Market Observations - as of Oct 19, 2018

Transcription

1 Market Observations - as of Oct 19, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. Last week ended with a rather small bounce after a large volatile drop the prior days. This week began with a pause day Monday, that was a little less volatile and mostly inside the prior (Friday Oct. 12 th ) day s range. Tuesday gapped up at the open and rallied strong all day, but this rally could only recover a small portion of the prior week s losses. Wednesday saw a pause in the trend but with rather wide range swings due to the expanded volatility. Thursday saw a pull back to return nearly all of Tuesday s gains, and a return to support (S&P and NASDAQ) near the 200 day SMA. Friday formed nearly another inside day, as a pause in trend, but with price still oscillated with somewhat expanded volatility. The week ended nearly flat with the Dow and S&P up a tiny bit, and the Nasdaq and Russell down a bit from the prior week s close. The VIX pulled down a bit on Tuesday and Wednesday of this week, but remained well above 17% the first half of this week. Thursday and Friday saw the VIX rise back up above 19% most of those two days, and reaching well above 21% both days as selling spiked at times. When the VIX is above 20%, we see volumes increase as some Algos kick in. The week ended with the VIX just barely below 20% at 19.89%. Volatility, like people, can increase very quickly, but usually takes more time to calm back down. With the VIX above 20% all of the latter half of last week, and again for a fair bit of time this week, we should not think that the markets are back to normal. Odds favor more volatility will continue. We saw examples of different levels of fear behavior last week and again this week. What I call Level 1 is when we see signs of Sector Rotation, out of high growth stocks and sectors, and into Blue Chip large cap stable, low growth stocks. This is one level of reducing risks by funds and investors. What I call Level 2 is when the sector rotation shows more fear, and more aggressively (volume) money moves out of most sectors, and into Utilities, Consumer Staples, and Bonds, or other flight to safety stocks and sectors. What I call Level 3 is more of signs of panic, and we briefly saw that last week on Thursday (Oct 11 th ) where all sectors are aggressively sold off, and money moves to cash, Bonds or Gold. In Level 3 panic the VIX often reaches at least 25% or above. A whole lot of Algos may kick in when VIX reaches 30%, as we saw back in Feb. of this year. (Read my minute by minute forensic analysis from that event and period in my Market Observations at that time.) Another way to spot an expansion in market Volatility is to observe and note extremely Wide Range Days (or periods) on your charts. We saw wide range days on Oct 10 th, 11 th, 16 th and 18 th that were wider than any day over the prior 4-5 months. A very useful tool I like to use to spot and compare these spikes in range is the ATR (Average True Range) indicator developed by Welles Wilder many years ago. Most all charting packages have this study. I set one line to be a 1 period (1 day) ATR, and another to be a 14 or 20 period ATR. A 1 period ATR is a way to chart daily True Range, and by comparing the size of these spikes to others, we see a relative gauge of how volatile a period is, as compared other spike (events) or compared to Normal (a 14 or 20 period ATR). ATR can be used in many ways as a measure of price volatility of a stock, sector, or index you are looking at.

2 Not only do markets tend to move in cycles between low and high volatility (expansion and contraction), they also tend to move in cycles of Trending and Non-Trending, or pausing for a while, as if to regain some energy for the next move. What we have seen this week, was a pause, but with expanded Volatility. Overall, the week moved very little from where it closed last week. What we did see was a rather strong up day Tuesday, with no follow thru on Wednesday, then a strong down day on Thursday. Most all the gains from Tuesday were given back on Thursday. That is not a bullish clue that the correction is done. It suggests a bit higher odds of more correction could be coming, or the bulls and bears are still struggling without a clear winner, but brief wild swings that do not show continuation. These observations suggest the Odds higher that we at least see more chop, or more likely more selling to retest or break below the Support from last week s lows. In a bearish scenario, the markets could even drop to retest their April lows. In a bullish scenario, the markets could rally to exceed last week s highs. Anything can happen, so we prepare for multiple scenarios, because we can often be wrong. For now, my portfolio is mostly populated with bearish positions, with ample cash at the ready, and a token bullish position just in case I am wrong at assessing the odds. We have lots of charts to look at, so let s begin by looking at the overall markets by way of the major indexes. S&P 500 weekly chart as of Oct 19, 2018 We see a minor pull back from new All Time Highs the first week of Oct. breaking below the Trend Line Support (Orange line), followed by a larger drop the 2 nd week down thru the 20 week SMA (Yellow) and to the Long term Trend Line Support (Red line) and the 50 week SMA (Blue). This week was nearly flat, up just a little while continuing to respect the Trend Line and 50 week SMA.

3 S&P 500 daily chart as of Oct 19, 2018 Here we see price break below the Trend Line (Orange), then below the 20 day SMA (Yellow) and next the 50 day SMA (Blue). Note the very large drop on Oct 10 th right after the 50 day SMA failed as Support. This is a flush as major support broke and LOTS of sellers pushed prices lower, both sellers who were closing out long positions, AND sellers that were entering Short positions. Both groups were doing the same thing at the same time, giving plenty of fuel to the down side move. The following day (Oct. 11 th ) we see more selling as the 200 day SMA (Purple) broke followed by the long term Trend Line Support (Red line) that goes back nearly 3 years. Friday Oct. 12 th was an inside day (higher lows and lower highs) as a pause in the selling needed time to digest the wild moves the prior 2 days. That was all last week. This week we see a pause continue Monday with another inside day then a strong bounce on Tuesday (Oct. 16 th ) to close above Wednesday was a pause Inside day with NOT follow thru to the up side from the prior day, suggesting the buyers are done. Thursday saw a strong selling day right back to the 200 day SMA where the prior week had closed, returning all of Tuesday s gains. This is yet another bearish clue, that the sellers were a bit more persistent and maybe not done. Friday was an inside day as Options Expiration worked its way to little change and a close for the day and week near the 200 day SMA. With very little recovery of last week s losses, this week, we end this week on a mostly bearish note. The more time spent at or near last week s support, and the smaller the bounces are above that support, the odds increase of that support eventually breaking. We see a similar story in the other indexes this week, as well as in many charts. Looking for exceptions could be a way to get clues for when markets change eventually.

4 DJIA weekly chart as of Oct 19, 2018 The Dow dropped hard last week, then only bounce a very little this week while remaining above its 50 week SMA and long term Trend Line (Red line). DJIA daily chart as of Oct 19, We see the similar drops last week in the Dow as we saw in the S&P, as well as the one day rally this week on Tuesday, then giving it all back on Thursday. Note that the Dow did manage to remain a little above both its 200 day SMA (Purple) and its long term Trend Line (Red line) all of this week. However, the shape of this week is about the same, a small bounce off of Support (Red Trend Line) last week.

5 NASDAQ weekly chart as of Oct 19, 2018 The Nasdaq broke down the first two weeks of this month, and bounced a little last week to close above its 50 week SMA (Blue) and near its long term Trend Line (Red line). This week remained just above the 50 week SMA but closed down a little just below the Trend Line. NASDAQ daily chart as of Oct 19, 2018 Here we see the Nasdaq bounce a bit last Friday (Oct 12 th ) to close on the 200 day SMA (Purple). This week rallied Tuesday, then gave it all back on Thursday, and dropped a bit on Friday to close the day and week BELOW both the 200 day SMA and the long term Trend Line (Red line). These are not exactly bullish clues, when the bears seem to show us a bit more Conviction than the bulls.

6 Russell 2000 weekly chart as of Oct 19, 2018 The Russell began its drop 6+ weeks ago, after delivering a new All Time High at the end of August. Note the acceleration the 1 st week of Oct. as the 20 week SMA broke (Yellow) and last week as the 50 week SMA broke (Blue). This week was relatively flat in comparison, was inside the prior week s range, and close down just a little. Russell 2000 daily chart as of Oct 19, 2018 Here we can see a slowly accelerating decline from the day that the 50 day SMA broke (Sept 26 th ) with a large range day that day (a Flush ). We also see a Flush on Oct. 10 th when the 200 day SMA (Purple) broke. Thursday (Oct. 11 th ) saw continued selling and Friday saw support found just above May 1 st lows (Grey line). This week saw and Inside day on Monday,

7 then a Rally on Tuesday. The last 3 days of this week saw all gains given back for the week and a close down pts for the week. This week seems like a good time to look back at the Influence the 5 FAANG stocks have had on the markets over the past few years. Since the S&P-500 s largest sector is now Technology (previously the largest sector was Financials), and the Nasdaq has always been Technology heavy, we will look at the Weighting of these 5 FAANG stocks: FB, AAPL, AMZN, NFLX and Alphabet (GOOG + GOOGL) on the Nasdaq-100 (QQQ) Index. Currently the Weighting of the top 25 stocks in the QQQ looks like:

8 The combined Weight of the 5 FAANG stocks in the QQQ (Nasdaq 100) index looks like: As of Total Weight Oct % May % May % As you can see, when all 5 FAANG stocks are combined, they have a very significant and GROWING influence on the Nasdaq-100 over time. The QQQ (Nasdaq-100) is Cap. Weighted, like all indexes except the Dow. These same 5 stocks are also all components within the S&P-500 index, and combined currently represent 12.4% of the S&P-500, and only have 1/3rd the influence on the S&P as they do on the Nasdaq-100. Below is a chart constructed by finding the DIFFERENCE between the Nasdaq-100 (QQQ) and the Equal Weighted Nasdaq-100 (QQQE) as a way to see if there has been a much of an influence over recent years due to the Cap. Weighting of the index vs. the same index but with every stock being equally weighted. [The QQQE data is adjusted with a 3.45 multiplier in order to equalize these two different ETFs for a fair comparison of the data.] DIFFERENCE between Nasdaq-100 and the Equal Weighted Nasdaq weekly chart as of Oct 19, 2018 Note the box that the difference was within for over two years (Q Q4 2015), then shifted upwards a bit in mid 2015 (the same time as when markets corrected a bit that year) to another box for almost two years (Q Q2 2017). This suggests that the differences between these two ETFs

9 has been mostly relative and stable. This relationship changed in mid 2017 as a slope began with a break out above the prior box and has continued upwards to date. The two Simple Moving Averages (Blue 10week = 50day, and Purple 40week = 200day) also show this change from horizontal to upwards. This slope could be due to large cap. stocks becoming larger and increasing their weighting, which then causes fund managers to buy more as they must keep up with the markets greater weightings of high growth stocks (like FAANG stocks). Fund manager s performance is compared to major indexes, and they are motivated to do better than those indexes in order to justify their performance and fees. If the indexes are on a major bull trend, then they must buy more of the strongest stocks just to keep up. Another influence could be the growing popularity amongst investors to just buy Index Funds to improve their performance and simplify their portfolios. This is most common in a strong bullish market. It is impossible to know exactly what really is driving this relationship higher, but it does alert us to the potential for higher volatility when markets do change, and we saw that this Month. Note how we have seen more often than not, over the past weeks and months, many days where the Nasdaq has shown both stronger up swings than the other indexes, and stronger down swings than other indexes. This correlation of higher volatility in the Tech heavy Nasdaq can be due in part to the relatively heavy influence of big tech on the indexes (as we saw in the above weightings), and we have seen evidence of that relationship in the Equal Weighted Difference chart above. Next, let s look at a few Market Internals. NYSE Advance/Decline Line daily chart as of Oct 19, 2018 The Advance/Decline line dropped the prior two weeks as the markets dropped, but then has remained mostly flat this week.

10 McClellan Summation Index daily chart as of Oct 19, The McClellan Summation index is like an accelerometer on Market Breadth. Last week we saw acceleration downward to new lows for This week we see more downward movement, but not as strong, with much less gaps between days than seen in the prior week. It ended this week still pointing down. VIX daily chart as of Oct 19, The VIX was stable Monday, near where it closed on last week. Tuesday saw a decline as the markets rallied. Wednesday was a pause, and Thursday saw the VIX pop back up to over 20%, but not as high as the prior week s climax on Oct. 11 th. This week ended just barely below 20%. This shows that there is still elevated fear and uncertainty in the markets. Next we will look at a few key commodities.

11 OIL daily chart as of Oct 19, 2018 Oil was quiet the first two days of this week, remaining in a narrow range and below its 20 day SMA (Yellow). Wednesday saw a drop in Oil back to the 50 day SMA (Blue). Thursday and Friday saw some normal oscillations as Oil traded under the 50 day SMA and back Inside its box (Range) from the prior months (Grey box). GOLD daily chart as of Oct 19, 2018 Gold remained inside a narrow range all of this week, keeping the gains from the prior week and establishing a new ( Box ) range just above the prior month s range. We do NOT see elevated volume this week, but did last week on Thursday (Oct. 11 th ) when fear briefly Climaxed.

12 US Dollar Index daily chart as of Oct 19, 2018 The US Dollar spent the first 2 days this week, right where it left off at the end of last week, in a narrow range near its 20 day and 50 day SMAs. Wednesday and Thursday saw a mild strengthening of the US Dollar above its 20 day and 50 day SMAs and above the Box it has been inside of most of the time over the prior 4 months. This week ended with a close right on the Resistance level (top) of this range (Box). TYX 30 Year daily chart as of Oct 19, 2018 The 30 year Treasuries Index rallied the last two days of this week but did not exceed the prior week s highs. We will keep a close eye on these to see if Resistance is retested.

13 Next we will look at several key Sectors to see what the charts tell us about this week. Dow Transports daily chart as of Oct 19, The Down transport rallied mid-week to test Resistance at the 200 day SMA (Purple) then fell back down to nearly the lows of the prior week. Even though oil was down this week, the Transports did not see a rally but selling to close the week down about -0.5% from last week. XLE daily chart as of Oct 19, 2018 Energy did NOT see a strong rally on Tuesday with the rest of the markets, but did see some mild selling on Thursday and Friday. XLE closed the week down -2.0%.

14 XLF daily chart as of Oct 19, 2018 XLF did rally a bit on both Tuesday and Wednesday, then gave back all of Wednesday s gains and half of Tuesday s gains on Thursday. Friday saw a bit of a bounce to close the week up 0.9%. QQQ daily chart as of Oct 19, 2018 Monday retested support at the 200 day SMA, and then we saw a strong rally on Tuesday. Wednesday paused and Thursday gave back all of the week s gains plus more. Thursday and Friday remained just barely above the 200 day SMA support. QQQ close the week down %. FYI, the QQQ is now down about -7.7% from its All Time Highs on Oct. 1 st. Compare the size of this correction to each of the 5 FAANG stocks (below).

15 SOXX daily chart as of Oct 19, 2018 The Semiconductor stocks also tried to rally on Tuesday, but ended the week giving it all back plus some. The SOXX closed Friday down -2.0% for the week just above its April lows (Grey line). XLC daily chart as of Oct 19, The limited history for the new XLC shows us the rally Tuesday was all given back by the end of this week. XLC closed up 0.8% for the week, keeping most of its bounce from the prior week.

16 XLY daily chart as of Oct 19, 2018 The XLY began the week on its 200 day SMA, rallied Tuesday, then gave all those gains back plus more to close the week below both its 200 day SMA and its long term Trend Line Support (Red line), down -1.9% for the week. XLU daily chart as of Oct 19, 2018 Utilities was one of the few beneficiaries of this month s bearish market action. The XLU rallied up from its 20 day SMA on Monday and launched off of its 50 day SMA support on Friday to close the week up 3.1%. Note the strong volume on Friday, as more investors appear to seek some safety.

17 XLP daily chart as of Oct 19, 2018 Consumer Staples is another classic sector that is attractive to investors seeking safety, and we saw that happen every day this week. After the panic selling climaxed last week (Oct. 11 th ) as the 200 day SMA broke, we saw all of those losses recovered plus more this week, as the XLP crossed above its 20 day SMA on Thursday, and gapped above its 50 day SMA on Friday, closing the week up 4.4%. Note the above average volume every day this week. XRT daily chart as of Oct 19, 2018 The Retail sector started to break down from the crosses below the 50 day SMA in last Sept, with a wider range day on Oct. 1 st. The very next day (Oct. 2 nd ) we see the Flush wide range day on very high volume as lots of folks saw the break below the 50 day SMA and sold to drove prices down below the Jan. highs (Green line prior Resistance) to near the early Aug. lows. We see another flush day as the long term Trend Line Support (Orange line) and the 200 day SMA were both broken (Oct. 10 th ). The next day saw a little lower lows, then a bounce last Friday to close under the 200 day SMA. Monday of this week was quiet, then a rally above the 200 day SMA on Tuesday, followed by giving all that back on Wednesday. Thursday and Friday saw more selling as the prior week s lows were exceed and the XRT closed down -2.5% for the week.

18 XHB daily chart as of Oct 19, 2018 Monday was quiet, and then a small bounce on Tuesday was all given back the following day. On both Thursday and Friday we saw more Lower Lows as XHB closed the week down -3.5% XME daily chart as of Oct 19, 2018 XME could hardly rally the first 3 days this week, with very narrow range days. Thursday and Friday saw strong selling as XME closed the week down -1.4% and nearly retesting the lows from the prior week. Next, let s look at some key stocks, beginning with the FAANG stocks, due to their significant influence. Look carefully at the chart patterns for each of these 5 stocks to see if they are similar to each other, or if they are similar to the Nasdaq-100 (QQQ) chart, for this week, and this month. Note any differences, since those could be useful relative clues.

19 AAPL daily chart as of Oct 19, 2018 AAPL remained in a narrow range all of this week, dancing above and below its 50 day SMA. Note how the 20 day SMA has been mostly flat and horizontal for a month or more. AAPL is now down only about -6% from its All Time Highs on Oct. 10 th, making AAPL the strongest of the 5 FAANG stocks as measured by the least amount of correction from its 2018 highs. AMZN daily chart as of Oct 19, 2018 AMZN dropped very hard on Oct. 10 th and found support on the next day. All of this week AMZN remained above last week s lows as it briefly found Resistance on Wednesday this week near its long term Trend Line (Red line) prior Support. Thursday and Friday gave back any small gains seen on Tuesday to end the week down pts. from the prior week. AMZN is now down about -13.9% from its All Time Highs on Sept. 4 th, making AMZN the second strongest of the 5 FAANG stocks.

20 GOOGL daily chart as of Oct 19, 2018 GOOGL tried to rally a bit on Tuesday and Wednesday of this week, but could not remain above its 200 day SMA resistance. Thursday saw strong selling to give back all of this week s gains plus a little. Friday was quiet as GOOGL closed the week down pts. below its 20 day SMA and just above its long term Trend Line Support (Red line). GOOGL is now down about -14.4% from its All Time Highs on July 27 th, making GOOGL the third strongest of the 5 FAANG stocks. NFLX daily chart as of Oct 19, 2018 NFLX retested support at its 200 day SMA Monday, rallied Tuesday before Earnings that evening. Earnings reactions saw a fast brief spike to $405 in afterhours trading to above that sold off slowly down to $378 by the Open on Wednesday. Wednesday s selling gave back a significant part of the overnight gains as NFLX sold down to $356.5 during the day, then saw a small bounce the last 90 min. of trading up to a close at $ Thursday saw more selling, crossing below the 20 day and 50 day SMAs and filling the gap from Tuesday s earnings day close. Friday saw even more selling as NFLX dropped to nearly the 200 day SMA. Overall, NFLX has a rollercoaster week, but remained Inside the consolidation triangle formed by Trend Line Resistance (upper Orange line) and

21 200 day SMA Support (Purple). NFLX is now down about -21.4% from its All Time Highs on June 21 st, making NFLX the fourth strongest of the 5 FAANG stocks. FB daily chart as of Oct 19, 2018 FB had a small rally on Tuesday, then a test of Resistance at the 20 day SMA on Wednesday. Thursday and Friday saw selling that gave back most this week s gains. Friday saw FB close up only 0.31 pts. FB is now down about -29.5% from its All Time Highs on July 25 th making FB the weakest of the 5 FAANG stocks. NVDA daily chart as of Oct 19, 2018 NVDA hardly had must of a rally this week on Tuesday and retested Resistance at its 20 day SMA several times this week. Friday saw strong selling (with volume) to break below both the prior week s lows and the July 2 nd lows (Blue line) to close the week down - 7.0%.

22 AMD daily chart as of Oct 19, 2018 AMD ended last week on the 50 day SMA, and began this week there as well. Tuesday s rally could not reach the 20 day SMA. Wednesday and Thursday s selling brought AMD back down to its 50 day SMA. Friday saw strong selling in the sector that dropped AMD below its 50 day SMA with the strongest volume of the week, breaking below the prior week s lows (Grey line). Friday was a Flush day as support clearly broke down and was the widest range day since Sept. 13 th. INTC daily chart as of Oct 19, 2018 INTC was quiet Monday then rallied a bit on Tuesday with a test of Resistance on Wednesday at its 20 day SMA. Thursday and Friday saw selling nearly down to the prior week s lows with above average volume both days.

23 SQ daily chart as of Oct 19, 2018 SQ saw a tiny rally on Tuesday, but then gave it all back the next two days. SQ closed the week nearly flat. V daily chart as of Oct 19, Visa saw a flush day on Oct. 10 th with a dip and bounce the next day once support was found near $ Friday of last week saw a bounce to close near $140. This week was mostly horizontal, but kept most all of the bounce from late last week, closing up 2 cents from the prior week.

24 GS daily chart as of Oct 19, 2018 GS began the week near its lows from the prior week. A rally Tuesday and Wednesday brought GS back above its descending 20 day SMA. Thursday and Friday remained in a narrower range just above the 20 day SMA, ending the week by keeping most all of its bounce this week. BA daily chart as of Oct 19, 2018 BA remained near its 50 day SMA on Monday, saw a rally on Tuesday that failed to touch the 20 day SMA. Wednesday and Thursday gave back all of Tuesday s gains and returned to the 50 day SMA. Friday broke down a little to close the day and week below the 50 day SMA and just above last week s lows.

25 CAT daily chart as of Oct 19, 2018 CAT was quite below its 50 day SMA the first 3 days of this week, then broke down with wide range days on both Thursday and Friday to break and close Friday below its June 28 th lows (Grey line). Note the very strong volume on Thursday and Friday this week as the flush occurred once price broke below $140. HD daily chart as of Oct 19, 2018 Similar to CAT, HD straddled its 200 day SMA the first 2 days of this week, then broke down ( Flush ) with a gap down at the open on Wednesday selling down to the May 30 th lows (Yellow line). Thursday saw more selling that broke below the May 3 rd lows (Blue line), and a little more selling on Friday. Note the above average volume on the last 3 days of this week.

26 TSLA daily chart as of Oct 19, 2018 Tesla was quiet on Monday, then gapped up and rallied on Tuesday. Wednesday saw the 20 day SMA tested as Resistance before pulling back down. Thursday and Friday saw more selling that ended the week nearly flat, just above its long term Trend Line (Orange line) and April 2 nd lows (Yellow line). JNJ daily chart as of Oct 19, 2018 JNJ is considered to be a Healthcare, drug, and Consumer staple by many. I thought I would look at an example of a stock that benefitted this week from the flight to safety mode we have seen in out sector charts. Note that JNJ rallied strong the first 3 days of this week, crossing above both its 50 day and 20 day SMAs on strong volume. The last 2 days of this week were quiet as JNJ remains near its prior highs from earlier this month, and not far from its Sept. highs. As you have seen from the charts this week, most had a similar story of a one day rally on Tuesday, and a give it all back on Thursday. The exceptions to this are worth noting, since they could be weaker

27 than the average stock (like CAT or HD), or could be stronger than the average stock (like JNJ or AAPL). These outliers can sometimes be found by carefully evaluating the various sectors for relative clues of either strength or weakness. Remember, anything can happen, so be prepared for multiple possible scenarios. Trade Smart, CJ