Cap iShares ETF) to see how bad the reaction was:
FXI was up 4.30% yesterday. Yes, you read that right, on a day when China was blamed of “genocide”, money poured into Chinese stocks. Perhaps the headlines aren’t always what they seem.
If there’s any better example of fundamentals and/or headlines meaning little or nothing, it’s Pfizer. Don’t get me wrong, I am very happy that Pfizer has a COVID-19 vaccine. And when they announced it, Wall Street rewarded shareholders for the breakthrough.
But, since the announcement, things really couldn’t have gone worse for Pfizer. While the tech sector continues to press to new highs, Pfizer’s stock is testing the lows of the last 6 months:
One of the main strategies that traders always told me when I was just starting up was to “fade the news”. That means that when the news came out, go against the price action, as that was a sign that all of the bullishness (in Pfizer’s case) or potential bearishness was now priced into the market. It doesn’t always work, so I tend to avoid that strategy now. Rather, I like to look for stocks that have momentum and a clear stop-loss level to manage my risk, such as the trend we are seeing right now in the overall market.
Now that we’ve covered the fundamental side and why I tend to prefer trading technicals, I want to throw out a major technical red flag now. The technology sector has had a lot of momentum, but is pressing against one of my favorite stop-loss levels to signal a potential change in momentum. Let’s take a look at XLK (the S&P 500 technology SPDR ETF):
For those that have been watching my Eye Openers with John Boyer and following my other content, you know that I get very nervous when an ETF starts to close below key Moving Averages. XLK closed below the 10- and 20-Day Moving Average on Friday and tried to recover them on Tuesday (closing JUST above both). Right now, there’s a major inflection point in this chart – if the ETF cannot hold above these short-term moving averages (and do it NOW), then I am going to have to start looking to trade for liquidation events. Technology has been the big winner, but we have seen negative stock action in many big tech names recently, so I want to make sure I’m focusing on these red flags so I don’t miss the exit.
Make sure you all take a chance to review how I apply technical signals to my options trades at https://optionhotline.com, and if you have any questions, never hesitate to e-mail me.