Mind the headfakes

In recent blogs, I have been suggesting that there is a good probability for a tradable rally. As noted in the past, we have the ingredients of the stew in the pot: Bearish sentiment by retail money (with some bullishness by “smart money”).  Oversold momentum indicators.  Bullish gap below the 200 day SMA exceeding 10%. Last week, I also noted a potential reversal candle setup should we note a two-candle “spinning top” scenario. We did get that setup on Friday. However, as noted in on that blog, and in past blogs, you always need a “follow-up” to confirm a potential bottom  – or in this case – a potential neartermed bounce. Lest you experience a “Head-fake”, like in boxing.

Regulars of this blog know that my rule for a successful follow-up for any reversal (be it a larger trend reversal, or, in this case, a neartermed bear market bounce) is a minimum of 3 days of positive follow-up. Typically, I want to see all 3 days as positive closes, but I will accept a day of very minor negative close in the 3 days following a reversal formation. The brave amongst us might choose to leg in after only one or two positive days.  But even those brave soles might still keep most of their powder dry for at least the full three days – or longer. As another point, I believe in the principle of legging-into positions.

So, even if we get a reversal signal and a 3-day follow-up, we are wise to divide the total allocation over 2-3 increments to ensure the direction of the market continues in our favor. That, and mind your stops, should the trade go wrong quickly. Remember, this is a bear market. And playing the rallies is not for conservative or inexperienced traders – even with a bullish confirmation setup. Many of you have enrolled in my Online Technical Analysis course. The course describes the techniques I use in greater detail than I can relay here. If you have not taken the course, I encourage you to check it out here.

So far, no go

When we review the setup from last week, we had one day (Monday, while Canadian markets were closed) of positive follow-up after the two spinning tops seen last week. The chart below updates the one I posted last Thursday. Note the rough “hammer” formation (black candle) Friday that follows the second spinning top. The white candle (yesterday – Monday) was day 1, positive follow-up. Encouraging…but… As I write this blog on Tuesday, we are seeing a down-tape. As such, we still do not have that 3-day setup we need to increase our odds of a successful bounce.

At ValueTrend, we still hold more than 26% cash in our ValueTrend Equity Platform. We are not buying – yet.  Bottom line: wait for 3 days after a base breakout or candlestick reversal formation before committing. That’s what we are doing.

Why rates may not decline as much as everyone thinks, and what to do about it

Over the weekend, US Federal Reserve Chair Raphael Bostic commented on the current challenge for the Fed. He reiterated that.. “the challenge for the Fed now is to identify when supply and demand are reaching equilibrium and NOT OVERDO RATE INCREASES”.

Translation – “We’ve wiped out $25Trillion so far (crypto, stocks, bonds, VC, private equity). When we get to $30T – $35T, we may have to adjust the 14 rate hike talk we have been feeding the media”

My take: The case for longer termed inflation continues. When the Fed-speak starts leaning towards an actual reversal in rate policy, the bear market will likely be over. That could happen as early as this summer or fall. Hence my belief that the current bear will be over before year-end. It’s still prudent to keep inflation-benefitting assets in your portfolio. Less hawkish Fed policies mean continued inflation. As noted in my blog last week, inflation will decline. But its level is highly, highly unlikely to get back to the 2% days of yesteryear anytime soon.

Next blog

I am going to be looking at some rare earth plays that have caught my eye. In the meantime, I covered gold bullion and producers on my latest video last week. Click here to watch that video.