The Week Ahead in Stocks – Jun 11th

In recent weeks we have been highlighting strength in Tech and FAANG stocks, but this could change as the Nasdaq struggles with resistance at the previous high made in March. While we expect this hurdle to be breached at a later date, many participants will prefer trades in lagging stocks instead of buying leading stocks at resistance.

The moves around the previous all-time high may look like a fairly random chop, but they have followed our expectations very well. These expectations are based on observations on how stocks/instruments tend to act in the short-term when testing previous highs after a long decline. A usual pattern is:

1. test all time high and pull back – this tempts in shorts
2. reverse the decline and trade to new high – this stops out shorts and tempts in longs
3. reverse again for a larger pullback – this stops out the break-out traders and leads to a more sustainable break

It is easy enough to label the above chart with these steps – especially now it has played out – but we can and do have these expectations in advance.

By the time the sequence is complete, most short-term traders have been chopped up and stopped out. Subsequent movements then depend on longer-term trends and patterns.

A break of the trend channel would signal a larger pullback, but is by no means terminal. When one trend corrects, another sequence develops and a channel can form in the timeframe above.

The week ahead has plenty potential market moving catalysts with three rate decisions, four inflation prints and of course the US-North Korea summit and ongoing trade tensions. We couldn’t begin to guess the outcomes of all these events, but having expectations of how price is likely to behave in certain situations gives us confidence in our views.

Good luck and good trading.

Andrew McElroy
Chief Stocks Analyst

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