A key to success in investing is paying attention to logic and good opinions. But don’t forget price action.
There’s a trade war heating up. There are disappointments in negotiations with China. The Europeans are upset. Closer to home, Canada and Mexico are indignant. Common-sense logic would say that the stock market should fall, but the Nasdaq Composite Index COMP, +0.41% is breaking out of a congestion zone. Let’s explore with a chart.
Chart
Please click here for an annotated chart of the Nasdaq 100 ETF QQQ, +0.63% The Nasdaq 100 NDX, +0.60% is acting stronger than the Dow Jones Industrial Average DJIA, +0.78% and the S&P 500 SPX, +0.34% For this reason, the chart shown is not of the popular S&P 500 ETF SPY, +0.39% or DJIA ETF DIA, +0.81% Please note the following from the chart:
• The chart shows the congestion zone with a rectangle. The congestion zone signified the struggle between bulls and bears with neither side winning.
• The chart shows a breakout from the congestion zone. This indicates that the bulls are temporarily winning the battle.
• Overhead resistance is nearby, as shown on the chart. This means that it is not prudent to buy aggressively here.
• The chart shows that the breakout is not on high volume. This indicates that institutions are skeptical.
• The chart shows that the relative strength index (RSI) on the breakout is not higher than the prior high. This is a negative.
Of note is that the Russell 2000, represented by ETF IWM, +0.07% is also strong. Please see “This breakout in stocks means the bull market isn’t about to end.”
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What to do now
The Arora Report recently decreased cash allocations and hedges prior to the breakout shown on the chart. The trigger for more bullishness was a dovish statement from the Federal Reserve.
As a note of caution, more bullishness does not mean buying aggressively. Buying still has to be selective, and there may even be opportunities to short-sell, or betting on a decline. If bad news continues on the trade war, the risk in this market will increase. For this reason, investors need to be prudent about the cash levels they hold and what they buy.
The Arora Report provides its subscribers with cash levels and hedges to hold based on the ZYX Global Allocation Model, which has 10 inputs.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.