Market Observations as of Nov 3, 2017

Transcription

1 Market Observations as of Nov 3, 2017 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week we again saw the bulls in control. The Dow, S&P and Nasdaq all delivered new All Time Highs on Friday while the Russell remains trapped inside a horizontal range. The breadth of this rally has not changed, as the acceleration of breadth continued to fade. Options volatility (VIX) ended the week near its lows of this year. These all suggest a complacent bullish market with little to fear. Neither the Fed minutes nor the announcement of a new Fed Chair cause much if any reaction in the markets this week. Earnings continue to offer mostly bullish fuel. Sector trends did not change much this week, with a few exceptions. We saw oil break to new highs and Home builders take a hit on Thursday. We will look at charts (below) to see examples of how we handled this event on Thursday and being stopped out. FYI, the Top-Down Market Analysis we share here each week via this document is not intended to be a thorough or complete market analysis. It s simply an example of one way to go about a process. One should their own process of Market Analysis that they can use on a regular basis. This help the trader find CLUES in the charts (Technical Analysis), and dig down to find stocks that are moving these markets. This coupled with a well written and tested Trading Plan, can help expose good Trade Opportunities. I share examples of common chart behaviors to help the reader see the value of Objective Analysis and observation. If you practice looking for such patterns on your own, over time, you will develop key skills that can help effectively execute your Trading Plan. If you have been reading these Market Observations for a while, you will have also recognized how I try to include a little nugget of wisdom each week. I encourage each person to test out and idea for themselves. Doing so will help you build either: a stronger belief that the pattern (or principle) is indeed confirmed (happens more often than random), or, you will confirm that is may not be common and in the process have learned something of value you can use or apply when appropriate. I know that I have had to change my beliefs more than once, after doing my own testing of a principle. I find the time and effort testing was very valuable because now I have greater confidence in that principle. Many aspects regarding the markets, trading and chart reading are not Absolutes, but are Probability advantages that are greater than random. Remember, the markets are a study of Mob Behavior. Understanding and recognizing higher probability opportunities are what make your Edge. Now, let s look at some charts to see what the Markets are telling us. We will start with the major Indexes, and then look at a few Market Internals, some key Sectors or Sub-Sectors, then some key Stocks.

2 S&P 500 weekly chart as of Nov 3, 2017 This week the S&P 500 delivered a sixth week in a row of positive trend.

3 S&P 500 daily chart as of Nov 3, 2017 Twice this week the S&P delivered new all time highs. Note how the 20 day SMA (Yellow) has been support since early September. Also note how the 20 day SMA (Yellow) has been above the 50day SMA (Blue) since mid September, and the 50 day SMA has been above the 200 day SMA (Purple) since about the middle of last year. These confirm the long duration nature of this bull trend.

4 DJIA daily chart as of Nov 3, 2017 The Dow delivered several new All Time Highs times this week and ended this week delivering the 8 th up week in a row. I don t think we have seen that long of a continuous weekly string for several years.

5 DJ Transports daily chart as of Nov 3, 2017 The Transports were mostly horizontal this week, returning to the prior Resistance level (While line) we have seen since last November.

6 NASDAQ daily chart as of Nov 3, 2017 The Nasdaq delivered new All Time Highs four of five days this week. The explosion we saw at the end of last week, continued this week with a bit less overall velocity. Remember the Pause in the bull trend we saw this summer, when the Nasdaq seemed to chop horizontally for all of August and much of September. Recall the pattern (Orange circle) we saw? Do you see a Cup-and-Handle pattern? Maybe it has a double handle? The Key is the behavior or persistence of the buyers during this horizontal time that kept retesting Resistance (White line) until it broke on Sept 29 th. It is easy to see a pattern after the fact, and that is where you begin to learn these market behavior patterns. However, to have any value in trading, you must teach your eye to see the pattern as it forms. This takes practice. Lots of practice. Building these skills is well worth the effort because it will give you skills to see opportunities when they are easier to enter the trade (before the mob jumps in) and thus have better Reward/Risk ratios. These patterns do NOT work every time, but the work often enough (> 50%) to be a statistical edge. A lot can be learned, if you keep good records when you first see an event or pattern, then weeks or months later go back and study the charts to see what happened AFTER you first saw that pattern.

7 IWM daily chart as of Nov 3, 2017 The Russell 2000 continued to be horizontal this week, after retesting Resistance (Yellow line) on Wednesday (Nov 1 st ).

8 NYSE Adv/Decl daily chart as of Nov 3, 2017 Note the horizontal nature of the Advance/Decline Line the past month. This confirms no real change in market Breadth. McClellan Summation Index daily chart as of Nov 3, 2017 Note how Breadth acceleration has been on the decline since early October.

9 Oil daily chart as of Nov 3, 2017 Oil exploded out of its horizontal range last Friday and again this Friday to deliver new highs for the year at the end of this week. GLD daily chart as of Nov 3, 2017 Gold remained in a tight narrow range all of this week.

10 US Dollar Index daily chart as of Nov 3, 2017 The US dollar remained in a tight narrow range all of this week.

11 VIX daily chart as of Nov 3, 2017 VIX dropped to nearly new lows for the year on Friday this week. No fear seen in these markets here.

12 Now let s look at a few key Sectors to see where the market leader ship is this week, and if that has changed from the prior week(s). QQQ daily chart as of Nov 3, 2017 Clearly the Tech sector has lead the rally again this week. The explosion we saw last Friday (Oct. 27 th ) continued this week, but not as violently. Note the True Range spike (White) in the lower part of this chart. The True Range for last Friday was $4.56 for the Qs, where its 14 period ATR (Average True Range) is $1.21. That is 3.77 times its ATR for that one day (Sept 27 th ). The Qs saw new All Time Highs four of five days this week, but more normal True Range each day this week. ** True Range vs. Average True Range is one way I like to use to compare normal to abnormal price behavior. Therefore, I have it on my charts so that the math is already done for me (by the charting tools) and I can quickly and visually compare a volatile day to other volatile days.

13 A key sub-sector of Technology is the Semiconductor sector. We saw leadership in this sector over the past months, so let s look at it again to see what has happened this week, and if there is any change. SOXX daily chart as of Nov 3, 2017 Well this chart speaks for itself. We can see the break out in early September, followed by a small and brief pull back for one week, then a nearly continuous bull trend since Sept. 27 th. This week again saw more new highs in the sector. We will look deeper at key stocks within this sector below.

14 XLE daily chart as of Nov 3, 2017 The Energy sector was stronger oil prices late last week, and again this week. We see a Retest of Resistance (Yellow line) this week, but no break out yet. Note the 50 day SMA support was nearly tested late last week. This chart suggests it might be very ready to break above the Resistance line very soon. Time will tell.

15 XLF daily chart as of Nov 3, 2017 The Financial sector is very important on a macro-economic level, to confirm a growing economy. We have not seen much support in this sector this year. W briefly saw a break out in late September, but that stalled at new Resistance (Yellow) for two weeks. Then a small break out occurred about two weeks ago, but then has been horizontal the past two weeks. This sector has been mixed, since we have seen mostly horizontal charts the past weeks, with the exception of the Consumer Credit stocks. V, AXP and MA (charts not shown) continue to show a mild bull trend again this week. The banks and other sub-sectors continue to be horizontal and mixed this week.

16 XME daily chart as of Nov 3, 2017 Materials remain mostly in a range for two months. This week we saw this ETF under its 50 day SMA all week and testing Support near $31.50 area. This is not a good sign of economic growth.

17 XLV daily chart as of Nov 3, 2017 The Healthcare sector has been oscillating the past several months as nearly daily comments come out of Congress about repeal or reform. Regardless of the political rhetoric, the CHAT tells us this sector is mixed and retesting prior Resistance (Red line) as possible Support this week. Also the old Trend Line (Orange) support has intersected that Red Line Support. This chart does not suggest a clear Trend to trade, so I will again take a pass.

18 XHB daily chart as of Nov 3, 2017 The Home Builders we have been tracking, and trading, since after Harvey hit Texas in late August. Note the wild swings on this chart, as the higher highs and higher lows confirm the trend, but not without some volatility also thrown in. The Resistance of early October (Blue line and arrow) was broken this Thursday with a large drop early that day. We will look at several charts below that were affected by Thursday morning s drop. We do not know why this drop occurred Thursday. Fortunately, we do NOT need an answer to the why in order to make ALL of our trading decisions. There are plenty of talking heads on TV that are paid to tell you why something happened, and they are usually wrong, and ALWAYS late. Turn off the TV and focus on the charts. This way you are making fact based decisions per the charts and according to your plan. STICK to your plan. It is there to protect you. The experts on TV are not there to help. They are there to entertain, or worse, spread false myths about the markets or promote the miss-information agenda of the BIG players. [Read Reminiscence of a Stock Operator to explain how big players can create demand when they need to.] Now, let s look at some key stocks.

19 AAPL daily chart as of Nov 3, 2017 Apple broke above prior Resistance (Yellow line and arrow) from the Sept 1 st highs on Monday of this week. Apple delivered new All Time Highs on four of five days this week. The 20 day SMA (Yellow) crossed above the 50 day SMA (Blue) two days after the Break out seen on Monday. This week saw increased volume as Apple reported earnings after the close on Thursday (Nov 2 nd ). Note the test of Prior Resistance (Yellow line) as new support on Thursday. Moving averages smooth out the noise on a trend, but they also lag a bit at announcing a change. Reducing noise has a penalty, and for most technical studies, that penalty is in the form of a delay.

20 FB daily chart as of Nov 3, 2017 FaceBook announced its earnings after the close on Nov 1 st. The new high was delivered just prior to this announcement. In the afterhours markets FB oscillated from $188 to $ on Wednesday. FB opened at $ on Thursday. Overall FB was mostly horizontal for the week.

21 AMZN daily chart as of Nov 3, 2017 Amazon & Alphabet & Intel all reported earnings last week on Oct. 26 th and could have likely sparked the huge tech sector gap up last Friday (Oct 27 th ). This week saw new All Time Highs on Monday (Oct 30 th ) before dropping and oscillating a little for the remainder of the week. Note on the chart how the Prior Resistance (Red line) from July 27 th highs was not exactly tested, but could be a likely area of support, as price remained above this level all of this week. The huge move in Tech last Friday could have been triggered by Amazon, since the charts suggest that as a possibility. The exact why is not necessary to know, usually impossible to prove, and most importantly - is not needed for any or our trading decisions.

22 NFLX daily chart as of Nov 3, 2017 Note how NFLX was quiet & horizontal all this week, and continued to respect the 20 day SMA (Yellow) as support. Also note how Netflix was pinned this Friday at the $200 strike where there was plenty of Open Interest in the weekly options. (Netflix reported its earnings back on Oct 16 th ).

23 GOOGL daily chart as of Nov 3, 2017 Alphabet reported earnings last week (Sept 26 th ) and delivered a new All Time High the following Friday (Oct 27 th ). This week Alphabet remained horizontal within the price range established on Sept 27 th. Note how Alphabet was pinned this Friday (Nov 3 rd ) at the $1,050 strike. Pins are less often seen on weekly series expirations, but more often on the monthly series options. However, as weekly series are becoming more popular (increased volume) with FANG stocks, we may begin to see this more often.

24 We saw how the Tech sector and especially the FANG stocks have been leading the bulls again this week. Now let s look at a Tech Sub-Sector, Semiconductors, and key some stocks in that sector that have been leading the bulls lately. NVDA daily chart as of Nov 3, 2017 NVDA has slowed but continues its rally this week. Note how it seems to move up for a few days, then pause for a week or so. This week looks mostly like another pause.

25 INTC daily chart as of Nov 3, 2017 Let s go back to Jan 27 th 2017, when Intel made a new high at $ Sometime in early February I saw this high, and chose to program an alert on INTC to be triggered when INTC traded above $ Over time, I forgot about this alert. (I programmed it a little below the $38.45 high so that if it goes off, I have time to see a chart and how it acts when it gets to $38.45 area. An alert is just a reminder. And reminders can be a bit more valuable to get your attention BEFORE some event happens.) Jump forward to Oct. 2 nd when this alert went off. I saw the alert, looked at the chart, and decided to get long INTC with Options (Green arrow). About three weeks later, on Oct 20 th those Options were due to expire (Yellow arrow) I rolled my Options contracts from Oct 20 to Nov 17 expiration and held on since the trend had not ended yet (as the charts showed on Oct 20 th ). When Earning came out on Oct 26 th, and INTC gapped up early the following day, I added a second INTC position. The little wiggle in price this Friday (Nov 3 rd ) was not large enough to trigger an exit. I currently hold both positions, and will do so until an exit is triggered or Nov 17 expiration day arrives. If you stick to your plan, sometimes you are lucky, and your plan should allow for that. Sometime you are unlucky, and your plan should also allow for that. Keeping both goals in mind, (1) keep your losses small, and (2) let your winners run, are both important to do. A well written Plan should clearly define your process for dealing with a variety of scenarios.

26 R and JBHT we saw a few weeks ago as they tested their 50 day SMA support. However, the past week we saw only horizontal oscillations as these stocks continued to remain above their 50 day SMA support. Since we traded options, there was no more positive momentum in these charts, and the time decay with options was nibbling away at their value. Therefore we exited both positions for a very small profit. If one was trading stocks on these, there was no cost for the time decay, but your capital would be tied up in a position that was not moving. As a Swing Trader, we are looking for Movement. And part of our exit plans for a Trend Following strategy includes how to deal with a position that has stalled. BA daily chart as of Nov 3, 2017 We exited LMT last week, and this week BA has been horizontal. Note how there are periods of 4 to 6 weeks when this stock seems to pause, then it may rally up for a week, just to pause again for several weeks. This appears to be normal behavior for this stock. A stock trader can keep holding on, as the trend has not shown any sign of changing to bearish, but is simply pausing. This has been common behavior in the past. As an options trader, the time decay can nibble away at a long Call position, less so if it is more In-The-Money. Options traders have various strategies where they can sell premium using spreads so that they can benefit from horizontal periods by collecting the premium, while still managing risks very precisely. If a stock has this behavior, an options trader should consider various strategies appropriate and advantageous for the behavior of each stock.

27 CAT daily chart as of Nov 3, 2017 Caterpillar reported on Oct 24 th before the open, and triggered a gap up. CAT has been horizontal this week and has kept most all of those gap-up day gains.

28 DE daily chart as of Nov 3, 2017 DE continues its rally after breaking above prior Resistance (Yellow line) last Friday.

29 HD daily chart as of Nov 3, 2017 HD pulled back this week after making new highs late last week. The 20 day SMA (Yellow) provided support Monday-Wednesday this week, and then Thursday s drop happened in the sector. Note how HD found support Thursday at the 50 day SMA (Blue) and the Prior Resistance (White line) from the Cup and Handle pattern we pointed out in September. The bounce on Thursday recovered 50% of the dip that day, so we did not exit. Friday saw a return to the 20 day SMA but now as Resistance. Below we will look at some 2 min charts showing the big drop on Thursday to see what the markets looked like about an hour into the day, where we made our decisions regarding affected open positions. This is for educational purposes only. After many years of experience day trading and doing so when some unscheduled event occurs, you learn over time that most of the time the markets overreact at first, and over the next hour or two, absorb the new information and usually recover half or all of that initial over-reaction. Having seen this many times, we will watch the chart behavior on short term charts to see if the over-reaction recovers or not. In the event this week, we made our decision at about min. after the open, and exited only one of our three affected positions. The charts below help see what we saw at the time. DO NOT TRADE per these examples, but study the charts to see what I am sharing. Day Trading requires a very different set of skills, and thus requires excellent discipline and quick decisive decisions.

30 HD 2min. chart 7:40amPST Nov 2, 2017 We saw the dip and bounce on Thursday morning to decide if we should exit this position. The $2 bounce and positive momentum we saw at the right edge of this chart Thursday morning was sufficient to decide to hold onto our position.

31 TOL daily chart as of Nov 3, 2017 We see a very significant drop in TOL on Thursday to exceed the 20 day SMA. Note the Oct 11 th high (Yellow arrow) was Resistance until it was broken a week later. This prior Resistance was Support on Thursday of this week. As a reference, our initial position in TOL was entered at the Green arrow near the 50 day SMA. We rolled from Oct20 to Nov17 options contracts on Oct 20 th (Purple arrow).

32 TOL 2min chart as of 7:38amPST Nov 2, 2017 On Nov 2 nd we saw the drop right to the prior Resistance level (Yellow line) and bounced only about 12-13%. The last 2min candle on this chart is lower, so we pulled the trigger here to Exit or TOL position, since it was below our Stop level, and the bounce did not look too significant. Our initial position in TOL (Oct 20 expiration Options) made a very nice profit (+$305. per contract) and the Nov 17 expiration options that we were stopped out of on Nov 2 nd made for a small loss (-$5 per contract). The important this, was we Stuck to our plan, and our plan helps ensure losses are kept small, and winners are allowed to run.

33 DHI daily chart as of Nov 3, 2017 DHI also has been trending nicely since September. It too was hit with a dip on Thursday this week. Let s look at the 2 min chart below to see how we handled it.

34 DHI 2min. chart 7:38amPST Nov 2, 2017 DHI dropped $1.50 in the morning. This came very close, but did not trigger our trailing stop. Also, the following bounce was more than 50%, so we decided to hold on for now. I hope the examples I share, inspire you to study your charts to learn to see the messages and clues offered by the behavior of the markets. We all trade in different styles, as it should be. Each should trade a style that best fits their personality, beliefs, and skills. Many of the behaviors I point out can apply to different markets and different time scales. The most Important thing about learning is for you to test it out first yourself, before you ever consider risking the first dollar. This way you can confirm (or not) in the market behavior, and that will build confidence. Confidence helps one be prepared for ANYTHING, and we know from experience, that ANYTHING can Happen. Trade Smart, CJ