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Market Lab Report - Premarket Pulse 7/16/18

Markets rallied in the latter half of last week on signs that Washington and Beijing are willing to resume trade talks, which could end in a bilateral agreement and avoid a trade war. Of course, this is a fluid and highly volatile situation that can change on a dime.

Interest rates are also at issue with the Federal Reserve planning to hike a few more times. As we have discussed before, the global economic environment remains stuck in its swamp of questionable growth amid distorted jobs data and inflation figures which in turn distort the GDP figures, thus the amount of QE from global central banks remains near all-time highs. The Fed will therefore at some point be unable to hike as aggressively as it wishes. QE explains much of the current below average, weak-volume bounce.

FAANG stocks are consequently looking stronger once again as the markets head higher on QE fumes.

QE is a powerful force despite the bearish headwinds. It has been known to baby-step the market higher for longer than one can expect.

So despite the overall bearish technicals, QE can still keep the bull alive. Volumes remain bearish for the major indices as bounces come on lower or below average volume while down days come on increasing volume. The cluster of distribution days prior to the current weak bounce had been pronounced.

Nevertheless, the FAANG stocks such as FB, GOOGL, AMZN, NFLX are all at or near new highs. These are institutional names that funds must own to keep pace with their bogies such as the NASDAQ-100 or NASDAQ Composite. Both indices have led the way higher, well outpacing the S&P 500 and Dow Jones Industrials.

Chinese names remain damaged with many trading around their 50-dmas such as MOMO though BZUN is showing more strength than its cousins. Other former leaders such as BABA are attempting weak bounces off their 200-day lines.

The market this year trades in stark contrast to the trending environment that began mid-2016, and lasted about 18 months.

The tug-o-war between QE and higher interest rates accounts for the choppy first half of 2018. This tug-o-war remains. Now add in the trade issues. Both are attempting to counter the bullish effects of the near-record levels of global QE.

The market may therefore remain choppy and trendless. Of course, absent trade and interest rate issues, QE would presumably push markets higher once again.

In the meantime, it is best to focus on low hanging fruit which are the Wyckoff undercut & rally set ups which have worked well in these choppy markets. Voodoo volume dry ups also can work well.

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