Federal Reserve Chairpersons never reveal very much about the Board’s economic policy between formal board meetings. Chairman Powell may break that tradition when he speaks at 1:00 PM today. The markets will wait and whatever they are given in the way of new, or regurgitated information, they will attempt to use to further reiforce their either bullish or bearish thesis.
Good will be good, or good will be bad; or bad will be good or bad will be bad. Right now good and bad are in superposition, that is like in quantum physics they occupy the same space. “Powell’s cat” is alive (bullish) or dead (bearish) until 1:00 PM.
But take a look at the recent individual candles on the daily index charts. They are clearly reflecting weakness and have rolled over in the last several days. This could be expected after they have approached or made new highs, and the Fibonacci retracement levels on the S&P 500 chart are modest potential pullback levels.
What is becoming a growing concern however is the combination of the continued call for lower interest rates against a back drop of higher equity prices, low inflation numbers, and low unemployment. The market must think at least one of three things: equity prices are headed lower, or inflation is about to surge, or the employment figures are not accurate.
Employment figures would seem the least volatile over the intermediate term, and do interest rates first have to go negative before a sudden bout of inflation can be adjusted for? It looks to me like the primary concern is asset prices readjusting. But while lowering interest rates will temporarily spark equity prices higher, they will only worsen that eventual downside adjustment when it does come. Market forces should almost always be allowed to play out naturally.
Right now the market needs a 10% pullback more than it needs a 10% rally.
The medical devices and scientific instrument and research companies are showing strength this month. Several in the space like Danaher (DHR) and EXACT Sciences (EXAS) look like they are ready to break out.
One way to take advantage of the broad sector strength is to trade the iShares US Medical Devices ETF (IHI). The daily chart of the fund shows it breaking our of a symmetrical triangle-like consolidation. A successful breakout projects a pattern target price that makes new highs.
The RSI indicator is tracking above its center line confirming the positive price momentum, and the Chaikin Oscillator is above its center line reflecting improving buying interest.
The trade offers a good risk-reward ratio at its current position.
The iPath Short-Term Futures ETN (VXX) tracks an index with exposure to futures contracts on the CBOE Volatility Index with average 1-month maturity. It resets daily so traders should use it as a short term and not a long term trading vehicle.
That said, a bullish morningstar reversal pattern has developed on the VXX weekly chart. The pattern formed just above the $26 level which correlates with the 15 level on the Volatility Index (VIX). Monitoring how this pattern plays out on the weekly time frame can provide context to analyzing the daily time frame.
A morningstar, as regular readers know, is a bullish three-day reversal candle formation. It consists of a large range down-day candle, followed by a narrow opening and closing range doji type candle, and completed by a large up-day candle. It suggests a transition in trader sentiment from bearishness, to uncertainty, to bullishness. The morningstar has been rated as a reliable candle pattern.
This morningstar comes after a period of trader complacency but that attitude may be about to change. A corroborating technical development is the bullish crossover in the MacD. It reflects a turn in upside price momentum. Upside volume has also been increasing over the last month.
The VXX needs to continue higher from here to confirm the legitimacy of the morningstar pattern, and any potential reversal in sentiment. But, concern may be replacing complacency.