Top Advisors Corner

At the Edge of Chaos: MEL Becomes MELA as Algos Send "Cease and Desist" Message to Federal Reserve

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It's a strange association for sure, but I am officially expanding the concept of MEL, the complex adaptive system composed of the markets (M), the economy (E), and people's lives (L) to MELA, with A standing for Algos. That's because, the algos are starting to play a key role in what happens in the former MEL. And well, if they're part of the system, they should get the proper credit. Here's what I mean.

Stocks made yet another new high on 6/25. But let it not be lost on anyone: uncertainty is rising. Of course, we trade the prevailing trend, which remains up. But we are certainly doing it with some trepidation. And we certainly can't ignore the fact that the algos took the market on yet another wild ride during the prior week as the Federal Reserve flirted with disaster and learned the hard way that any hint at higher interest rates will not be taken lightly by people or algos.

Algos Join MEL Team

Last week in this space, I noted: "a decisive break below 415 on the S&P 500 SPDR ETF could trigger a selling avalanche and create a large mess for the stock market in a hurry." I also detailed the lay of the land for the Fed in its quest for a way out of its QE mess, noting: "Plainly stated: in a global economy powered by debt and easy money, it's not going to be pretty when the easy money goes away. And, as anyone who lives in the real world will testify, that's because, when the easy money disappears, there is less real money in the coffers due to debt servicing. Therefore, it becomes harder to pay off debt and to continue to operate businesses and households at the same time. And when people have to choose, they will almost always choose to put life first and debt second."

Certainly, the market found support, predictably at the 50-day moving average for the major indices and the New York Stock Exchange advance decline line, as I detail below. And yes, it's a good thing when a crash is averted. But it also can't be lost on anyone who trades (or the Fed) what the reality of the moment truly is: the Markets (M), the Economy (E) and People's lives (L) are one single complex adaptive system built around the liquidity created by QE. And yes, thanks to the new member of the system, the algos (A), a nearly permanent uptrend in the stock market is required for the system to function properly.

Thus, it follows that any attempt to reduce or significantly alter the current set of relationships will have an adverse effect on MELA. Consider the fact that, just as the Fed was talking about "tapering" its QE, we've had the following:

  • Markets tumbling rapidly before recovering when the Fed backed off its QE "tapering" stance
  • Consumer confidence starting to roll over
  • Housing starts and home sales declining
  • Inflation is rising even in the Fed's arcane surveys
  • The employment situation is uncertain, and
  • There is now some weakness in business surveys where services are starting to feel the pinch of all of the above.

In other words, aside from the fact that the MELA system is clearly an entity to be reckoned with, news travels at the speed of light and markets and people respond instantly. What it means, unless something very dramatic changes, is that the Fed is almost certain to cause a simultaneous crash in the Markets (M), the Economy (E), and People's lives (L) when it eventually pulls the trigger on QE and the algos (A) go crazy on the sell side. 

As I noted in my most recent Your Daily Five (YD5) video (watch here): "Trading is Uncertain. Be Prepared."

SPY 425 is the New Support Level as Options Fear Rises

The market is on pins and needles and stocks don't have much room to fall before aggressive selling hits; more just below.

Just when it seemed the market was finally going to correct significantly, the algo games in the S&P 500 SPDR ETF (SPY) did an about-face. Initially, SPY and the market took a dive when the SPY 420-425 trading range failed to hold starting on 6/16 and finally breaking down by 6/18, as the Quadruple Witch options expiration hit; the put volume drowned the call volume at 420, making the support level give. But, by 6/21 the call buyers returned and the market rallied, establishing 425 as the new support level.

So now we have to see how the hedges develop in the new cycle that started on 6/21. Certainly, there is some heavy put buying at 425, just below the 6/26/21 close, which means the algos are holding the rally on a short leash. Moreover, what that means is that a decisive break below 425 on SPY could well trigger a selling avalanche, which could get worse if 420 doesn't hold.

Incidentally, to learn more about how options may make sense for you, check out these presentations: "How to Let Your Stock Charts Lead You to Great Covered Calls" and "Five Things to Know About Covered Calls" on StockCharts TV.

Cal-Maine: A Dark Horse Bet Against the West Coast Megadrought or Maybe Just Laying an Egg

I'm not known for picking stocks whose price charts are not near a breakout. But, once in a while, it makes sense to consider a company whose industrial niche could be pivotal in the not too distant future, even though its stock price is in the basement. Such as stock could be leading egg producer Cal-Maine Foods (CALM).

Let's face it, eggs get no respect. There isn't even a futures contract via which to trade them. Talk about being the Rodney Dangerfield of the commodity markets. Still, even though they get a bad rap regarding cholesterol levels, it's hard to get along without them since they are a key ingredient in an infinite number of both fresh and processed foods. Moreover, as the West Coast megadrought develops, the potential for higher meat prices, as well as general disruptions in other protein sources produced on the West Coast (e.g. nuts, avocados, etc.) certainly raises questions about an unexpected rise in the demand for eggs, and a subsequent rise in prices.

But there is the contrarian case beyond the drought. In fact, CALM has been steadily shoring up its business via acquisitions and building up its balance sheet in the process. In fact, they beat expectations in their most recent quarter and gave fairly good guidance. But, alas, the stock is still going mostly nowhere, even though the company recently restored its dividend.

The technicals are not outstanding at first glance, with Accumulation Distribution (ADI) rising and On Balance Volume (OBV) fading slightly. But a closer look is not as dire as it might seem. The fact that ADI is rising points to most of the recent buying having been done at the top of daily trading ranges, which is bullish. In addition, RSI is slowly climbing above 50, which is a sign of downside momentum stabilizing.

So what's my point? CALM is starting to see a bit of buying as more traders start to factor in the potential for food supply issues later in the summer. And that means that a mangy dog stock like CALM could well see its day in the sun under the right circumstances. Risk is certainly low at these prices, although the real test will come at the $39 area where there is a fair amount of price resistance. Meanwhile, call options for CALM are still cheap for those who don't wish to own the stock at the moment.

Of course, I may have egg on my face on this one. Yet, in this market - once in a while you've got to consider going a bit against the grain, or consider not being too chicken.

I own shares in CALM, and I have an open option trade on CALM at the moment which you can view with a FREE trial to Joe Duarte in the Money Options.com. Click here.

NYAD Nears New High

NYAD is on the verge of a new high. And although it didn't quite get there during last week's rally, for now we will give it the benefit of the doubt while noting that a failure and a major pullback would likely trigger some serious selling.

Still, in a market where liquidity is questionable, the New York Stock Exchange Advance Decline line (NYAD) becomes a hugely important indicator, as it gauges the general health of the market and how it's responding to current external conditions. In addition, it's also bullish that we didn't quite get to test the 50-day moving average on NYAD during the Fed tapering talk tantrum, which is fortunate as, if that event had taken place, we might have seen more damage done to the market.

Thus, as things stand as of 6/25/21, NYAD remains in an uptrend, although it has yet to make a new high which would confirm the odds of the uptrend likely starting a new leg higher. Moreover, NYAD also held above the 50 area on RSI. This is important as, when the RSI breaks below 50 and NYAD both break below the 50-day moving average decisively without a rapid upside reversal, the odds of a major market decline increase (a Duarte 50-50 Sell Signal).

The Nasdaq 100 index (NDX) moved higher last week, but failed to close at a new high.

Good news! I've made my NYAD-Complexity, Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.


Joe Duarte

In The Money Options


Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Joe Duarte
About the author: is a former money manager, an active trader and a widely recognized independent stock market analyst going back to 1987. His books include the best selling Trading Options for Dummies, a TOP Options Book for 2018, 2019, and 2020 by Benzinga.com, Trading Review.Net 2020 and Market Timing for Dummies. His latest best-selling book, The Everything Investing Guide in your 20's & 30's, is a Washington Post Color of Money Book of the Month. To receive Joe’s exclusive stock, option and ETF recommendations in your mailbox every week, visit the Joe Duarte In The Money Options website. Learn More
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