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China’s banks lowered their key lending rate on loans of five years or more to 4.45% from 4.60%, the biggest cut since 2019. The reduction came as a surprise as the banks are wary of capital flight to the U.S. and the strong dollar is their rates are too low. The move comes to stem a deepening slump in the Chinese housing market and a slew of soft economic data for April.
The news out of China is but a nominal measure, but a headline that traders can latch on to when $1.9 trillion in options and derivatives expire Friday, setting up for more volatility that has the market on pace for its seventh straight week of posting losses. The hits just keep coming as inflationary prices pressure takes a deeper toll on businesses.
Last week revealed some risks to forward earnings growth when a couple of big retailers reported their quarterly results. Shares of Walmart Inc. (WMT) and Target Corp. (TGT) tanked after both companies cited excessive shipping costs and higher wholesale prices for goods that squeezed profit margins. This is what the market feared would be an eventuality if inflation persisted, and unfortunately, it has.
There are also fresh signs of lower business investment in IT products and services, a key driver of the U.S. economy and market sentiment. Some recent surveys of IT spending are showing a more cautious approach to upgrades. This concern was evidenced by the slowdown in orders reported by Cisco Systems Inc. (CSCO), where the stock shed nearly 20% following the release of its quarterly results.
Commodity prices remain elevated and will likely remain so until there is some positive data regarding oil inventories and crop forecasts that satisfy the market’s fear of ongoing shortages brought on by the war in Ukraine that is entering its third month. As these concerns and the slow growth prospects in China overwhelm buyers, bond yields are retreating in the process, a positive development. To sum up, a lot of bad news has been priced into stocks where the market is due for a short-term oversold rally.
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I also want to emphasize to traders how vital a stop-loss discipline is to winning and being successful in an unforgiving market. We employ specified stop-loss instructions with every trade. The buy and sell programs controlled by high-frequency related algorithms can create great profits or cause sudden losses, so it is imperative to maintain an element of controlling risk with each trade.
CURRENT TRADING LANDSCAPE
The major averages are groping for a tradeable bottom and quite possibly it is in the making, albeit not without some serious technical damage to overcome. In another sign that bearish sentiment is taking hold, the transportation index broke to a new 52-week low Thursday that opens the way for some follow-on downside, but how much probably is a function of oil prices.
Transportation stocks tend to be leading indicators of future GDP growth prospects as the flow of goods is easily measured along with freight rates. The break of the recent lows is a negative development, but could easily be reversed with a drop in crude prices and improving supply chain conditions.
Not everything is bearish as sentiment would suggest. This past week saw strong quarterly results from notable companies Analog Devices Inc. (ADI), Palo Alto Networks Inc. (PANW) and Home Depot Inc. (HD). The price action has been to initially rally stocks on good news only to see those gains fade within a day or two. This kind of selling into any bouts of strength has to exhaust itself before traders will reverse course and resume buying the dips on strong volume. Downside volume and the A/D line have been clearly bearish and are a strong tell as to when the selling pressure will subside.
The $SPY closed lower 0.6%, at $389, retesting the long-term support level. The value/reflationary ($VTV) closed lower 0.8%, at $136, below the 200 DMA. The technology sector ($QQQ) closed lower 0.5%, at $289, retesting the 50-percent retracement from the pandemic 2020 low to 2022 high.
The $DXY closed lower, near the $103 level, breaking the December 2016 high. The $TLT closed higher 0.2%, at $117, and below the July 2019 lows. The ten-year yield closed higher at 2.83%. The $VIX closed lower, near the 29 level.
The $SPY short-term support level is at $385 followed by $380. The SPY overhead resistance is at $396 and then $412.
I would be a seller into the rally and have a NEUTRAL portfolio at this time.
"BUY" signal based on the Aggressive Power Trader Portfolio for tomorrow is at the $385 level using SPY and the "SELL" signal is at $396 for short-term traders.
If you are trading options consider selling premium with September and October expiration dates.
Based on our models, the market (SPY) will trade in the range between $350 and $430for the next 2-8 weeks.
NEW PROFIT ACCELERATOR TRADER SERVICE
We recently launched our new Profit Accelerator Trader service that we at Yellow Tunnel are very excited about. Each week, our expert traders use our AI Tools to provide the Top Bullish and Bearish Stocks, each with an Entry Price, Target Profit, and Stop Loss.
This new service is special because it offers real-time alerts via SMS and access to Vlad's live positions and orders. When I put together this system, I wanted to be in the fight with other investors. That’s why I don’t play on your emotions to sell newsletters - I put my money where my mouth is.
Every trade recommendation that I make using this system – comes straight from the list of trade recommendations I use myself.
Not only that but every trade I make is logged in detail for you to review at any time. You can see my entire trading history, updated LIVE so that you can see, learn from, and even copy my trading strategy.
Signals have historically averaged over 85% accuracy in my live trading since inception. Sometimes we hold position 2-5 days by using options (selling OTM Calls and Puts spread) and targeting 1% target gain and 1% stop loss using stock price. The green color should be interpreted as a bullish signal and the red as a bearish signal.