Markets Clear Next Resistance Levels

The NASDAQ takes back the leadership role for the broad markets gaining 1.7% on the day. Thanks to biotech and small cap stocks the major indexes made it through the next key resistance points and made solid moves higher today. The chart of the NASDAQ index below shows the break above the 4480 level and now sets the sights toward the 4611 level or the previous high which will complete the ‘V’ bottom. There are plenty of comments about this move and the time line it has taken to advance back to the level as being too much too soon. Another phrase being used is overbought. While all of those may be justified comments, it is what it is. In other words, we have achieved this level because buyers have been willing to put money to work and bid stock prices higher on the belief prices are justified looking forward. I am not saying I agree, but it doesn’t stop it from being true. Hope brings with it eternal optimism and evidently buyers for stocks.

Composite Index

How do we progress from here? Hang on and enjoy the ride. That of course assumes we added stocks to our portfolio on the reversal or we never sold and still hold our long term positions. Again hang on for the ride. What if you have not put money to work since the low was established on October 15th? Hold your nose and jump in? I was asked the question today why I would have bought the NASDAQ 100 index on Monday? Today I look very smart based on a 1.5% gain in the index. I am not smart… I just follow the charts and exercise what we have practiced for more than twenty years, buying breakouts and momentum… no matter how much it pains me to do so… I just held my nose and jumped in. What if the trade doesn’t work and it reverses lower? That is called risk management and the use of a stop would have taken me out of the position with a modest loss and I move on to the next opportunity the market presents. If you believe you will ever have the perfect trading solutions for managing your money good luck with that. Trading and investing money is all about developing good habits and practicing them regardless of your emotions.

What are good habits? Defining your entry point based on your predefined strategy, defining an exit point if the trade does not work according to plan, and a target or objective for the position based on your strategy or defined reason for owning the position. Armed with those simple habits you can practice getting better at executing each step of this process every day if necessary. The better you get at this process and more ingrained your habits become the more financial risk you can take because of your habits to manage your risk daily. This is the most important aspect of managing money to me! We can study markets and strategies until we have two PhD’s in market analysis, but if you never learn sound habits for managing the trading process you will find it difficult to make money long term in the markets.

Getting back to the markets, the S&P 500 index today cleared the 1970 level of resistance and the Russell 2000 Small cap index cleared the 1120 level of resistance. Good news overall for stocks as they make it through these levels and look to climb the next wall of doubt. The chart below is of the ten sectors that make up the S&P 500 index plotted against the index itself. This allows us to see the leadership since the low on October 15th. As you can see Industrials (XLI) and healthcare (XLV) are the clear winners with the balance trading in conjunction with the index itself. It would be positive to see Technology (XLK), Financials (XLF) and Consumer Discretionary (XLY) to step up their game to lead as well. If they do, the upside has a better chance to continue to the previous highs and beyond.

As stated above, there are plenty of reasons to not like this move off the lows. But, there are equally positive reasons to believe in the move off the low. The goal is to define a strategy for when to buy and when to sell, practice the trading process within those strategies and thereby developing habits that will allow us to manage our risk while managing our money to achieve our goals. Sounds simple enough… but far too few investors practice and develop sound habits to manage money. For now we go with the newly established micro trend on the upside, manage our risk, and keep our focus on what lies ahead and take it all one day at a time.