At the end of 2021, most major indices are near all time highs. A seemingly endless flow of cheap money from the Federal Reserve has pushed markets higher pretty much through the entire year. As written at the end of 2020, a prolonged uptrend often has 70% of the move in the last 30% of time. Meaning, that the slope of the uptrend gets very very steep and even more parabolic right before turning the corner before it starts to retrace. In many ways, the perfect storm continues together as high inflation continues, the Federal Reserve ending it’s quantitative easing asset purchase program, and massive worldwide supply chain problems caused by the pandemic continue to interrupt business operation. But even with all these problems on the horizon, the bandwagon does not stop until the music gets shut off. Meaning that the market will continue to march higher until a catalyst of some kind causes a correction, which at this point is long overdue. Investors and traders alike need to be cautious and protect the massive gains that they have seen over the course of 2021.
This chart of the $QQQ shows a steady uptrend for the duration of 2021, with no major pull backs. The RSI is showing a major divergence as indicated by the yellow trend line.
This chart of the $SPY illustrates the recent breakout to a new high, but on very low volume; the RSI is also showing a divergence. The MACD is still bullish but the MACD tends to be a lagging indicator.
It is fundamentally unhealthy for markets to be overheated for a long period of time and not to experience some kind of correction to consolidate the gains and keep earnings per share ratios in line with historic levels.
The $DIA which represents major industrial companies has already been in a sideways trend for an extended period of time. It is also showing a divergence between price and the RSI, again the MACD is still rising but it is a lagging indicator.
This Chart of $USO shows oil is poised for a breakout to the upside and the short term benefits of president Biden’s release of the oil reserves has started to wear off. A drastic increase in oil prices will cause an increase in inflation as oil is a prime commodity. In 2008 just before the financial crisis really kicked off, oil skyrocketed to $150 a barrel. This example shows that oil tends to be the most resilient commodity price when going into a correction and could be the final catalyst.
Understanding the US dollar, Stock Market Correlation
One market factor that needs to be clearly understood going into 2022 is that the U.S. financial markets are denominated in U.S. dollars. What that means is that if the U.S. dollar starts to strengthen and increase in value, U.S. financial markets will drop as there is an inverse correlation between the value of the U.S. dollar, and the value of the stocks listed in the markets.The U.S. Dollar is likely to strengthen now that Biden’s Build Back Better Bill is unlikely to pass, the Federal Reserve is no longer adding to its $8.7 trillion balance sheet via asset purchases, and there are expected 4 quarter point rate increases planned for 2022.
$GBTC the ETF that tracks $BTC shows what you would expect, the leading digital asset is showing real weakness. The RSI has gone negative and the MACD is trending down. Price is currently below all moving averages, this is partly due to an expected strong move up in the USD. As the Federal Reserve starts to increase interest rates in 2022, the attractiveness of dollar alternatives such as Bitcoin and Ethereum will decrease. Unlike the financial markets, most of these digital assets have already decreased by over 20% which would put them into bear market territory. The traditional hedge against inflation is gold, so potentially $GLD and $SLV might gain a little traction yet again.
So for yet another year, traders and investors should be cautious and take profits if they are there. Focusing on shorter term trading such as swing trading and keeping a larger cash balance as the U.S. dollar is expected to strengthen. Caution might be the prudent position going into 2022. Also remember that 2022 is a midterm election year, which also adds a degree of political uncertainty. Be cautious, trade well and we wish you all a happy and profitable 2022!
What’s New from DAS
While we didn’t release any production updates during the month of December, we did release beta version 5.6.4.16 for testing. In this beta release, we implemented the following changes:
Short Locate
-For NotRecycledLocateList, after admin added/removed a symbol,
re-sync the list to clients.
-Added configuration for short locate window default account/route.
Options
-Optimized options chain window performance.
Charts
-Added Squeeze Indicator.
Display
-Montage: Added back heatmap for level 2
-Account window: Show Comma for float numbers.
– Account window: Added option to show/hide account name for avg
position line.
-TradeSignal: Added two new filters ‘Vol-Today Relative Volume
%(Yesterday)’ and “Vol-Today Relative Volume %(vs 30Day)” in common filters.
-TradeSignal: Added two new columns ‘RVOL %(vs yday)’ and “RVOL (vs
30D)” in result window.
-TradeSignal: Bug fix – Don’t keep the ungroup window if ‘Auto group
window’ enabled.
-Basket Trader: Auto round limit price for %bid, ask, last+
operations.
Hotkeys
-Added montage hotkey buttons file (.hkb) to backup zip file.
-Hotkey script now supports 4096 characters.
-Added hotkey “CXL STOP” to cancel only stop orders.
-Added “check naked options” hotkey
-ResetTopBottomMargin hotkey can now reset vertical dragging to
-Added PANIC ACCOUNT=myaccount script that designate which account to
apply PANIC function ONLY to.
API
-CMDAPI: Return condition field for time sale data ($T&S).
-CMDAPI: Added support for “POSREFRESH” in replay mode.
-CMDAPI: added VWAP, trades of the day and RVOL in level 1 quotes.
Bug Fixes
-Basket Order: “Bid+%N” changed to “Bid+N” after load from template
file.
-Charts: Trendline label not displaying correctly for volume study.
-Options Chain window: bug fix for Weekly/Monthly options color
filling.
-Short locate window: Fixed some alert sound playing issue.
-Short locate window: Accept/Reject offer not work if no “Account”
column.
-CMDAPI: Fixed SLPRICEINQUIRE issue.
-CMDAPI: Added support for SLPRICEINQUIRE for all routes (ALLROUTE
If you wish to become a beta tester, you will need to fill out the contact form on our website and include the firm/broker you’re trading with as well as your login ID.
Please be sure to install the latest version of the DAS Trader Pro platform. You can do this very easily from DAS by clicking Tools > Auto Upgrade. You can learn more about the Auto Upgrade feature in our Knowledge Base.
Watch our Streams on YouTube
You can view the most recent live stream here as well as all of our live streams from this link. Also be sure to subscribe to our YouTube channel for educational and trading videos as well as all things DAS! And also be sure to follow us on all major social media platforms by following @dastrader.
If you have any ideas for anything you want to see on our live stream, please send us an email: newsletter@dastrader.com.
