Market Observations as of Dec 22, 2017

Transcription

1 Market Observations as of Dec 22, 2017 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week began with a continuation of the bullish trends on Monday with multiple new all time highs seen in key indexes with strong above average volume. The remainder of this week we saw a small and quiet pull back as the three day Holiday weekend approached. The breadth of market participation on Monday was impressive as news regarding approval of the new Tax legislation soaked in. Volume on Friday was weak which is common for Fridays just before a three day Holiday weekend. Markets will be closed on Christmas Monday (Dec 25 th ) and reopen Tuesday for the final four day week of trading in It will be interesting to see if there is much volume this next week, as some Fund Managers may re-balance before the year end. Other manages may adjust their holding in the first few days of I don t expect to see much Tax Selling this next week, since there has been such wide market breadth in the bullish markets this year, with lower odds of folks with losses to be booked in You never know, since anything can happen. Each week I only have time to share and comment on a limited number charts. As per my personal trading plan, I actually look at a lot more charts than are shared below, but the overall process is very similar. In this publication I try to give an example of one way to perform a Top-Down Market Analysis. Over time, you will likely see how it is valuable for both staying in sync with the overall market character, as well as uncover changes in leadership and potential trading opportunities. I encourage each reader to consider developing their own process that fits your personal trading style. Each week we look at weekly and daily charts for the S&P to keep a market context in mind. I encourage folks to look at weekly charts first, then the daily. This seems to keep the context of clues seen in the daily chart in context. One should do this for all the major indexes, sectors and stocks. Process: Each week we look at [1] the major US indexes first (S&P 500, Dow Jones Industrial Average, Nasdaq composite, and the Russell 2000). Next we look at [2] a few key Market Internals like the Advance/Decline Line, McClellan Summation Index, the CBOE VIX or other statistical measures of the overall market s character. Next [3] we look at a few key commodities like Gold or Oil, as well as sometimes we look at Bonds, Currencies or Interest rate impacts. Next [4] we look at several (7 to 10) key market Sectors to see strength and weakness. Last [5] we look at several key stocks with in the various sectors, usually a strong leader as well as an example of weakness. When we look at these charts, we are looking for changes in character (compared to the prior week s) for that chart/sector/stock, as well as look for the strongest stocks in the strongest sectors and charts that may expose an opportunity. We may change the specific sectors and stocks we look at from week to week as we follow both strength and weakness as it changes in the markets. Each week I also try to include some key nugget of experience that may relate to an example I see in the charts at that time. This is a way to see these concepts when they work and when they fail. Real examples can be a useful educational tool. Although I do not give any specific trade advice (no buy or sell recommendations here), I will share some real examples that I may or may not be trading at the time, since they serve as learning examples. If you see something you like, that s fine but know that it is 100% your responsibility to evaluate an idea on your own, per your own trading plan, to see if it meets your trade criteria or not. Again, the purpose of this publication is solely educational in nature.

2 Now, let s look at some charts starting with the key US Indexes. S&P 500 weekly chart as of Dec 22, 2017 The S&P was rather flat for the week, as were most of the major markets after making new highs on Monday. S&P 500 daily chart as of Dec 22, 2017 Here we can see the new highs on Monday, followed by quiet coasting down the rest of the week. Overall the S&P closed higher this week just under its all time highs.

3 DJIA daily chart as of Dec 22, 2017 We see a similar story with the Dow that also made new all time highs on Monday and then coasted mostly horizontal the rest of the week.

4 NASDAQ daily chart as of Dec 22, 2017 The Nasdaq was the strongest index at the open on Monday and briefly broke above the $7,000 level mid day. The rest of the week saw a small drift down, but remained above the prior week s range by the close of this week.

5 IWM daily chart as of Dec 22, 2017 The Russell also popped up at the open on Monday, but failed to retest the highs from Dec 4 th. The remainder of this week we saw a retesting or the prior week s Resistance as new Support for this week.

6 Now let s look at a few of the overall market Internals for this week. NYSE Advance/Decline Line daily chart as of Dec 22, 2017 The Advance/Decline line showed strong breadth to the market rally on Monday, and remained near this level all week. McClellan Summation Index daily chart as of Dec 22, 2017 Any acceleration of changes in breath was again not seen this week.

7 VIX daily chart as of Dec 22, 2017 The Options markets show us continued low Implied Volatility as the complacent bulls are not showing any signs of fear. TLT daily chart as of Dec 22, 2017 Note the break down Tuesday and Wednesday of this week of the 20 yr Bond fund to end the week back below the 200 day SMA (Purple).

8 US Dollar Index daily chart as of Dec 22, 2017 Note that the dollar remains weak and back below its 50 day SMA (Blue).

9 Now let s look at a few key commodities. GLD daily chart as of Dec 22, 2017 Gold had been in a horizontal range most of October and November, then dropped below support the first two weeks of December, to then find support near $1,238.3 on Dec 12 th. The past two weeks we saw Gold bounce back into its prior range and closed the week near its 50 day SMA (Blue).

10 Oil daily chart as of Dec 22, 2017 Oil has been in a consolidation pattern since early November. Not drawn, but you can visualize an ascending triangle pattern being formed since early November. This week saw very small advances each day from a $57.35 close on Monday to $58.35 on Friday. Odds may favor a positive break above Resistance soon. Time will tell.

11 UNG daily chart as of Dec 22, 2017 We looked at US Natural Gas last week as price had dropped below Support (Orange line) in early December. This week opened with a small gap up, but then followed with four days down to lower lows on Thursday with the smallest bounce on Friday. This week ended with lower lows than the prior week.

12 Next let s look at some key sectors. DJ Transports daily chart as of Dec 22, 2017 The Transports showed strength on Monday and Wednesday delivering new all time highs. This confirms an environment of overall economic growth when both the Dow Industrials and Transports are in sync with each other.

13 XLF daily chart as of Dec 22, 2017 The Financial sector was mostly flat this week as it hugs the Resistance area forming an ascending triangle or box this month. This sector has yet to break above its 2007 highs, but it is getting closer.

14 XLE daily chart as of Dec 22, 2017 Last week was not as interesting as we saw this sector remain within its range (i.e. Darvas Box ) since mid September. This week we saw a strong break out on Thursday (Dec 21 st ) above this Resistance level (Orange line) defined by the Nov 7 th high of $ ** If you had set up an alert at or near this Resistance level (Orange line) in your charting software, you would have been notified either late on Wednesday (if alert was at $70.45 or lower) or early on Thursday (if alert was at or above $40.47). This then alert would serve to direct you to look at this ETF and either consider a trade in this ETF, or, act as a clue to dig a little deeper to find strong stock(s) within this sector to consider trading. The top three holdings in this ETF are XOM, CVX and SLB. Looking at all three of these charts after the close on Dec 20 th, we liked the look of CVX the best. We will look at this chart a few pages below. When we look at the major holdings within an ETF, we are looking for a chart that shows the best trade opportunity per our edge and trading plan. Sometimes we do not find an opportunity yet, so we put that stock on our watch list to look at again each day for a week to see if it develops into an opportunity or not. Your edge and opportunity is likely different than mine, so you must evaluate per your written plan. This is only an educational example of one such process of looking for an opportunity. FYI, If you had placed this alert prior to Dec 4 th, it would have triggered on the 4 th about mid day when price did pop above this level briefly. Price quickly reversed mid day and dropped back below this level. XLE was well below $69.85 the last hour of the day, not creating a valid entry condition for me. FYI, I like to set my alert 5 cents or so in front of the actual prior Resistance (or Support) price level. This way I have a little reaction time to see the chart and price behavior to decide if any action may be justified.

15 QQQ daily chart as of Dec 22, 2017 The Tech sector popped up strong at the open on Monday, then pulled back a little the following days. SOXX daily chart as of Dec 22, Semiconductor stocks are a sub-sector of Technology. Stocks like AMAT, MU, and NVDA were mostly quiet, horizontal or slightly down again this week. The exceptions this week were stocks like INTC and AMD that gave a little rally early this week followed by a small pull back.

16 XRT daily chart as of Dec 22, 2017 The Retail sector moved up strong on Monday, followed by horizontal days that ended the week up a bit. Possibly news regarding stronger than expected Holiday sales seems to be helping some in this sector.

17 XHB daily chart as of Dec 22, 2017 Note the Consolidation pattern (Triangle) formed in this sector over the prior 2 to 3 weeks (Grey Support and Resistance lines) that we saw last week. Note how Monday of this week we saw a positive break out of this consolidation triangle. We will see a similar pattern in the HD chart below. ** Consolidation patterns (like a Triangle, ascending triangle, descending triangle or a box) are like seeing a rest occurring within a trend. More often, the eventual break out will be in the same direction as was the trend prior to this pattern forming. We can call this a continuation of the trend. Reversals of the trend also occur, but less often. Therefore we require more evidence of a Reversal than we do for a Continuation. We can gain a small statistical edge over the long term (many occurrences) if we assume a continuation pattern is the more likely break out direction. With stronger trends, it seems the odds for a continuation break out are even higher.

18 XME daily chart as of Dec 22, 2017 We saw a very aggressive break out of Resistance (Yellow line) on Monday (Dec 18 th ) of this week. The Sept 5 th high (Yellow arrow and line) can be an area to place an alert. Note the break above the 50 day SMA (Blue arrow) on Dec 7 th. Also note the Cup-n-Handle pattern that formed starting at the Red Arrow, with a tiny handle formed by the quick test-dip-retest of Resistance on Dec 13 th 15 th last week. Note the stack of the three SMAs in bullish sequence and all three are bending upwards at the right edge. There are lots of clues in the chart, if you look for them. We will look at US Steel ( X ) chart below, but also take the time to look at other stocks in this sector that exploded this week (AA, SCCO). The same process we outlined above with the XLE energy sector example was applied to the XME sector on Monday morning as the break out began this week.

19 Now let s look at some key Stocks. We will begin with a few of the FANG stocks that were prior leaders. AAPL daily chart as of Dec 22, 2017 Apple briefly popped up to new highs on Monday, to then be pulled back down below the Resistance (Orange line) the rest of this week. News of intentional slowing of older phones by Apple s updates did not sit well with long term customers, regardless if it was for battery rationing or not.

20 GOOGL daily chart as of Dec 22, 2017 Alphabet has been one of the strongest FANG stocks last week which continued on Monday of this week delivering new all time highs. The rest of the week saw prices drift back a bit. The other FANG stocks (FB, NFLX and AMZN) were mostly horizontal to down a small amount this week.

21 INTC daily chart as of Dec 22, 2017 One of the big exceptions this week in the Semiconductor sector, was Intel. We had a clue on Friday last week, where INTC moved up strong off of its support at the gap base (Orange line) and its 50 day SMA (Blue). This momentum continued this week until new highs on Wednesday defined new Resistance. Thursday saw a small pull back with a tiny bounce on Friday to end the week higher. This similar arc for this week was also seen in AMD, but on a smaller relative scale. INTC all time highs from 2000 have yet to be retested.

22 GS daily chart as of Dec 22, 2017 Goldman looks rather flat this week, but closed the week well above last week and delivered new all time highs three of five days this week. Other strong stocks in this sector this week were BAC and WFC.

23 Now let s follow up on our XLE energy sector example we mentioned above. CVX daily chart as of Dec 20, 2017 After the close on Wednesday of this week (Dec 20 th ) we looked at several charts in the XLE Sector ETF and liked CVX the best. Note the Cup-n-Handle pattern that has formed over the prior two months, with Resistance (Orange line) drawn from the Oct 16 th Highs (Orange arrow). I like to see the persistence of the bulls retesting this Resistance; it suggests it will soon break. Also note now the 20 day, 50 day and 200 day SMAs are stacked in order, and all sloping upwards, with the 20 day sloping the steepest. I also like to see both the higher lows and higher highs after the gap day in late October. Once I confirm my trade criteria is fully met, then I can put my action plan in place before the open the following day. I use the time to compute my window and risk criteria for the possible trade so I am ready to go well before the open the next day. If CVX opens the next day below my window I will pass on the trade and wait to see if something has changed. If CVX gaps up above my window at the open the next day, I also pass on the trade to avoid chasing and compromising my risk reward parameters. If CVX opens within my window the next day, I place my trade after a few minutes using the predetermined position size and Stop locations that meet my Risk Rules. Having all this computed well before the open, with clear decision points, makes actual trading a very simple task. Stick to the Plan.

24 CVX daily chart as of Dec 22, 2017 As you can see, CVX opened near the prior Resistance (now as Support) at our Orange line, and had a very strong day on Thursday this week on above average volume. Friday was quiet and up just a little. Friday volume was low which is common for a day before a three day Holiday weekend. -

25 HD daily chart as of Dec 22, 2017 Back in September we pointed out the Cup-n-Handle pattern that was forming in HD. Prior Resistance (Grey line) was then tested as new Support along with the 50 day SMA (Blue) on Nov 2 nd (Blue arrow). A week or so later HD really took off and accelerated upwards moving up nearly every day until Dec 5 th. The following two weeks we saw a consolidation pattern form in HD and in the XHB sector. Below we will look at a 30 minute chart of HD to see better how this consolidation pattern was formed and eventually broken. HD 30 min. chart as of Dec 22, 2017 Here we can see the Triangle (Orange lines) consolidation pattern form over the first two weeks of December. Note how the oscillations got smaller and smaller as price

26 seems to be attracted towards the center of this ($177 to $186) range. Monday of this week we saw a break out in the positive direction, as the prior bullish trend resumed and delivered new highs. Riding your winners is a very important goal of any trading system, and a consolidation pattern (like HD above) is not a sign that the trend is done, but simply taking a rest. In this case, patience and not overly tight trailing stops will help to keep on riding the trend when it resumes. DHI daily chart as of Dec 22, 2017 DHI also was in a consolidation pattern (with the XHB sector) over the prior two weeks. DHI did break out on Monday to deliver higher highs on both Monday and Tuesday morning this week before returning to a horizontal narrow range for the remainder of the week.

27 DE daily chart as of Dec 22, 2017 Deere saw a very strong week this week, breaking above its Resistance from the prior two weeks. Ride your winners is a key objective and requires patience until the trend ends. We do not see an end yet in this chart. CAT daily chart as of Dec 22, 2017 Similar to DE, CAT had a strong week of advances this week. Unlike DE, the prior week for CAT was not exactly flat. CAT us up over 50% in the past six months since its test of its 50 day SMA support in late June (Green arrow). Who would a thought that would happen? If anything, CAT s velocity is increasing this week. The why is not important to know, but it is easy to imagine that Mining of metals, building homes, and a hope of Infrastructure projects in the near

28 future can all add to demand for shares of CAT. Regardless of the why, we just keep an eye on the charts as we ride our winners. X daily chart as of Dec 22, 2017 Speaking of Metals, US Steel saw a strong bounce to higher highs this week. The prior week s small pull back could not even touch the 20 day SMA.

29 AA daily chart as of Dec 22, 2017 It s clear to see the explosion in AA that started Monday of this week. Yes, when XME broke out early Monday, we were looking at AA as one of our favorites, and it delivered. Friday s highs this week came with 27 cents of the Oct 24 th prior Highs. SCCO was another great candidate Monday morning, as it was gapped up from its 20 day and 50 day SMA support last week.

30 BA daily chart as of Dec 22, 2017 Boeing had a relatively flat week after delivering new all time highs on Tuesday and Wednesday of this week. This was an amazing week, with lots of new all time highs delivered Monday, with key sector break outs on Monday and Thursday, and strong trends continuing after a brief pause. I hope these examples give you ideas that you can go on to study and adapt to fit your trading style. I also want to wish you and your family a very Merry Christmas filled with love and special time spent together. May God Bless. Sincerely, CJ