Market Observations - as of Jul 20, 2018

Transcription

1 Market Observations - as of Jul 20, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week we saw mostly consolidation and little change from the prior week s close. For this week the Nasdaq closed down 5.7 pts, the S&P was up barely a half a point, the Dow was up less than 39 points and the Russell 2000 was up 9.73 pts. Volatility remained relatively low all week as well. With July Options Contracts expiring on Friday of this week, we are reminded that it is not uncommon to see trends pause for a day or so in front of expiration, as fund managers settle or re-new their hedges using options, and options traders look to exit their positions before they expire. On a daily basis, we did see some brief changes in sector leadership, often lasting no more than one day as they appear to be reactions to earnings from a key component stocks within that sector. Monday saw Financials rally after BAC reported. Tuesday we saw much of the tech sector gap down at the open after NFLX reported, then rally strong most the day to provide the widest range day of this week. Transports saw their strongest day of the week on Wednesday after CSX reported. Financials again rallied on Wednesday after MS reported. Earnings continue this next week, so keep an open eye and know when any stocks in your portfolio may be scheduled to report. We also noted on Monday, that the S&P Futures (ES contract) saw the lowest volume traded since Christmas 2017 (for a full trading day not counting the half day on July 3 rd ). Also worth noting, is that S&P index Options remain underpriced much of this year, where actual price swings in the S&P have often exceed the expected moves defined by Options Implied Volatility. We also saw an extreme in volatility SKEW on Wednesday of this week, at We have not seen SKEW this high since March Volatility skew is a measure of S&P Out-Of-The-Money Puts option s Implied Volatility as compared to Out-Of-The-Money Call s IV. When the demand for Puts spikes up and OTM Put IV along with it, while at the same time Supply of Calls increases and IV drops as a natural action, we see a Skew in the Volatility curve. This happens when the fat tails (probability curve 2 standard deviations) are getting fatter. This can happen when large fund managers get nervous, or increase their portfolio protection (buying OTM Puts and selling OTM Calls to help fund that insurance cost). Historically, High Volatility Skews have not been very good at foretelling of pending drops in the markets. I believe it does show the sentiment of a large number of big players who are getting a bit more uncertain about the markets.

2 SKEW daily chart as of July We do see a large spike near the Brexit event in 2016 and a small spike near the US Elections in Nov The March spike correlates with Quad Witching, as do several other spikes. This week was July expiration, and SKEW spiked in front of that event. Fund managers will roll their hedges often around these expiration events, and that is likely where most of the activity occurs that can increase the SKEW briefly. Sept SPY Options Volatility Skew as of July The SPY was trading near 280 at the time. The horizontal scale shows the option Strikes, and the vertical scale shows the Implied Volatility percentages. To the Left of 280 are the out of the money Puts, and to the right of 280 are the out of the money Calls. If a lot of fund managers decide to adjust or increase their hedges, then out of the

3 money Puts tend to see greater demand and their IV will naturally increase. If at the same time the out of the money Calls are being sold, and there is a lot of Supply, then this tends to decrease their price and Implied Volatility. This combination of actions will have the effect of increasing the SKEW value, as we saw this week. Even if you do not trade options, paying attention to the VIX (based on at-the-money S&P Options btw) and to SKEW, one can recognize changes in market sentiment, and that clue can help one to focus on finding likely opportunities knowing better what the market could be feeling and might be more likely to do. Now that we have introduced you to yet another Market Internal - sentiment indicator (SKEW), it is time to look at the charts, starting with the major indexes, and see what the markets are telling us this week.

4 S&P 500 weekly chart as of Jul 20, 2018 S&P 500 daily chart as of Jul 20, 2018 Here we see a very quiet Monday, then gains on Tuesday and Wednesday this week, then a pullback Thursday and Friday to end the week back nearly flat as the S&P return to its March highs near

5 DJIA weekly chart as of Jul 20, 2018 The Dow barely changed this week, chopping sideways near its May highs and its Trend Line Resistance just above 25,000. DJIA daily chart as of Jul 20, 2018 The Dow could not exceed its June highs, so it remains inside of a consolidation pattern as it loiters on its Trend Line Resistance (Orange line). The small gains on Wednesday were returned before the end of this week.

6 NASDAQ weekly chart as of Jul 20, 2018 The Tech heavy Nasdaq also chopped sideways this week after recovering its late June dip. NASDAQ daily chart as of Jul 20, 2018 The Nasdaq saw a quiet Monday on light volume, then a gap down at the open Tuesday (in sympathy with NFLX?) to then rally strong all day and deliver new all time highs late in the day. The rest of the week saw a quiet descent back to end the week nearly flat.

7 Russell 2000 weekly chart as of Jul 20, 2018 The Russell ended the week up a little, but failed to exceed the prior week s new record highs. Russell 2000 daily chart as of Jul 20, 2018 Here we see the bounce off of the 20 day SMA (Yellow) support Monday and Tuesday this week, followed by a small rally Wednesday and Thursday. Friday saw a small pull back to end the week up over 9 pts. Next we will look at a few Market Internals to see what overall breadth did this week.

8 NYSE Advance/Decline Line daily chart as of Jul 20, 2018 NYSE breadth was mostly unchanged this week. McClellan Summation Index daily chart as of Jul 20, 2018 Market Breadth acceleration was not seen this week, as the Summation Index remained nearly flat.

9 VIX daily chart as of Jul 20, 2018 The VIX remained low and under all of its SMAs this week, showing no fear and a complacent market. Next let s look at a few key commodities and currency. OIL daily chart as of Jul 20, 2018 Oil dropped on Monday below its 50 day SMA (Blue) and then remained below its 50 day SMA and in a narrow range the rest of this week (between $66.3 and $68.8).

10 GOLD daily chart as of Jul 20, 2018 Gold continued to drop this week before finding support on Thursday at The small bounce Thursday and Friday helped to close Gold at for the week. US Dollar Index daily chart as of Jul 20, 2018 The US Dollar rallied stronger this week, delivering a new high briefly on Thursday. The drop on Friday gave back all of the gains this week and then some, while remaining above its 50 day SMA (Blue). Overall the dollar remains in a range the past two months.

11 TLT daily chart as of Jul 20, 2018 Here we see quiet chop until the drop on Friday below the 20 day SMA (Yellow) and below the 200 day SMA (Purple). Next we will look at a few key sectors. Dow Transports daily chart as of Jul 20, 2018 The Transports rallied on Wednesday, gapping above its 20 day SMA and crossing and closing above its 50 day SMA (Blue). The rest of this week saw chop near and closes above the 50 day SMA.

12 XLF daily chart as of Jul 20, 2018 The Financials are alive, with a rally on Monday and Wednesday of this week, crossing above their 50 day and 200 day SMAs. Thursday saw a drop back to support near its 50 day SMA, and Friday a small bounce to close the week just above this SMA. The Descending Trend Line (Green) was broken on Wednesday, but price could not seem to remain above this Resistance area. The Financial sector has been one of the weakest sectors for several months, and it seems to struggle to get a rally going. Time will tell. XLE daily chart as of Jul 20, 2018 The Energy sector has mostly chopped sideways for three months, even while Oil has rallied to new 2018 highs and pulled back over 9% in the past month.

13 QQQ daily chart as of Jul 20, 2018 The Tech heavy QQQ chopped sideways and quiet (narrow range days) all week except for on Tuesday. Tuesday saw a significant gap down at the open, then a rally all day to new all time highs before the end of the day. Clearly Tuesday was the widest range day of the week for Tech. Much of this action seemed to be related to the negative reactions after NFLX reported on Monday after the close. The XLK and XLY charts for this week look very similar to the above QQQ chart, in part due to the significant weighting of the f.a.a.n.g. stocks within these sector ETFs. SOXX daily chart as of Jul 20, 2018 The widest range day for the SOXX was also on Tuesday, with the rest of the days this week feeling rather quiet. Resistance was tested on Wednesday at the 50 day SMA and respected. The week closed above the 20 day and below the 50 day SMAs and up about 2.5 pts for the week.

14 XRT daily chart as of Jul 20, 2018 The Retail sector rallied on Tuesday to cross above its 20 day SMA and then again on Thursday to retest Resistance near its June 9 th highs (Grey line). Friday saw Thursday s gains returned for a close this week over 0.9 pts. above last week s close. XME daily chart as of Jul 20, 2018 XME chopped sideways most of this week, with the exception of a rally on Tuesday (cross above its 20 day SMA) and Wednesday to test Resistance at the 50 day SMA. Thursday saw most of the week s gains returned and Friday closed back above the 20 day SMA and a close up 0.17 above the prior week s close. Not shows this week are the XLV, IBB, XLU, XLB and

15 XLI daily chart as of Jul 20, 2018 Industrial rallied Wednesday to cross above its 50 day SMA just to find resistance at its 200 day SMA (Purple). The rest of the week chopped sideways between these two SMAs. Next we will look at a few key stocks to see what their charts tell us this week. AAPL daily chart as of Jul 20, 2018 Apple delivered alternating days within a narrow range this week to end this week up $0.11 from last week. Clearly a pause in the trend this week, just below its all time highs from early June.

16 AMZN daily chart as of Jul 20, 2018 AMZN delivered new all time highs the first three days of this week, then pulled back a little on Thursday and Friday to end the week up only $0.67. NFLX daily chart as of Jul 20, 2018 NFLX reported earnings after the close on Monday, and fell to $ in the overnight session. The Gap down and rally on Tuesday recovered about 2/3 of the drop ($40 rally); however half of that recovery ($20) was given back over the slow downward slide on Wednesday through Friday. The big gap down at the open followed by a 3 hour rally on Tuesday gave day traders something to ride. NFLX ended the week below its 50 day SMA. Not since April 9 th had NFLX closed below its 50 day SMA. All of the June gains were given back by the end of this week.

17 We saw much of the f.a.a.n.g stocks and tech sector move over a wide range on Tuesday, appearing to be in sympathy with NFLX, however most stocks closed the day with net gains after a gap down at the open. Not so for NFLX. FB daily chart as of Jul 20, 2018 FB mostly saw quiet and horizontal days this week, except for the whip saw, gap down and rally, on Tuesday. FB closed the week with a $2.62 gain for the week. GOOGL daily chart as of Jul 20, 2018 GOOGL also saw the whip saw on Tuesday, but gave back all of its gains from Tuesday and Wednesday by the end of this week. GOOGL was down $6.54 for the week.

18 MSFT daily chart as of Jul 20, 2018 MSFT reported earnings after the close on Thursday and rallied to $109.3 in the afterhour s session. Friday s open at $ saw a steady decline most of the day to end the week at $ after delivering new all time highs Friday. AMD daily chart as of Jul 20, 2018 AMD chopped sideways this week, remaining within a narrow range and closing the week up $0.23.

19 GS daily chart as of Jul 20, 2018 GS rallied on Monday to then struggle above and near its 50 day SMA the remainder of the week. It ended the week just above its 50 day SMA. Like GS, JPM also rallied on Monday of this week and crossed above its 50 day SMA, then mostly chopped sideways the rest of this week. V daily chart as of Jul 20, 2018 V continued to ignore the Financial sector, and delivered more new all time highs on both Wednesday and Friday this week. V closed the week up $1.57.

20 SCCO daily chart as of Jul 20, 2018 SCCO chopped sideways in a narrow range on Monday and Tuesday then rallied to test resistance at its 20 day SMA on Wednesday. Thursday saw a gap down and drop to new lows for 2018 with only a small bounce on Friday. The bearish trend continues with confirmed lower lows and lower highs since mid April. DE daily chart as of Jul 20, 2018 DE s bearish trend continued Monday and Tuesday this week, with lower lows each day. The Rally on Tuesday was the widest range day this week, and broke above the prior day s highs and last Friday s (July 13 th ) lows and close. The following two days saw this bounce continue with less momentum to find Resistance on Thursday at the 20 day SMA again. Friday saw a small drop from this confirmed resistance. We see both lower highs and lower lows over the past two months, and no real signs yet of the bear trend being done. A Failed New Low (a higher low) would be an example of a clue of a bear trend that may be ending.

21 BA daily chart as of Jul 20, 2018 The Rally in BA that began about July 9 th continued the first half of this week, with BA finding and respecting the old Resistance at the Feb 1 st highs (Purple line) on Wednesday. The small pull back Thursday and Friday remained well above the 50 day SMA.

22 HD daily chart as of Jul 20, 2018 HD broke above its Trend Line Resistance (Green line) briefly on July 9 th, then crossed and closed above its 20 day SMA (Yellow) the following day. We have seen a steady rally since with the prior June highs (June 15 th ) being exceeded on July 18 th. We have seen higher highs (higher than the prior day) every day this week except for on Monday. No signs this week that the HD rally is done. Time will tell. A big key to successful trading: is carefully & always managing your risks. If you can do that, then you can keep your losses small. If you can also learn to be patient to let the winners run, then do so until THEY say that they are done. Focus on limiting your risks, and the profits will take care of themselves. This sounds simple, and it is. But it is NOT easy. Trade Smart, CJ