For trading, this means that the bulls will need to keep their positions light and stops tight; the bears will need to keep their flat positions intact and wait for the right moment to pounce.
US stocks opened in fresh record territories after index futures had extended their gains overnight as investors’ insatiable appetite for risk continued for yet another day. Although some European indices lagged, Germany’s DAX index did well again, partly because of news the country has extended a fiscal programme aimed at preserving jobs until the end of 2021. We also saw some
weakness for benchmark government bonds and, earlier, haven gold prices, before the metal rebounded sharply from a key support level amid a
still-positive fundamental backdrop.
In so far as US stocks are concerned, the big question is how much further can they rise before we see a sizeable correction? Since the March low was created, Wall Street investors have continually shrugged off concerns about Coronavirus, US-China relations, valuations, the economy and surging levels of government debt etc. Behind the big rally has been the equally massive supply of newly-created central bank money and government stimulus, driving yield-seeking investors away from zero- or very-low-yielding government debt and into racier equities (as well as other zero-yielding assets that unlike bonds have infinite duration and finite issuance, namely precious metals and some cryptocurrencies.)
But as the US stock market bubble gets larger and larger, so do the chances for a correction by each passing day. For trading, this means that the bulls will need to keep their positions light and stops tight; the bears will need to keep their flat positions intact and wait for the right moment to pounce. Indeed, the rally could accelerate even further before the bubble potentially deflates. There is no point in being a hero and standing in the way of this. And it doesn’t mean you shouldn’t participate in the largening balloon – you just have to do it in a responsible way as mentioned above.
Whatever your view is on the markets, it is definitely worth keeping an eye on the Nasdaq 100, the leader among the major indices following its super-charged rally off the March lows:
Source: TradingView.com and ThinkMarkets
The tech-heavy index has now surpassed even the 161.8% Fibonacci extension level of the entire Covid-19-retlated plunge. Fibonacci extension levels are used by many traders to identify objective targets. The Fibonacci extension is an especially useful tool for markets that are making new all-time highs, as there are no prior reference points for traders to use as guides to decide on exit locations. Thus, with the Nasdaq now at around its 161.8% extension, we may soon see some profit-taking and possibly some short-selling pressure come into play in the not-too-distant future. A technical sign that the rally has potentially ended could be in the form of a completed bearish looking daily doji candle, for example. Until and unless such a reversal is seen, anything else would suggest the uptrend may continue for a while yet, even if we are at new record levels and the economy only just recovering from a rock bottom.