Does “Don’t Fight The Fed” Still Matter?

Sentiment is shifting quickly in the market. The selloff we recently experienced in the major indexes increased the fear of many investors.

That change in sentiment can be seen in the S&P 500 weekly chart, shown below.

The solid gray line in the bottom panel of the chart shows my Income Trader Volatility (ITV) indicator. ITV is a versatile momentum indicator that rises when momentum is bearish. The current setup on the chart appears similar to the pattern seen at the market’s top in February.

ITV is designed to behave in the same way the VIX does. In both cases, a rising indicator shows that fear is climbing, which is generally associated with declines in prices. The green dashed line in the chart is a moving average (MA) of ITV. When the ITV (gray) moves above its moving average (green), we generally see price weakness.

The ITV signal warns us that we should expect more weakness. In the next chart, I show the minimum downside target is about 13% below Friday’s close.

To find this target, I applied the principle of symmetry. The blue rectangle highlights a broad topping pattern. This pattern includes the end of the uptrend and the beginning of the decline.

There is enough price data to see that the direction of the trend has changed. There is an initial selloff, a brief rally that failed to reach a new high and then an additional decline. Last week, prices tested support at the same price level that offered resistance in July.

This approach is not a traditional take on pattern analysis. Technical analysts often debate the name of a price pattern and miss the trading opportunity while discussing whether they see a “head and shoulder” top or a triple top. My approach is simply to find an area on the chart that is significant. Then I apply the measuring rules, which assume the depth of the pattern shows the size of the expected price move.

Money Supply Still Drives The Market

Of course, prices won’t move straight down. There is a chance prices will rally off support this week. While normally I would expect the rally to end after a few days, the Federal Reserve is fighting against the downtrend.

The next chart shows the S&P 500 with the 13-week rate of change (ROC) of M2 at the bottom. M2 is a measure of money supply. Green bars highlight times when the ROC is greater than 2%. This is generally bullish for stocks.

M2 is updated weekly. Last week, the ROC topped 2%. This could be bullish.

Wise old traders like to say, “Don’t fight the Fed.” And as I’ve said before, this could be the most important factor in the stock market right now.

Action To Take

The charts are bearish. Economic news is bearish. Earnings are well below their peak. Yet, it’s possible none of that matters as long as the Fed keeps trying to push stock prices up.

This week, we should know how effective the Fed’s strategy is. And while there are plenty of reasons to remain cautious, that doesn’t mean you should sit on the sidelines…

In fact, if you’re looking a “home-run” stock that could take your portfolio to the next level, then you’ll want to check this out…

My colleague has found a little-known tech stock that’s involved in several massive tech trends: the Internet of Things, satellite technology, 5G, communication, you name it… And the good news is that right now it’s completely unnoticed by the market, which means it’s the perfect setup to make investors a lot of money in the coming months.

Go here to learn all about it in his latest report.