Larry’s Note: An October 28 event could send up to $1 trillion rushing through the markets – creating a burst of trading opportunities…
It’s triggering something I call an “AI Overdrive Window”…
These are brief periods when money floods into an overlooked market being transformed by AI, creating multiple chances to profit.
I’ve identified five tickers I’m watching, and I go into the details in a new free briefing.
You can go here to watch it and learn more.
One of the more challenging aspects of trading is that markets don’t always react as you’d expect.
Take Wednesday’s hotter-than-expected Consumer Price Index (CPI) print.
With inflation coming in above expectations, the initial reaction was fairly predictable. Treasury yields jumped as traders reassessed the likelihood of further Federal Reserve interest rate hikes. At the same time, stocks came under selling pressure.
But as the trading session progressed, something interesting happened…
After initially surging, Treasury yields reversed all of their daily gains. Ordinarily, you might expect that to provide some relief for stocks – particularly technology and other growth stocks that are more sensitive to interest rates.
Yet despite the reversal in Treasury yields, stocks remained under pressure.
Of course, there’s no rule saying that stocks must rally whenever Treasury yields fall. There are plenty of other factors driving markets at any given time.
But when something happens that should work in a market’s favor, yet the market barely responds, that catches my attention…
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As traders, we naturally look for relationships between different markets.
Higher Treasury yields can put pressure on stocks. A stronger U.S. Dollar (USD) can weigh on commodities. Falling interest rates can provide support for equities.
But while these common relationships can be useful, they’re not set in stone. Markets are constantly weighing up different factors, and their relative importance can quickly change.
For example, falling Treasury yields might normally be bullish for stocks. But if investors are becoming increasingly concerned about slowing economic growth and the prospect of more folks out of work, these other concerns might outweigh the potential benefits.
The key isn’t necessarily figuring out precisely why the market isn’t responding as you’re expecting. It’s simply recognizing that it isn’t.
Consider a market in a strong uptrend. When a potentially favorable development comes along, buyers are often quick to jump on board. Even what might be considered relatively minor good news can be enough to push prices higher.
But when the market is struggling, the opposite can often play out. Positive developments may barely register. Rallies quickly run out of steam, and traders look to sell into any bounce.
To be clear, this week’s action doesn’t automatically mean a major selloff is coming. But it can indicate that the balance between buyers and sellers is starting to shift…
And that’s valuable information for any trader.
Sometimes, the most revealing thing about a market isn’t the move it makes.
It’s the move it doesn’t make despite seemingly favorable conditions.
When conditions appear favorable for a rally, but buyers don’t respond, that can tell you something important about the market’s underlying strength. And the longer that non-response persists, the more significant it can become.
However, recognizing that weakness and knowing how to trade it are two very different things. Just because a market doesn’t rally as expected, it doesn’t mean it’s about to fall sharply. It could simply drift sideways and consolidate before finding a new base.
That’s where traders can get caught out…
They correctly identify a lack of buying interest and jump straight into a short position, assuming that weakness will translate into an immediate move lower. But the market doesn’t work that way.
A failure to rally is important information. But in itself, it’s not necessarily a trading signal…
For me, the next crucial step is watching how the market reacts around important levels. Does that support level hold despite repeated selling? Or does selling momentum start accelerating once support gives way?
How the market reacts helps determine if there’s a genuine trading opportunity…
Identifying underlying weakness is only one part of the equation. You still need the right trade setup, the correct entry, and a clear point where you’ll know you’re wrong and have to exit the trade.
As traders, we’re constantly looking for clues about where the market might be headed next. But those clues don’t always come from big market moves or dramatic headlines.
Sometimes they’re found in the moves that never happen.
The key is knowing the difference between what the market is telling you and when it’s giving you a genuine trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
