Thursday, December 13, 2018

Trader Notes: Importance of the Yield Curve

Mentioned in several posts, the yield curve, returns to take importance in these weeks because its reaching a flat level that had not since 2007, with possibilities to invest for 2019, this with clear damage to the stock market. Why? Let´s briefly explain you.



The Basics:


Understanding how this curve is drawn, its types (normal-reverse-flat-humpback), its inclination (steep or flat) and its relationship with the market, will allow us to make better trades. Also knowing its basic principle: the direct influence of the short-term yield bonds is the i-rate assigned by the FED, while the long-term ones depend, also directly, on inflation and how it is eroding the value of the bonus in time.

The yield curve is formed on an XY chart with the maturity times of the US Treasury Bond on one axis and the interest rates on the other. In an expansive cycle, there is a growing slope, as it is obvious that, at a longer time, higher yield is expected through a higher interest rate. Flattening occurs when the differential or spread between the extremes approaches. 

In StockCharts you can observe the yield curve and the SPX index at any moment. Verify its flattened form today, here: https://stockcharts.com/freecharts/yieldcurve.php


On the stockcharts link: just choose a year in the SPX to see how the yield curve was that moment.

Yield Curve behavior


Depending on the state of the economy, four cases can occur:

1. Bull steepener: occurred after the crisis in 2008 when the FED became dovish and in order to heat the economy, began to lower rates, so the short-term i-rate fell faster than the long-term. Notice that a bubble was created in the price of the short bonds, whose consequences are seen until today.

2. Bear steepener: it´s seen only the first months after Trump's victory, when an increase in inflation and FED Rate Hikes were foreseen. The steep slope was a sign of an expanding economy.

3. Bear flattener: occurs this year, when the FED adopts a more hawkish tone and short-term rates rise faster than long-term rates. The slow pace with which inflation advances flattens the curve, with the risk that it will reverse, which is a sign of the beginning of a recessive cycle.

4. Bull flattener: after a recession, reactivation is appreciated when the influence of inflation decreases in long-term rates and these fall faster than short-term ones. It is usually a good time to buy long-term bonds.


Understanding the rate curve is decisive to invest taking advantage of the inflation and i-rate data.


Divergences in Wall Street and a crucial chart


Already since January 2017 I wrote about the beginning of the flattening. With the months it was accentuated and today its investment is a worrying possibility. Some important FED members express their opinion: for example the dovish James Bullard consider the yield curve inversion a real possibility and a bearish signal for markets. On the other side, a hawkish John Williams said yesterday that FED shouldn't be afraid, because he considers that wages are still slow and with the field to continue growing.  Also Steven Mnuchin, the Treasury Secretary and promoter of the Trump's tax reform, said he´s perfectly content the flat yield curve...

The fact: a way to see graphically what can occur to economy, and therefore the stock market, is checking the differential between the bond rates. It is usually used as a spread data, the 2-year and 10-year bond yields, although other authors prefer to use the 3-month and 10-year bond. On this Bloomberg chart the spread is shown between the 2 and 10 year bonds since 1977. Look: whenever there was a recession cycle (in green) the spread became negative a few months earlier.



Also Wall Street main banks, Citibank C, Bank of America BAC and JP Morgan JPM, had been having a tough year, this flat yield curve not benefit them, despite the tax reform and the 10-year Treasury Bond TNX near to the 3% rate, its higher since 2013 . The financial etf XLF also had a negative YTD. 


Conclusion


Consider the following:
- The current flattening is due to successive FED Rate Hikes, in addition to the slow progress of inflation. 
- In the US more than 50 years ago, this behavior has meant the preamble of recession, which usually pulls down in the stock market. 
- There is almost consensus that two consecutive quarterly GDP decreases signals the start of a recessive cycle.
- Today the jump in Average Hourly Earnings (2.9% vs 2.8% consensus) tell us a lot about how inflation and wages are moving, and fears of more Rate Hikes.

From the point of view of the bonds, which always anticipate the stocks, it does not seem time to enter long on stocks, because the historical statistics shows that when the curve is reversed the recession begins, and that event is close to occur.So my best advice is to check the evolution of this spread in the next days and weeks. Swing trading, with risk management emphasis is, in my vision, the best option for the market today

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Friday, December 7, 2018

Wild sessions last week in Wall Street

Market Pulse.


Ends a wild week in Wall Street, with the SPX and the Nasdaq, already settled in a bearish environment, with its worst week since March, and almost all technical indicators negatives. Both started the week very optimistic (Monday + 2%) after the G20 and the news of an apparent truce in the US-China trade war, a fact that was losing strength as details of it were known, and protagonists of it, like Trump or Kudlow, began to spoke. The final thrust occurred half a week ago with the arrest of Ms. Meng Wanzhou, Huawei CFO, a police-diplomatic event that, if misused by the Chinese as it seems to be, can cause major problems for the markets. Wall Street understood it, finally closing with a worrying cumulative weekly drop of -5% in its main indices. And, technically, SPX has already lost the key SMA 200-day support, and now is facing a 'death cross' pattern between the moving averages 50 and 200-day, a clear bearish signal. It is not infallible but it must be taken into account, as well as the following points:


This 2018 SPX chart shows, in the circle, the "death cross" pattern between the moving averages of 50 and 200-day, which is produced for the first time this year. Also seems to be formed, not very clear, a bearish downtrend channel in which the SPX is bouncing. Finally, the fundamental aspects, which will be commented on in this post, will determine if this year the usual Christmas mini-rally will take place.


The Yield Curve flattening


This curve is decisive for the next weeks' market behavior. Some of its yield spreads have already been reversed this week. The main one, the 2 and 10-year is one step away from doing so. Historically, whenever this investment occurred, it marked the beginning of a recessive cycle in the US and the consequent fall of the stock markets. The 10-year T-Bond yield TNX has been falling to 2.8% levels, flattening the curve more and more, favoring the bonds and hurting the dollar and the financial sector XLF that has been sinking since October. The word recession comes more and more in the US, and signals begin to appear everywhere ...


The chart that everyone in Wall Street fears: whenever there was a recession cycle (shadow in green), the spread between the 2 and 10-year US T-Bond became negative a few months earlier. We are at that point now. This data is so important that it's possible that FED may back off its Rate Hike program for December. 


Market Volatility spike



This week exceeded the psychological value of 20, its average for years and generally used as a reversal point in the markets. However, this does not happen, and the fear index VIX continues to rise, closing the week above 23. You know, when it spiked, stocks come under pressure. The smart thing to do when its above 20, approaching 30, is waiting for the VIX decline: check market fundamentals and, technically, its Bohlinger Bands and SMA200, before playing a buy order. 


Chart of the "fear index" behavior this year. As you see, the popular Bohlinger Bands works fine with the VIX: as it trades, volatility rises or falls as it bounces off the upper and lower bands, that means overbought and oversold conditions. Except for some specific peaks, the whole year has moved between these bands, which makes it an efficient indicator, regardless of the tone of the market, bullish or bearish.
Another simple and good indicator for the VIX is its moving average 200-day: its signal varies rapidly from support to resistance according to the behavior of the market. Its best application is given when price touches it: since October the SMA200 is acting three times as a powerful support. Use the ETF VXX, that follows the fear index, or the UVXY, at triple speed, with this two easy indicators.


The Trade War influence



Some indicators published this week suggest that it has not been so convenient for the US, because the applied tariffs have not helped to reduce its gigantic fiscal deficit as expected, because the Chinese, in fiscal surplus, do not buy anything from US. Was a Trump's error pushing it? Assuming this, it is possible that the influence of this 'war' on the stock market's behavior diminishes, this judging by a recent Trump tweet that usually moves the market, was ignored by it.


In other months of this year, a tweet like this meaning a +1% spike of the SPX. This week: nothing...




The FAANGs pullback



The FAANG stocks, with its prices falling, continue pulling all the values of the Nasdaq, with such force that the usual effective 'buy the dip' method that is applied by many traders in each pullback no longer works, and rather the investors are taking profits as soon as they achieve them ('sell the highs'), a short-term attitude that resembles what is happening with the yield curve. 

The Nasdaq has fallen more than 13% since its peak in October and at the moment there is no technical support for a rebound, so the fundamentals, that we are discussing here, will probably indicate the end of this fall.


Bad week, once again, for the FAANGs (Since highs in early October: Facebook FB -10%, Amazon AMZN -10%, Apple AAPL -25%, Netflix NFLX -20% and Google GOOG -9%). It is insistently talked about on Wall Street that its prices are exaggeratedly overvalued and they need a clear correction like the one that has been taking place. 
The big question: are prices ready now for buying the dips? The first thing that a trader usually does is see the ratio P/E, which has decreased strongly in all the FAANGs, however, I think it is not enough. I prefer to check Apple news and reports first, and now there aren't positives: Apple predicted a weaker-than-expected holiday shopping quarter in November and other reports about the slow demand for iPhones, analysts have cut the Cupertino company's net income estimates for the month of December by almost 1,000 million dollars. So, better wait some weeks before entering long here.


OPEC agreements on Crude Oil production


It seems to have found a good support at the psychological price of $50, as it comes ranging all week. Apart from the decisions of the trio USA-Russia-Arabia, those that really command the price of crude oil, this half-week we have an agreement between the OPEC and non-OPEC countries to reduce their production in 1.2mbd helps in this sense, but it's not enough even for the large existing supply, generated by the US, which continues to increase its production. In my opinion, a difficult 2019 awaits for crude, although Goldman Sachs forecasts /CL price hovering around $ 70 in next Q1.


The three "defensive" Sectors leading



This comparison chart shows the performance of the nine main sectors during 2018. Show in blue sky is the SPX. As we see, by far, the three default defensive sectors (Staples XLP, Health XLV, and Utilities XLU) continue leading this bear market, signing a clear downtrend, confirm by the Sector Rotation Model, above, deeply in the red. More recession signals.



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Friday, November 30, 2018

December depends on the Trump-Xi meeting this weekend

This week closes with a strong rebound of all Wall Street indices, starting with the most important one, the S&P500 SPX, which recovered 5% since last Friday, at its last pullback, reaching again its crucial SMA200 average, and also the lower part of the Ichimoku cloud. Attention to these two important resistances because if it exceeds them, it can be the starting point to the traditional Christmas mini-rally. It is known that December is, seasonally, the best month in the stock markets, not only in the US but globally. But... wait for Trump -Xi meeting...


Technically, important week for the SPX facing the two resistances indicated in the circle. However, with an event as crucial as the Trump-Xi meeting, any analysis loses relative value today, until Monday.


Factors


What factors have originated this bullish week? I see several. Perhaps the main one is the change of tone in the messages of the FED, recently hawkish, encouraging more Rate Hike adducing were necessary to boost the economy, to the completely dovish image of Powell this week, now announcing that the i-rate is in levels "just below neutral", that is, 'if I raise the i-rate I could cool down the economy and if lower it, I could heat it too much.' Clear message that the Rate Hike can be stopped for a time, and the decisions will be taken exclusively as indicated by the economic indices in the short term. Even the Rate Hike that was taken for granted in December, today may seem somewhat distant.

Another key factor, as I mentioned in the previous post, is the drop in the price of Crude Oil /CL. Brutal, impressive, for almost two months, reaching below the $ 50 level. And regardless of the crisis it generates in the sector, this has immediate consequences for the world economy: inflation will stop, or slow down at least for a while. The dollar /DX will begin a correction to the downside, for Trump' happiness who wants it that way, and sadness for the banking sector XLF. Another key consequence of lower inflation is given in the bonds: this week bonds TLT went up, and so, the rate of the 10-year T-Bond TNX, the benchmark, reached down the psychological level of 3%. This causes that an inverted yield curve is very close, with all the consequences I mentioned in this earlier post.


Crude Oil /CL: ranging at the $ 50 level a few days ago, awaiting decisions by the Trump-Putin-Bin Salman trio in the G20, and in a lesser degree the OPEC decisions.
US Dollar /DX: after its powerful rise, it can change course after the dovish tone assumed by Powell and the FED.
10-year US T-Bond TNX: closing the month at the $ 3 level, it will also be affected by the reduction in inflation. Predictions failed, including mine, which put them in ranges of $ 3.25
Finance Sector XLF: they do not like the recent dovish tone of the FED. Technically it will be difficult to get out of the lateral range in which it has been since April. Also, there is a bearish "death cross" in the short term between its SMA50 and SMA200 averages.



December Outlook


Given the sensitivity of the market today, it is clear to everyone that the likely historical Trump-Xi meeting this weekend in Argentina, on the occasion of the G20, will be decisive for the short term of the stock markets. At the moment there are many news, opinions, rumors, and few certainties: Trump, true to his style, throwing critical tweets against China, and on the other hand, officials auguring a success in the meeting. Wall Street expects decisions of the type "we will reduce tariffs, or we will agree in some areas or topics". Any other unclear decision can lead to a red session this Monday 3 that open markets. And good news could mean a big jump in global markets and a happy Christmas for all!

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Monday, November 26, 2018

Stocks to Watch: US Crude Oil Fund $USO (/CL)


Background:


As I have usually written in this blog, I do not trade with futures, but I follow them daily because they are the basis of all my analysis. This time I will review the protagonist of the last two months, the Crude Oil /CL, which can be traded through the popular etf USO, or at triple speed through UCO, for riskiest traders.


Fundamentals:


The fall of oil in October and November has been the deepest that has suffered since the remembered pullback of 2014. Of its annual maximum, at the beginning of October, of almost $ 77, today oscillates in levels of $ 50, that is to say, a descent of almost 35%, something very uncommon. It's because we are living a new era in the leadership of the crude. Today the price is decided by a trio of unpredictable governors like Trump, Putin, and Bin Salman. The oil production of their countries, together, represent almost 40% of the world supply, surpassing the once powerful OPEC, and making its decisions almost unnoticed. Even less is the weight of non-OPEC, all already practically aligned with Russia and Arabia, the true leaders of OPEC.

This trio establishes the political context, leaving operational decisions in the hands of ministers and officials. And obviously each country has different interests and visions:

- Bin Salman wants a high price in crude oil, at the expense of reducing its production, to boost its agenda to modernize its country. He still supports the North American pressure in the opposite direction.

- Trump wants a low price, so as not to boost inflation or the dollar in his country, as we discussed earlier in this blog, handling the situation both in the external and internal front. Pressing Iran, its natural enemy, with sanctions and exemptions to its consuming countries, and on the other hand directly pressing Arabia, its ally, to increase its production. Trump' support for Riad in the Khashoggi theme is not casual. And in the internal scope, Trump relies on the boom and high production of shale gas, despite its controversial extraction by fracking, to keep in line the traditional private oil companies.

- Putin and Russia, as always, put themselves in expectation of what is happening to accommodate themselves. As a producer country he wants for Russia high prices, and as a popular governor in your country, low prices. It maintains its strong alliance with the Arabs since 2017 by defining the production quotas for its own interests and also with the idea of annoying the USA.



This is presented only for information purposes: the map of OPEC member countries, increasingly less relevant in the decisions of the price of crude oil.


Technicals:


Little to add here. In the face of tremendous collapse, today all indicators, without exception, mark bearish signals and extreme oversold, so what is indicated is to try to deduce when this trend could end, and risk a "buy the dip" trade for profits. For this, my favorite indicators are the supports/resistances and the popular Fibonacci Retracements.

His two-year Fibonacci chart shows the price struggling with the 50% retracement level, which almost matches the psychological and key support of $50. So, we are in crucial days for next move of /CL price.


If after the G20 the crude oil price does not overcome the support of $ 50 and the Fibonacci 50%, their following support would be 61.8% of the Fibonacci and one unclear in $ 43, already quite dangerous levels.



Idea:


In the short term, there may be a rebound at the $50 level mentioned. It would be the most sense because the pullback already deserves it. It will be able to oscillate some days around that level: the strength and momentum of the rebound will depend exclusively on what can be decided at the end of this month in Buenos Aires when the Trump-Putin-Bin Salman trio meet for the G20 forum.

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Thursday, November 22, 2018

Alexander Elder reviews the current Market

By kind permission of Elder.com, the website of the recognized trader, Alexander Elder, I reproduce for you, literally, its article "Books and Trades #252: Current market, Thanksgiving Special" of November 21th, about the actual behavior of the market and his outlook for the next months.


November 21, 2018


Dear Trader,

I haven’t written to you in a while, but felt compelled to do it today, in view of the current market situation.

There is a definite sound and smell of panic.  Go to any news website, and their waves of fear hit you in the face.  Don’t you think that if those writers knew how to trade, they would be making money instead of spreading emotional waves. Here’s what I recognize in the current markets:

Click here to enlarge this chart (only when you’re online)

  • Bull markets are defined by the pattern of higher highs and higher lows
This pattern is intact on this weekly chart of the S&P as well as the Dow (not shown).

  • The bottoms of severe corrections are usually retested on lower volume.
The latest decline was just such a correction. The Nasdaq (not shown) had actually nicked its October low before recoiling and rallying.  This is very similar to what happened in February 2016, when only the Dow among major indexes had nicked its previous low.

  • The second bottom of a correction is almost always confirmed by multiple divergences.
The inset in the center of the chart shows a bullish divergence of the New High – New Low Index.  The dark inset on the right shows the weakening of the Fear Index.

This bull market is definitely getting older (aren’t we all) and more ragged.  At some point it will top out, creating great shorting opportunities, but that time is very unlikely to be now.

To see what goes on day to day, I recommend joining SpikeTrade.com, where I post several times each week.  Take a Trial to see how much you can learn.  Another invitation: join my private webinars at elder.com to see live market analysis and receive answers to your questions.

Best wishes,

A Elder

---------------------------------------------------------------------------------------------------------------------


November 28, 2018  (Update)


Dear Trader,

Here’s the weekly chart of the S&P I sent you last week, followed by today’s daily chart (drawn around 2pm).

Click here to enlarge this chart (only when you’re online)


The headline of my post in SpikeTrade on Monday was “Had the corrective move been completed?”  I presented evidence for both sides, answered affirmatively, and shared my long purchases. The ensuing rally went into high gear today, crossing above the value zone, gathering steam.

Don’t you wish you were receiving daily SpikeTrade posts.

The reasons for this reminder: a) in tonight’s webinar we’ll focus on stock selection and b) our Thanksgiving special will end on Friday.

I will aim to write to you again before the end of the year,

Best wishes,

A Elder

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Monday, November 19, 2018

Trader Notes: InterMarkets Analysis. Part 2


John Murphy


This post complements the previous one published a few days ago and aims to give a summarized idea of ​​what intermarket analysis is about, study developed by John Murphy in his two classic books 'Intermarket Technical Analysis: Trading Strategies for the Global Stock, Bond, Commodity and Currency Markets '(1991) and' Intermarket Analysis: Profiting from Global Market Relationships '(2004). Although they may seem out of date because it does not deal with recent events such as the crisis of 2007, its reading is indispensable for a trader because it gives us a global vision and a better outlook when explaining in very detail the relationship between the four markets (currency, commodities, bond, stocks) and how they influence one another. This will allow us to establish our portfolio, telling us the best place to start investing in instruments for the medium and long term.


Inflation and Deflation


A basic idea of ​​Murphy's book is to understand that the correlation between markets depends on the environment, which is stronger: inflationary (like the current one, with the general level of prices increasing), or deflationary (the opposite). Both extremes can be harmful to the economy: the first decreases the value of money over time, the other causes one to postpone his purchasing decisions ('I do not buy today, the next week will be cheaper'), situation which ends up increasing unemployment. The ideal is to maintain price stability, with a low and stable inflation, never close to zero, being the order of 2-3% the usual target.


Main correlations


There are several but I only summarize the main ones. In an inflationary environment, stocks and bonds move in the same direction, or have a positive correlation. The useful fact here is that bonds usually change direction before stocks. Another key correlation is the inverse between the dollar and the commodities, being the best known and used by the traders the inverse gold-dollar relationshipAgain, the useful fact for the trader here is that commodities usually change direction after stocks. As a complement, in inflation, a fall in i-rate drive up stocks (stimulate the economy, as in 2009-2016) and also bonds (lowers its yield, which is the inverse of the price).



The intermarkets relationships during deflation are largely the same in inflation, except for one: stocks and bonds have a inverse correlation.


In deflation, the fear of it moves the money from the stocks to the bonds, especially towards the safe Treasury Bonds that raise their price, lowering their yield. Observed that the relationship between stocks and bonds is here, inverse. What a central bank usually does as a solution is increase the i-rate to decrease the deflationary effect in the economy.

The charts are explained alone: ​​the best hedges according to
the environment, inflationary and deflationary: gold and bonds, respectively.

Dollar vs. Commodities (or USA vs. China...)


It is understandable that when an economy strengthens and inflation begins to rise, commodities begin to have more demand and raise their priceThe main reason for the inverse relation between the dollar and the commodities is that this are quoted (exchanged) in dollars. When the price of the dollar falls, emerging markets importers will have more purchasing power and therefore, demand for these products will increase, which in turn will cause a rise in the prices of products. So, commodities have a positive relationship with stocks and i-rate, and inverse with bonds, both in inflationary or deflationary environment.

One of the best lessons of intermarket analysis: the inverse relationship between the dollar and commodities. This 2018, the crisis of emerging markets, very linked to commodities, is generating the strengthening of the dollar.

Remember, a strong dollar will always be a problem for a commodity, given that these are always traded with that currency, while a weak dollar is usually a stimulus for exporters and therefore for commodities. Thus, in 2015, China devalued intentionally its currency (falling its exchange rate through a rise of the dollar/yuan pair) to lower its exports (and make imports more expensive) and therefore accelerate its growth to the annual target of 7%. Since 25 years China lives with a trade balance in surplus (exports> impots), with reserves and a fixed exchange rate. 

In the USA, in 2017 the dollar remained under great pressure, as it was expressed Trump's intention to keep it weak in the short term as a government strategy, to favor exports and weaken imports. Totally different this 2018 with the dollar strengthening towards the long term with the beginning of the Trade War and the tax reform, as was the initial express wish of Mnuchin. Definitely successful Trump's strategy with the dollar, complicating all its global peers and emerging markets.

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Wednesday, November 14, 2018

Watchlist Update: November 14th, 2018


Market Pulse.


The stock market is threatening to finally enter a bearish stage, judging by the movement of SPX that, technically, fell again under the SMA200 and struggles to overcome it. We mentioned that its monthly chart closing under the SMA10 was a bad sign, and now the usual Christmas mini-rally is in danger of not being made. Some notes:
- The Apple AAPL 5% correction is pulling down the Nasdaq and the entire technology sector XLK, and this time seems it will continue in the short term because there are some fundamental aspects.
- The Trade War makes Wall Street move according to its rumors, news and subsequent denials. Now, it seems that Trump and Xi could meet on November 30 at the G20 Summit.
- The VIX volatility reached the psychological value of 20, after many indecisive sessions.
- The dollar remains very strong against all its peers, but today's inflation flat data can generate more pressure to the FED about a Rate Hike in December. 
- On the other hand, the apparent tranquility of the 10-year T-Bond yield TNX at the 3.15% level and the collapse in the price of oil /CL (12th. straight sessions of declines, and today falling 6%), can help the market in the mid-term. 
Let's see some technical charts and ideas for stocks of my November Watchlist.


Comparison between sectors


This comparison chart shows the performance of the nine main sectors during 2018. Shadow in blue sky is the SPX, the benchmark. As we see, since early October, the default three defensive sectors (Staples $XLP, Health $XLV and Utilities $XLU) still leading the market, signing a clear downtrend, confirm by the Sector Rotation Model above, in red.

Apple Inc. AAPL, $192.595


Apple today at a crucial moment when trying to bounce in its SMA200 after 6 months over this. A "buy the dip" trade or wait for the rebound: that's the dilemma. Meanwhile, the bear signals continue strong in the MACD, but now an excessive overbought in its Stochastic can mean a rebound. Good time to trade options or spreads as implied volatility is below historical data. AAPL, with their fundamental problems as the sale of their iphones and excessive buybacks, is likely a short in the  short-term.


Nvdia Corp. NVDA, $203.06


NVDA is one of my favorite stock, only for speculate, with a day-trade. Always its good volume and volatility above 60%, guarantees good daily movements, but requires constant vigilance. This week several entry points (that usually happens in the first half-hour of the session) were given using the ADX-Ichimoku strategy reviewed in a previous post. Using levels of support or resistance from the previous day and verifying the required price and chart conditions (breakout, above/below the cloud, ADX>20 and Tenkan exit), fast profits can be obtained. The ADX-Ichimoku, as all, not infallible, but good strategy in days of choppy markets. Remember in Thrusday, Nvdia reports Q3 earnings, that likely will define its route in the mid-term.

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