Identifying Stock Market Pockets Of Strength


Simpler Trading Team

8 min read

In this article:

  • Key signals holding this week?
  • Finding the edge, pockets of strength
  • Swing trading gives way to day trading

Is the stock market stuck in neutral or are pockets of strength building toward a bigger rally?

Simpler’s traders expect these questions to persist as the traders struggle to find footing to determine trade direction.

As the market works through the uncertainty, our traders are focused on short-term strategies to tap into stock market pockets of strength for profit potential.

(Check out the free video, above, for insight into trading this changing market.

Key signals continue to hold… mostly

The up-and-down swings in this market are making trading frustrating for swing traders.

Last week was another see-saw series of sessions where the bulls improved positions week-over week, but it remained an uncertain market for swing traders.

Trying to swing trade in a market that bounces by 2% and then drops 2% every other day is at best frustrating and at worst damaging to the trading account.

Bulls improved positions to some degree last week with hints of a continued rally, but not enough to flip the markets in a defined direction to the upside. All three major indexes closed down on Friday. The market still exhibits conditions of a longer-term downtrend in the indexes and, when combined with shorter term (hourly) uptrends, day trading presents a path to better risk management.

Until stock chart signals align more decisively either up or down, Simpler’s traders expect to swing trade only in more defined sectors such as energy. Day trading other sectors such as semiconductors until a larger trend is established is part of current strategy.

A continued focus for trading strategy this week surrounds four signals discussed last week: U.S. Dollar Index; U.S. Treasury Notes; “Fear Indexes;” High-yield bond ETF. 

These signs could keep the bulls’ hopes alive and all four signals are still in play, although bonds are getting suspect. For now, treasury notes (bonds) appear stable, as long as notes trade from “flattish” to higher this signal works. Still, the 10-year appears in danger this week and stuck in bearish action.

Bonds will need consecutive closes higher and above key chart levels to reverse this pattern. Expectations are for a break lower if the move higher doesn’t happen.

Who has the trading edge this week?

Bulls are showing a slight edge to start the week, based on hourly structures remaining intact and peripheral indicators (like the VIX) are agreeing with bulls… for now.

This week is setting up as pivotal in terms of who wins in June – bulls or bears. An early push this week likely has an edge up, or down, heading into monthly and quarterly options expirations at the end of June.

The three major indexes bounced higher out of the gate this week.

The Dow closed just above flat at 32,915.78 points and a .05% lift (adding 16.08 points on the day). The Nasdaq managed a rise to 12,061.37 points for a .40% gain while the S&P 500 added .31% to 4,121.43 points.

Traders may consider giving bulls the benefit of the doubt in the short term after holding structure and improving while the four key signals (above) are at this point intact. To gain a stronger shift, bulls must get going and push forward.

Is day trading an option for you?

Continual market chaos has created an added level of stress for traders.

Have you considered day trading? While day trading is considered a higher level of risk, the team at Simpler Trading understands what traders go through when the market maintains an extended level of uncertainty.

Simpler Day Trading allows members to follow experienced traders as they work trades within shorter time frames designed to limit capital exposure. Traders are attracted to this community of professional traders delivering live-trading insights during market sessions.

Avoid the stagnation of trading alone, and check out this daily training and learning option.

Finding pockets of strength in the stock market

Where are some pockets of strength in this uncertain market?

While previous “defensive” sectors such as healthcare continue to degrade in a bear environment, some sectors are holding up.

Energy continues to be strong in the market. Possible setups continue in crude oil that could run for the summer (consider higher prices and increasing summer demand) and remains a top pullback buy candidate.

Also, the SPDR S&P Metals & Mining ETF (XME) and metals overall are showing strength and possible plays ahead.

Three stocks to watch include: International Business Machines Corp. (IBM), Quanta Services, Inc., (PWR), and Northrop Grumman Corp. (NOC).

The pockets of strength come with a bit of caution.

Across the board, the market continues to show positive momentum divergences on hourly charts into new, major lows. This will act as an accelerant whenever a direction is determined, but for now give the benefit of the doubt for these stronger tickers to be able to do something.

What is driving the stock market?

Last week the S&P lost 1.2%, yet charts show the index maintaining positive signals while remaining above shorter term 10- and 21-day moving averages.

This hold kept the shorter term uptrend in place, even after the follow through day the week before.

A follow-through day signals an attempted rally during a market correction at a time when a major index closes much higher than the day before and with significant volume. This happens on the fourth day or later of the attempted rally.

Not every follow-through day turns into a lasting uptrend. Simpler’s traders are watching how a follow-through day has signaled market bottoms going back many market cycles.

A sustained new uptrend out of a bear market or correction is expected to have additional characteristics other than the follow-through day in order to push the markets much higher.

No strong characteristics are showing as the market faces continued negative news through increasing inflation and rising interest rates. The market is grappling with each economic data release – such as payroll reports – that are affecting price action.

This economic pressure, like the selloff on Friday, spoiled any continued rally.

The see-saw price action last week in the market highlights the nervousness among investors. This includes concern about whether inflation has peaked and how Federal Reserve policy and actions will affect inflation going forward.

Pulling some good news from market action, recent economic data does not point to an economy teetering on the verge of a recession… At least not yet.

What is happening with Amazon?

Amazon (AMZN) not only held its own after the 20:1 stock split (this took effect Monday), the ticker pushed higher along with the Nasdaq.

Simpler’s traders are looking for symmetry in the stock, comparing post-split movement to previous drops lower followed by bounces higher. Amazon closed down at $2,447 on Friday, a 2.52% dip. After the split Monday, AMZN closed at $124.79.

Amazon hasn’t held up as a “pandemic darling” and has declined most of this year with some upward movement in recent sessions.

If AMZN can’t hold a move higher this week and heads lower, expectations are it could break below the previous low. The key is identifying a roadmap of “what’s next” in AMZN after the split.

Simpler’s traders are adjusting specific tools – Voodoo Lines® and Fibonacci levels – to lay out this roadmap. Once the stock adjusts further post-split, these levels will help determine potential trade setups.

Turning frustrating market into opportunity

With the ongoing uncertainty and volatility in the market, traders are searching for ways to turn frustration into opportunity.

Simpler’s traders are limiting swing trades to sectors and stocks with well-defined strength. Any trade targets that might have big pops or drops (such as semiconductors) are being worked on a shorter time frame.

In short, the focus is to swing trade to the long side only with the best potential setups, while day trading other possibilities. This is the roadmap until markets decide what direction they want to go – up or down.

Simpler’s traders are using hourly charts this week for any trade setup – this shorter time frame on the charts is where the structure will be built by bulls or dismantled by bears in this directional battle.

Expectations are that if hourly charts start to break structure, then the larger time frames will shift to the bears’ side. By contrast, if hourly charts hold structure and improve the bulls will be moving and the battle for control will continue.