Alan Knuckman on "The Greatest Bull Market"

Q: Alan, as a former floor trader, what do you see is the biggest opportunity in the market right now?

Alan Knuckman: I’ll start with an old trading mantra that still rings true today: “the trend is your friend.”

Simply put, I still think the markets have great opportunity to keep going higher, just because we’ve come a long way doesn’t mean we can’t go further.

That’s rule number one in trading, markets can always go a lot higher than you think and a lot lower than you think.

Novice traders make the mistake of trying to anticipate the turn – they want to “call the bottom” or “call the top.”

The problem is, that mentality can be very expensive not only financially but mentally as well.

Think about it, there have been people talking about the top in the market since 2009 and it’s essentially gone straight up. Unfortunately, people factor in their emotions and factor in their own biases into their trading instead of letting the markets give them the clues to as where they’re going.

Will the market keep going straight up? No way. But as a professional trader, it’s not my job to predict when the next earthquake or shark bite is going to happen.

Right now, you cannot ignore the fact that we are in one of the greatest bull markets of all time. That’s the opportunity in front of us.

Trying to predict when that’s going to come to an end is a fool’s errand.

How to Know When Markets Might Be About to Turn

Q: Okay, so you said the market won’t go straight up. Do you have any tips for our readers so they’ll know when they should start playing the downside?

Alan: Ah ha! Now you’re starting to think the right way!

You see, when the market does turn it won’t happen overnight. Don’t listen to anyone that says otherwise. It’s not going to be a straight down move. In fact, it’ll happen in a very recognizable way…

The first step is we need to see sustained “sideways” action. In other words, we need to see a period of time where we don’t make new all-time highs. And, by the way, I don’t think we’ve gone more than a couple weeks at most, before making new all-time highs in the major market indexes.

After we see that sideways action, from a technical standpoint, what I’ll be looking for is if we do close below the 200-day moving average in the S&P (and this will be a recognizable mentality shift as well).

You don’t have to make this any more complicated than it is… the 200-day moving average is just a technical situation that people pay attention to, if that happens for, say, a month, then the overall trend may be broken a bit.

That’s why a downturn won’t just sneak up on us! Professional traders don’t sit around guessing, they wait for a change in the trend and they act appropriately.

In today’s market though, I’m still a believer in buying any dips.

The market still has inherent strength, you cannot deny that.

If you delve into the numbers, look at the dollars earned by these corporations and look at the earnings growth, the fundamentals remain solid.

And I’ll go off on a slight tangent, but it’s important…

Right now there is no other real choice for investors or traders. What are you going to do, buy treasuries? I always look at treasuries, I used to work in the pit, but right now we’ve got the 30-year treasury at below 2.75%.

Alan Knuckman news segmentAre you going to tie up your money for 30 years to get 2.75%?

Probably not.

Are you going to tie up your money for 10 years to get 1.5%?

Probably not.

And if you look at the yield in the S&P 500 stocks, it’s above that 30-year treasury. Until that equation changes I’m not expecting this market to turn.

There will be pull backs but each and every time the market pulled back, and let me say that again, every time in history the market’s pulled back, it’s rallied and made new highs.

As a trader, I have to respect that. That’s where the money is.

Buy Bullish Divergence

Q: Okay let’s get into the weeds here – what’s one of the specific ways you’re picking stocks in today’s market?

Alan: That’s an easy one! Two words: bullish divergence.

Traders know that term well – but since I think it’s important for everyone to know, let me explain it right now…

So far we’ve been talking about the overall market and that the trend is heading higher. But the overall market is full of stocks that are going up AND down.

Remember, since the overall market trend is up… for the most part I’m going to be a buyer.

But, one of the best places to find a great trade in after a stock has pulled back. Even hot stocks cool off for a little bit. Or some stocks fall out of favor from the overall trend. That’s a big opportunity if you play it right.

One of my keys is looking for bullish divergence when I’m trying to find something that’s been beaten up that I think is undervalued.

In particular, I will look for something that’s making new lows but the volatility is not making new highs.  That’s bullish divergence.

I know that sounds a little confusing, but hear me out….

Volatility is a simple measure, all that’s doing is measuring how fearful people are. And if volatility is not making new highs that tells me maybe the sellers are tired out. This trade has worked many times in stocks that have fallen out of favor.

You think about stocks like Twitter that have had nice U-turns and some good opportunities to make money.

Stocks like British petroleum, stocks like Lumber Liquidators, a lot of these stocks that everybody had a negative sentiment on… but bullish divergence was the sign for a reversal.

Those kinds of trade set-ups have been successful for the last seven or eight years.

My point is, buy the bullish divergence.

What You Need to Know About Gold Right Now

Q: What’s your favorite “Breakout” recently?

Alan: If you’ve been paying attention over the past few days you know EXACTLY where I’m going with this…

Yep…I’m talking about GOLD.

See, a few weeks ago I was wandering around the Agora Financial office in Baltimore and I physically took a couple of people and I stuck their head in the chart to show them what was happening in gold.

In the trading pits everyone sees the action. In the real world, you have to really wave your arms to get folks to look. So that’s what I did.

Gold had been trading sideways — between $1,200 and $1,300 an ounce for all of 2017 — and it was telling us something was going to happen. Gold was really looking for a breakout.

The charts don’t lie! And finally gold broke out above $1,300 an ounce and now we’re seeing 2017 highs. That’s a classic breakout.

And what’s great about gold is there are plenty of ways to play it! The pick I recommended to readers was with Newmont Mining, and with the special strategy we used ended up making over 60% in one day. That’s the power of the right trade at the right time.

But better yet, that was just one an example, there’s still more upside in gold. I’ll talk about that in a moment.

But really that’s the biggest news of the week, the breakout and sustained follow through on gold. Because we’d been up to this level three times unable to push through it, but that’s very significant market action.

Plus, when you look at what’s happening in the U.S. dollar it all makes sense…

We saw the dollar make new 18 month lows.

So, it’s not just gold, it’s a much larger currency play.  The major headwind facing gold in recent years was a strong dollar. That’s all unwinding now. And there’s no real strength in sight for the greenback.

We’re not raising interest rates any time soon at all. And looking at the numbers, to get to a 50% or greater chance of our next rate hike we have to go all the way out to March or June of 2018. This means a rate hike is not even on the radar.

Simply put, if there’s no rate hike and the dollar doesn’t go up I think gold continues to breakout to the upside. I’m looking for that to continue.

Focusing in on the gold price, if we go way back to the all-time highs in gold at $1,900 down to the recent low around $1,100, we’ve got a solid short-term price target at $1,450-$1,500. That’s just getting us back to the halfway point of this recent five-year fall.

So, there’s still A LOT more upside in gold.

Q: Alan, thanks for giving us your take. Hopefully we can catch you on the trading floor again soon!

Alan: Thanks. We’ll talk soon, the markets are always moving.

Thanks for reading.

Alan Knuckman

Alan Knuckman

The Daily Reckoning