Last week could have been a back-breaker for stocks, but it wasn’t.
Instead, what turned the tide was bad news taking the markets to a very good place.
Rather than testing support-level lows, the markets went up across the major indices. The Dow increased 2.3%, the S&P 500 increased 2.4%, and the Nasdaq Composite increased 2.7%.
What could have made last week a bad week was if stocks plumbing near their lows had broken down and traded through critical support levels. The S&P 500 had touched – make that tested – its lows three times since the February selloff, and so had the Dow.
Not only that, if the market had seen that kind of selling, the S&P 500 could have experienced a “death cross.”
How HFT Bots Saved Us from a Death Cross
A death cross is when a stock or index’s 50-day moving average crosses below its 200-day moving average.
We came close to seeing that from the Dow last week when it could easily have fallen in a death cross crumble.
It is a dangerous technical condition because it tells investors and traders that the short-term trend of the market is negative. If it pierces through the 200-day average, it could signal that the longer-term trend is turning down, too.
There could have been many stop-loss orders hit if support had been broken for the benchmarks. And there could have been a lot more selling and shorting if any death crosses tripped up markets.
But the opposite happened; the news helped initiate an upward move.
After lackluster Monday trading, stocks fought downward pressure on Tuesday when President Donald Trump announced he was exiting the U.S. from the Obama-era Iran nuclear deal. When the market ended the day flat, that got a lot of attention.
The potentially bad news for the market turned bland, but it was accompanied by some economic news that wasn’t so promising.
As it happens in the sometimes-upside-down world of markets, that actually became good news for the market. Investors, traders, and HFT robots read the soft inflation numbers and downgrading of potential GDP growth prospects as news that the Fed would be less inclined to raise rates a few times this year.
The 10-Year Treasury yield traded down, away from the dreaded 3% level, which proved there was still life left in the bond market’s ability to rally and not roll over from higher rates.
But it wasn’t investors – or even traders – who got the ball rolling on Wednesday. It was the bots, the high-frequency trading algorithms that drive market moves up and down whenever they see an opportunity to create momentum for themselves. They pull in real traders and investors to take stocks in the direction the bots initiated.
Last week, that was up, up and away.
Let the Good Times Roll
In the absence of selling into the close on Tuesday, the bots started to buy gingerly on Wednesday. When they were able to get prices higher, they sent out more “buy orders,” which other traders’ computers picked up, pushing them off the sidelines into buying mode themselves.
That’s the momentum the bots were looking to create. What followed was aggressive buying by a lot of shorts that were positioned for markets to test their lows and break down. Traders with defensive hedges on scrambled to cover those downside bets – which, of course, added to buying through Friday.
That’s how easily we got to where we are today.
Now, the path of least resistance is up – not down.
However, buyers who believe the worst is over must conform to that upward path.
It’s not over. Until the Dow can stay above 25,000, the S&P can stay above 2,700, and the Nasdaq Composite stays above 7,400 (and trades consistently between there and 7,500), we’re only pushing on a string.
It should be fairly easy for markets to hold above where they are now and consolidate hereabouts. The worst was faced, tested, and laughed at last week.
So, let the good times roll.
It’s safe to put on some long trades and will be a good idea to add to them as markets consolidate and look to push higher.
Still, because we’re in a consolidation phase that’s only just begun, stocks are still prone to weakness if bad news scares investors, or if good news for stocks fails to tickle them higher.
Here’s one thing I know for sure: if you do nothing, then get used to not making money.
Markets are poised for a good run higher, but on an individual level, only 38% of stocks have gone up in price. Even worse, the average stock has gone down 1%.
The real question to ask yourself is, do you really want to waste your time tracking each security in the markets, only to watch your money disappear into thin air?
I’m not about to let that happen, and neither should you.
But now, thanks to eight years of private research by a team of math prodigies led by a PhD physicist, there’s a new way to squeeze thousands of dollars out of the markets every week.
Without ever trading a single share or executing a single stock option ever again.
I just released a video on how I use this groundbreaking research that you can watch here.