The most important stock market adages are “Don’t fight the tape” and “Don’t fight the Fed”. “Tape” means the ticker tape which shows real-time stock prices. This advice essentially advises investors to follow the crowd; buy when everyone else is buying, and sell when everyone else is selling. It’s based on the idea that prices for stocks, and the market overall, gain momentum so it’s more profitable to trade with the trend rather than against it. However, fighting the tape can sometimes be profitable because the prices overshoot to the extremes on upside and downside.
The Fed as we know it, is the most powerful central bank in the world. The Fed sets the Fed funds interest rates and is also directly involved in controlling the Dollar currency, in addition to many other monetary policy tools. Literally, the Fed controls the price of money by easing or tightening money supplies. The stock market valuation is greatly affected by the price of money, therefore the Fed’s influence to the financial markets can never be underestimated. However, the Fed has admitted many times that they don’t have a third eye to foresee the future. The Fed’s policies are simply reactive, never predictive to the state of the economy. Sometimes the Fed gets the conditions wrong and has been forced to react very strongly several times in the recent history.
In a nut shell, we are living in an imperfect world with never ending boom and bust cycles in the financial markets. As a student of market cycles, we try to filer out the times when we should listen to the tape or the Fed.
In the beginning of 2022, at the beginning of the Fed rate hiking cycle, the market was skeptical about the Fed’s resolve to tighten money supplies. But soon the market got the memo by taking out the February 2022 seasonal low in April 2022. The market didn’t bottom until it hit the next seasonal low location in mid October 2022. From the mid October 2022 low, the market stopped to listen to the Fed because the market believed that inflation has peaked and the Fed will not be able to keep the tight monetary policies forever. Yes, finally we had a friendlier Fed during the February 2023 Fed meeting. But prior to the Fed February 2023 meeting, the market has already established a bullish trend. The new friendlier Fed just confirmed the prior bullish trend. Somehow the market sniffed out everything before hand!
We sent out a direct email to our members last week, in which we emphasized that the mid October 2022 seasonal low has established itself as a very important low. The rally from this mid October 2022 low could last minimum 7 months, potentially it could last as long as 12 months. We have to wait and see how it develops down the road.
Another sign of a new market condition is all the rage about AI. The introduction of chatGPT ignited the rage about artificial intelligence. Microsoft’s multi-Billion dollar investment in OpenAI further legitimized AI as the next frontier in the tech space. The next bubble will definitely be in the AI space.
In short term, the market is overbought by jumping out the established channel line on the daily chart. It will take some time to walk back to the upper channel line in the next 1-2 weeks. But the underline trend is bullish.
In the daily NASDAQ chart, the price jumped above the trendline b, that itself is a sell signal. But you can’t take it as a short sell signal because you just don’t short the market during a bull leg. You can use it a profit taking signal for a short term trade. Get back into long position again when it finishes tracking along the trendline b. Eventually it will move up to trendline c by using trendline b as support. Trendline b was resistance, now it becomes support.
The vertical distance between trendline c to trendline b is the same vertical distance between trendline b to trendline a. This is called equal swing of channel lines.