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Leading into March, JNK and HYG were losing support, so we were recommending that members sell some of their swing positions into strength. Additionally, we were hedging with SPY and/or QQQ puts as Junk bonds (JNK) and High Yield Corporate (HYG) began to lose support.
Junk Bonds – JNK Leading
As a measure of risk appetite, junk bonds (JNK) led the markets lower in March as traders sold positions. We saw weakness in June as well, to a lesser extent.
Presently, stochastic is in the green zone (oversold), while MACD crossed lower. Price action closed below the 50sma.
As we lose support once again, we have been reducing our risk exposure in our trading and retirement accounts.
Seasonality – Additional Considerations
The NYSE Composite over the past 5 years has seen weakness in August, relative to the rest of the year as investors and traders vacation during the last few weeks of the summer. We can see this tendency in seasonality charts.
SPY Standard Deviation
Over a week ago we talked about price action in the S&P500 ETF and what to anticipate if we closed inside standard deviation one (dark inner bands). We felt reducing exposure to long positions was prudent. Since that time Bollinger bands have begun to compress as price action drifts lower.
Sidenote: Gerald Appel created the Moving Average Convergence Divergence (MACD) momentum oscillator and recommended using a longer duration (19,39,9) for sell signals. Note MACD is crossing lower.
While the above is not a predictive statement, we do feel strongly that members reduce risk at this time. In addition, new winning stock positions should be short duration. Scalps, day trades, and one or two-day swings are preferred.
Once we have additional data to trade from, we will update the trading room.
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