Market Observations as of Jan 26, 2018

Transcription

1 Market Observations as of Jan 26, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week we saw the fourth bullish week of 2018 delivered in most all the major indexes. The S&P, Dow and Nasdaq each delivered new all time highs on either 4 or 5 days this week. The Russell 2000 continues to struggle some, but was able to deliver new highs at least twice this week and ended the week up a little. Market breadth expanded a little more this week, suggesting the bull trend is not done yet. Earnings have been mixed so far, but we are beginning to see a few more upside beats than downside misses against analyst expectations. A large number of companies report earnings this next week including many of the Big Names, so keep an eye open for these potential reactions or risks to your portfolio. This earnings season is interesting since lots of folks are listening for details regarding tax savings amounts, and what companies plan to do with these funds. This type of news can act as a catalyst for amplifying reactions. You can avoid some surprises by keeping track of the earnings calendar and your portfolio. Remember, Anything can happen. The Big story this week was the continuation of the weakening US Dollar. The US Dollar Index broke down even more Wednesday and Thursday to new 3-year lows, with an exhaustion bounce Thursday and Friday that ended the week at new Weekly Close Lows. This drop in the dollar added fuel to dollar priced commodities that rallied to new Highs on Thursday (see Gold and Oil charts below). This inverse correlation is common to see in the charts between the US Dollar Index and most Commodities. The Financial sector continued its bullish trend this week moving up with nearly all of its sub-sectors participating. The Semiconductor sector started this week (Monday and Tuesday) with a continuation of its bullish trend until was hammered back down hard on Wednesday and Thursday of this week. TXN earnings gap down Wednesday seemed to fuel some of the reactions in the sector. Friday saw a bit of a bounce back to end the week up only a small amount. The Technology sector mostly remained strong this week. One of the strongest sectors this week was Healthcare and Biotech. Metals & Mining and Homebuilders were mostly horizontal sectors again this week. Industrials continued to pause most of this week, ending near Resistance. Utilities seemed to finally find some support Monday, after falling hard since early December. We saw a small bounce the last few days. Now let s look at some charts to see what they are telling us about the markets.

2 S&P 500 weekly chart as of Jan 26, 2018 Clearly we see four up weeks in a row since the first of this year. We also see how last week was a smaller range up week compared to the other three. If anything the bull trend appears to be strengthening here. S&P 500 daily chart as of Jan 26, 2018 Here we can see that Wednesday and Thursday of this week opened higher than their close (red candles) but did not break the trend in any way. You can visualize a support trend line drawn at the lows since the beginning of 2018 and that line has not been violated yet. Also note how the 20d 50d and 200d SMAs are all beginning to bend upwards at the right. Yet another clue to the strengthening trend.

3 DJIA weekly chart as of Jan 26, 2018 Similar to the S&P, we see four up weeks in a row since the first of this year. Last week was the smaller advance of the four, and the SMAs are all bending upwards. DJIA daily chart as of Jan 26, 2018 The Dow was a little different than the S&P this week in that it paused on Tuesday and Wednesday. The Dow did end the week on a strong up day after delivering all time new highs every day this week. Note how the wider range days this week were smaller than last week on Jan 16 th. We can see this by looking in the lower part of this chart at the White (1-period ATR) that is actually the True Range where as the Yellow line is the 14-period Average True Range.

4 Comparing the size of these White Spikes is an easy way to see if price volatility has increased or decreased when comparing volatile reactions to events. This trend shows no signs of stopping, yet. NASDAQ weekly chart as of Jan 26, 2018 The Nasdaq also delivered a fourth up week this year, with the smaller week being last week. NASDAQ daily chart as of Jan 26, 2018 Here we can clearly see a pull back after the new high open on Wednesday, and then a lower high on Thursday. The Nasdaq delivered new all time highs 4 of 5 days this week with no signs yet of quitting this trend. Note how all 3 SMAs are bending upwards and the spacing in-between the 20 day and 50 day is widening, more signs of a mild acceleration.

5 IWM daily chart as of Jan 26, 2018 The Russell has been the lagging index for over a year now, with 2018 continuing this behavior. Although less dramatic, the Russell did deliver new all time highs the first three days of this week as it continues its slower upward trend. NYSE Advance/Decline Line daily chart as of Jan 26, 2018 Market breadth has been slowly increasing the past two months and increased a small amount again this week. No clues here of this trend being done.

6 McClellan Summation Index daily chart as of Jan 26, 2018 We see that Market Breadth has been increasing its velocity a small amount again this week. VIX daily chart as of Jan 26, 2018 Options Implied Volatility did see a very small increase last week (on Jan 16 th and the open on the 17 th ) when we saw a wide range day that opened high and closed low in most of the indexes. This week we saw the drift back down to below 12% with support near 11%. This brief spike last week got a lot of experts excited and talking about a market correction. Must have been the same experts that predicted the market crash if Trump was elected. Just watch the charts and ignore the experts works well for me.

7 UUP weekly chart as of Jan 26, The major event of this week was the drop in the US Dollar. As you can see from the weekly chart above, the dollar has been dropping since the beginning of Not a new trend, but note the break of support last week and the larger drop this week to 3 year lows. UUP daily chart as of Jan 26, 2018 On the daily chart we can see the support for the US Dollar was established back in early Sept 2017 (Grey line) and that had held as support until last week, yes, you guessed it, this support broke on Jan 16 th! The first two days of this week saw the Dollar stay in a

8 narrow range, then broke down hard on Wednesday followed by a wild (wide range day) on Thursday. The week ended with new 3 year lows. Note the current down trend started about Dec 11 th. A weak dollar helps increase the prices of most commodities (Gold, Oil, etc.) since they are priced in US Dollars. Oil daily chart as of Jan 26, 2018 Last week we saw a pause in the bullish trend and a minor consolidation. This week Crude Oil prices continued its trend and delivered a new 3-year high on Thursday of $ This level had not been seen since late in Higher oil prices usually help the drillers and refiners etc. profits and stock prices in this sector. However, they tend to hurt Transportation related stocks as fuel costs increase. Note how Oil was in a horizontal range for about four weeks until the current rally began about Dec 14 th.

9 GLD daily chart as of Jan 26, 2018 Gold broke above its Sept highs briefly this week. The new high of $ was seen briefly very late on Wednesday night and nearly retested late in Thursday s US market hours. If you compare this gold chart to the US Dollar index, you will see that they nearly form a mirror image of each other. Note how the current Gold rally started on about Dec 11 th (same day the US dollar turned south).

10 UNG daily chart as of Jan 26, 2018 Natural Gas prices broke down in December, and then have rallied since the beginning of 2018 to recover more than the December losses. We now are at levels not seen since Sept The week ended with UNG now above its 200 day SMA (Purple). TLT daily chart as of Jan 26, year bonds continue to hang near support (Grey line) as they have since May 2017.

11 DJ Transports daily chart as of Jan 26, 2018 As oil prices made new highs this week, the Transportation sector dropped below its 20 day SMA on Thursday, and bounced a bit on Friday. This minor correction seems to be driven more by fuel prices than a change in the economy or overall demand. XLF daily chart as of Jan 26, 2018 The Financial sector seems to now be firing on all cylinders. We see the large banks, Consumer Credit and Financial Services nearly all in a strong rally this week. In prior weeks we have seen one or two sub-sectors in a rally, but not all three. This is a strong indication (or confirmation) of a strengthening economic growth cycle.

12 XLV daily chart as of Jan 26, 2018 The Healthcare sector exploded this week, especially on Friday. You can dig into the key components of this sector ETF to find where the strength is mostly coming from. IBB daily chart as of Jan 26, 2018 The Biotech sector broke out strong on Monday this week, and continued higher each day this week except for Wednesday. Setting up alerts on key sectors you watch, or stocks, is a great way to be alerted to when price breaks some key level you have identified. This reduces significantly the probability of you missing an opportunity you have identified.

13 XBI daily chart as of Jan 26, 2018 Another Biotech sector ETF is the XBI, which has a different weighting and a higher average volume than the IBB. I usually like to select the ETF with the higher volume, but sometimes I will select a different ETF if the weighting seems more evenly spread. Study the weighting of each of the key components in any ETF before you decide to trade it, or use it as a sector monitor. XLE daily chart as of Jan 26, 2018 We saw the new highs in the Oil chart above, and we see a similar pattern in the XLE as new highs were delivered this week on Wednesday.

14 XLU daily chart as of Jan 26, 2018 The Utilities sector has been one of the lonely bears the past two months, until this week when we began so see a small bounce off of new support established last week. XRT daily chart as of Jan 26, 2018 Retail began the week with a new high, but then remained in a narrow range hear this new Resistance all this week.

15 XHB daily chart as of Jan 26, 2018 The Home Builders sector slowed down its rally last week and then found new Resistance on Wednesday this week. Thursday and Friday saw a small correction as economic data confirmed the seasonal slowing. QQQ daily chart as of Jan 26, 2018 The Tech sector delivered new all time highs 4 of 5 days this week. The wider range day this week was on Wednesday when a new High was delivered just after the open, but then selling seemed to occupy most of the day

16 SOXX daily chart as of Jan 26, 2018 The Semiconductor sector has been oscillating with a few days up then a few days down, back and forth while delivering higher highs and higher lows since early December. This week continued with the oscillations with new highs on the first two days, followed by wider range days and drops on Wednesday and Thursday. The bounce on Friday was strong and helped to end the week about flat with where the prior week ended. What we seem to be seeing are the impacts of Earnings, and how earnings not only move the sector ETF, but also seem to have sympathetic moves in other stocks in the same sector. This is not uncommon early in an earnings season, where the first few stocks that report not only cause reactions (Up or Down) in their own stock prices, but also have small echoes in other stocks in the same sector. This seems to be a sign of over-reaction or worry of uncertainty for the stocks yet to report their earnings. Later into the earnings season, after more companies have reported, these sympathetic reactions seem to be reduced or vanish as there are fewer companies remaining yet to report, and thus less overall uncertainty. This sympathetic reaction was seen last week when AA reported and appeared to have affected (bearishly) other stocks (yet to report) in the same sector. This week we saw it happen on Tuesday with NFLX (Bullish), on Wednesday with ADI (Bearishly) and then on Friday with INTC (Bullishly). Stocks in these sectors seem to have simultaneous and small sympathetic moves. Now let s look at some stocks to see what we see.

17 AAPL daily chart as of Jan 26, 2018 Apple had a rough week this week, crossing below its 20 day SMA on Wednesday and its 50 day SMA on Thursday to end the week below its 50 day SAM. No new highs delivered this week. Note how the 20day and 50 day SMAs are bending downwards as the now look horizontal and not upward leaning. FB daily chart as of Jan 26, 2018 After a rough week last week, FB exploded up this week mostly on Monday and Tuesday to deliver new all time highs Tuesday and early on Wednesday.

18 AMZN daily chart as of Jan 26, 2018 Amazon saw another large range bullish week, after the pause and minor pull back the prior week. NFLX daily chart as of Jan 26, 2018 Netflix gapped up after earnings at the open on Tuesday and established support for the day in the first hour. That support held, and a Gap n-go pattern seemed likely. Indeed that happened as buyers rushed in to drive up prices Wednesday thru Friday. Once support was established and confirmed on Tuesday morning, a low risk entry was possible to ride the reaction wave. Reactions of slower and slower buyers each make their buy decisions with a bit more

19 delay help to fuel the following rally. The bigger the gap, the more participants seem to be attracted to the move. GOOGL daily chart as of Jan 26, 2018 Monday saw the strongest gains for Alphabet, with continuation all week. MA daily chart as of Jan 26, 2018 MasterCard continues its trend this week, with only minor pause on Tuesday and Wednesday.

20 The chart for V looks very similar to the MA chart. However, AXP continues to struggle and not look as strong as it moved above its 50 day SMA as support but then quickly found resistance at its 20 day SMA this week. SQ daily chart as of Jan 26, 2018 SQ broke above its 50 day SMA (Blue) on Jan 5 th, then dipped a week later to test and respect the 50day SMA as Support on Jan 16 th and 17 th. Monday of this week saw the largest gain as SQ broke above its Jan 11 th highs. The following three days were a pause, and then on Friday we saw a small increase to higher highs as the week ended up. The Nov highs are approaching so we will watch if that area acts as Resistance again or not.

21 JPM daily chart as of Jan 26, 2018 JPM had a mild upwards slope in December that seemed to increase its rate on Jan 8 th. The trend since Jan 8 th continued again this week as we see both higher highs and higher lows. MS was mostly horizontal this week as it retained all of its large gains from Friday Jan 19 th.

22 GS daily chart as of Jan 26, 2018 Goldman popped up this week from its 20 day SMA (Yellow) Support and its prior Resistance/new Support from March (Grey line). The strong volume has been in place since the Jan 17 th Drop. BAC daily chart as of Jan 26, 2018 Band of America continues its boring slow and steady rally this week. The charts for C and WFC look similar to BAC with a slow and steady uptrend this week.

23 FCX remained horizontal again this week as it continued to retest resistance at $20. X daily chart as of Jan 26, 2018 US Steel was horizontal the prior two weeks, establishing resistance at $39.96 (Jan 16 th High). This resistance level was broken on Tuesday this week, to resume its bullish trend with higher highs and higher lows. X held up well last week when AA dropped post earnings. This is a sign of strength in that context. AA remained mostly horizontal this week and under its 20 day SMA, as it recovered only about 90 cents above last week s close.

24 SCCO daily chart as of Jan 26, SCCO broke above its all time highs (from 2011) last week. This week we saw a mostly horizontal pause continue with a test of support on Tuesday at the 20 day SMA. On Thursday we saw new all time highs briefly delivered just after the opening bell. Friday delivered a new high Close to end the week on a positive note.

25 CAT daily chart as of Jan 26, 2018 CAT was moving quietly sideways until earnings reactions on Thursday when price oscillated wildly up and down to end the day nearly flat. Friday saw the late reactions crowd come in and sell CAT down to its 20 day SMA then bounce to end the week down about $3.3 from the prior week s close. DE daily chart as of Jan 26, 2018 Deere was quiet and horizontal this week, until Friday where is saw a small rally to end the week with a higher high.

26 HD daily chart as of Jan 26, 2018 HD has been like the Energizer bunny since the test of its 50 day SMA for support back in November. Remember back in September, we pointed out the Cup-n-Handle pattern forming in HD just before it broke above its Resistance (Grey line). After that Resistance was broken in late September, we saw a dip in early November to test that same prior Resistance as new Support (Blue arrow). HD respected the 50 day SMA support for seven days before next breaking back above its 20 day SMA in mid November. The rally accelerated from there. In early December we saw a pause for two weeks that formed a Triangle consolidation pattern (Orange lines). Price broke above this Triangle on December 18 th to resume its prior trend. This week we saw a strong move up on Monday, followed by narrower range days the rest of the week. So far we see no signs telling us this rally is over, so we will keep riding the trend. You will never know at first, if you have caught a big one. You only will know that over time, or after the fact, as you ride a trend. The rally could end the next day, or continue. So we remain patient and let the chart tell us when the trend is over. Trailing stops allow us to accomplish this. We do not set profit goals, since that is like predicting a price target where the move will end, and I have no idea when I enter a trade if the move will happen let alone where it may end. If you exit at a specific price target, you risk leaving more profits unrealized. Or you risk price just falling short of that target when the trend stops. I want to allow each trade to reveal itself as it progresses. I know that some will be losses, and some will be winners. I know that I have the power to keep losses small. I also know that I must be patient to let the winners run. Some winners will be small, more will be average, and a few will be big. It is impossible to know what one will be big until AFTER the fact, so I choose to allow each trade that possibility to reveal itself in time. I know only a few will be monsters, but I don t want to exit until it is clearly indicating its trend is done. Not being patient, and missing out on the few biggest trades of the year can dramatically affect your overall performance, so be patient and objective to follow your plan. Allow yourself to be lucky. ** Trading is not a matter of being lucky or unlucky, but doing the right thing when you are. And the great news is that you may not control what the markets do, but you can fully be in control of what YOU do. (Think about this for a while>.)

27 DHI daily chart as of Jan 26, 2018 DHI has been horizontal for nearly two months now, and finally broke down this week below its 50 day SMA on Thursday. Note how the 20 day SMA (Yellow) went horizontal in the last few weeks, and the 50 day SMA (Blue) is only now beginning to flatten out. BA daily chart as of Jan 26, 2018 Boeing has been one of the monsters I rode in The minor pull back we saw late last week, was more than halfway recovered this week.

28 ADI daily chart as of Jan 26, 2018 ADI had a wild wide range day on Thursday this week that was sufficient to trigger my stops for an exit and a loss of -0.35R. Maybe Thursday was an overreaction to something? The why does not matter. What does matter is that I stuck to my plan. The Cup-n-Handle pattern we see in this chart could still resume, as Friday seemed to respect the prior Resistance as new Support (Beige line)

29 INTC daily chart as of Jan 26, 2018 Intel crossed above both its 20 day and 50 day SMAs on Monday this week (Blue arrow). INTC then popped up strong on Earnings reactions on Friday.

30 NVDA daily chart as of Jan 26, 2018 Nvidia had a strong week this week, after a pause last week that ended with a break out on Jan 19 th (Orange arrow). In the above chart, I have highlighted key days and levels with Lines and Arrows for educational purposes. I usually do not add so much clutter to my charts unless it is for clarity when teaching. This will help you see what I see in my mind when I look at a chart and make decisions. First we see Resistance at the Highs in late November (Green Arrow and line) followed by Support about 7-8 days later (Grey Line) at the Lows in early December. These lines are drawn at least 3 days after that key high or low day, once that price level appears to be unique in its context. Most of December saw a small and slow rally back above its 20 day SMA that was still sloping downward. Then on Jan 3 rd as the New Year began strong, we see NVDA gap up and above its 50 day SMA (Blue arrow). This was my first entry trigger (Blue arrow) event to enter a long position. The next two days saw price respect the prior Resistance (Green line) until Jan 8 th when price broke above this Resistance on Jan 8 th (Purple arrow) providing a second entry trigger event. This prior Resistance acted like new Support (Green line) with tests on Jan 10 th, 16 th and 17 th. The next Resistance level from the High on Jan 11 th (Yellow arrow) provided me a place to draw a line three days later. FYI, the Green line was drawn on or after Nov 29 th, the Grey line on or after December 8 th, and the Yellow line on or after January 17 th. When the Green line was confirmed as new Support on January 16 th and 17 th, this also provided a 3 rd (Grey arrow) and 4 th (White arrow) possible entry triggers at or near this Support level (Green line). On Jan 19 th, Resistance (Yellow line) was broken to provide a fifth entry trigger (Orange arrow) event. The point of sharing these five entry trigger examples, is to not tell you what to do, but to explain by example how we can define objective events to trigger entry decisions, and how there are pros and cons for each one. The early (more aggressive) triggers tend to have lower probabilities of working but higher potential rewards when they do work, and initial stops that are closer to the entry level. The later (more conservative) triggers tend to have higher odds of working (since they have more confirmation) but less potential rewards, and stops a bit further from the entry (risks). In this example

31 I pointed out five choices, and they range from the more aggressive to the more conservative, and each will have a different tradeoff between Probabilities, Potential rewards, and Risks. The point is for you to do your own study to find you preferred entry trigger, that you are fully comfortable with the Probabilities, Rewards and Risks. Once you determine your comfort level, then STICK to that same method and keep good records. Over time, your records will help you confirm it is working as you planned, or you may find it needs refinement. It is very important to trade using very small size until you have found your own comfort level and have proven to yourself consistent performance. After confirming the pros and cons, you will know when you are ready to increase your size up to, but never over, your defined risk level. I hope these examples get you to think about your process, and might even give you some ideas to go and test for yourself. LOTS of companies report earnings this next week, so keep your eyes open to avoid surprises. Trade Smart, CJ