Market Observations - as of Apr 20, 2018

Transcription

1 Market Observations - as of Apr 20, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. The slowly fading volatility we saw last week continued the first part of this week until Wednesday, when the VIX moved up a little then chopped sideways in a narrow range the rest of this week. Likewise, the bullish short term trends we saw starting after the April 2 nd lows, continued this week until peaking mid day on Wednesday (April 18 th ), then slowly fading back down Thursday and Friday this week. Overall this week was flat for most of the indexes, giving back most of the gains from Monday and Tuesday on Thursday and Friday. The Energy sector continued strong this week, with only a relatively small pull back on Thursday and Friday. The semiconductor sector was hit hard this week, with more indications out of China as to potential trade pressures being applied. Earnings ramped up this past week, and continue next week. Market reactions have been mixed and often are more correlated with the market s and sector trends than actual company performance data. As Technical traders, we are aware of when earning announcements occur but follow the charts for our objective trading decisions. We do not listen to the news since it is often wrong, and always late. As options traders, we have an added advantage since the Implied Volatility and Pricing of Options are inflated in front of earnings announcements, and then that Implied Volatility is crushed after the data comes out. By selling Options when they are expensive, and buying them back when they are cheap, we can use the Earnings Volatility Crush to our advantage. Paying attention to when earnings come out, and what range of Implied Volatility has been seen around prior earnings announcements for that stock, we can use this behavior patterns to improve our odds and edge. Ignoring these behaviors can end up hurting the less experienced and less prepared options trader. After the markets close on Friday (April 20 th ) is when April Options contracts expire, and this fact can also drive another behavior of options that options traders should understand and utilize in their trading strategies. Understanding the exercise and assignment processes, as well as pinning help the options trader make better decisions as to how best to close, roll, or do a Conversion or Reversal. Each week we look at charts for the major indexes, then a few Market Internals (statistics), a few key commodities, several sectors, and then some key stocks. This is part of a daily Top Down market analysis process that helps keep the trader in sync with the overall market trends, changes, as well as sector rotations. We encourage each trader to create their own process to do these types of observations, since it not only helps keep a perspective on the markets, but also can reveal key changes and opportunities as they occur. Each week we also try to include one or two special observations about the markets, usually some event that occurred that week that we can use as a timely example of some principle of market behavior. Last week we showed [1] how the overnight Futures markets can give us clues of events or changes that could be important before the next session opens. [2] An overlay study of the F.A.A.N.G. stocks over the past 3 quarters and changes in leadership. [3] And some Sector and Stock price reactions to Earnings on 5min. charts.

2 Over time, we hope you find these weekly examples useful for learning about how the markets behave, and they spark your curiosity to study further on your own certain behaviors. This week we will look at a different way of using the VIX to see when behavior returns to normal after an expansion in Volatility. We will also do a little detective work on some curious volume the middle of this week that closely corresponded with the peak and a trend reversal that followed. We hope you will take some of these ideas from our examples, and do your own chart analysis to see what you find. This is a great way to learn by practice. Regardless if you confirm what I saw on your own or if you find something different has happened, either way you will be building your skills. If you find you agree, then your time practicing will help you confirm your beliefs about that behavior and quantify that statistical advantage. If you find I was wrong, or you discover something very different, great! Please let me know. I love to be wrong, because that is often when and how I learn something new. This way we both learn something that may turn out to be valuable. Now, let s look at the charts for this week. S&P 500 weekly chart as of Apr 20, 2018 We remain inside the Consolidation pattern for the past 3 months with this week opening and closing flat, after a test of the 20 week SMA as Resistance.

3 S&P 500 daily chart as of Apr 20, 2018 On the daily chart we see price cross above the 50d SMA on Tuesday with positive momentum stalling out on Wednesday. Wednesday was also the quietest (narrow range) day of this week. Thursday saw Tuesday s gains returned and Friday saw price cross below the 50 day SMA to close near 2670, a level we have seen often over the prior weeks. Also the Friday close was near the middle of the Consolidation range and just above the 20d SMA.

4 DJIA weekly chart as of Apr 20, 2018 The Dow was also flat this week. It tried to break above its Resistance Trend Line (Orange) this week with the 20 week SMA providing Resistance. DJIA daily chart as of Apr 20, 2018 Like the S&P, the Dow also crossed above its 50d SMA on Tuesday, paused on Wednesday, and reversed on Thursday and Friday to end the week back below its 50d SMA. Now that we have had 3 closes below the Trend Line Break out peak (Tuesday) we can now re-draw our Trend Line from the Jan highs to the April 17 th high. This then recognizes the false break out this week as the DOW remains inside its (new) consolidation triangle.

5 NASDAQ weekly chart as of Apr 20, 2018 The Nasdaq was also flat this week, beginning and ending this week nearly on its 20 week SMA as this year has been mostly horizontal so far. NASDAQ daily chart as of Apr 20, 2018 Like the other indexes, the Nasdaq crossed above its 50d SMA on Tuesday, then paused Wednesday before turning back down Thursday and Friday to end the week back below the 50day SMA and near where it closed the prior week. We places a Fibonacci Retracement study (Purple) from the Mar 13 th High to the April 2 nd Low, and found that the range of this week found resistance a few cents below the 61.6% Retracement level, and Support Friday at the 38.2% Retracement level.

6 Russell 2000 daily chart as of Apr 20, 2018 The Russell rallied Monday and Tuesday, paused Wednesday and gave back only Tuesday s gains on Thursday and Friday, ending the week with a small gain and near the upper 1/3 of the Consolidation range. Next we will look at a few Market Internals.

7 NYSE Advance/Decline Line daily chart as of Apr 20, 2018 We saw market Breadth increase Tuesday and Wednesday to new highs for 2018, before slipping back down Thursday and Friday to end the week near where it ended the prior week. McClellan Summation Index daily chart as of Apr 20, 2018 The acceleration of changes in breadth were mild this week, showing only gaps between days and little change during each day.

8 VIX daily chart as of Apr 20, 2018 Here we can clearly see the VIX break below its 50d SMA last week and continue to slowly drop Monday and Tuesday of this week. Then on Wednesday the VIX bounce a tiny bit to break the down trend and remain in a narrow range (15.3% to 17.2%) for the rest of this week. Let s look at the Volatility of the VIX as a way to observe periods of expanding vs. contracting market volatility. This is an observation I have found a bit more useful than just using the VIX Value as an indication of high or low volatility. This is due to the non-symmetrical nature of the Options volatility that the VIX calculation is based upon. This is all based upon human nature. When markets begin to drop, fear can increase nearly instantly, and market participants become willing to quickly pay up for insurance before it becomes even more expensive. In the case of when markets have bottomed and begin to rally, market participants more slowly become calm and may re-enter the markets as soon as they feel the dust has settled. Each participant makes this transition to calm at their own pace, and each person is different at how quickly (or slowly) they become ready to take on new risks. This non-symmetrical behavior can be seen in the VIX, as it can increase in values with large swings up very quickly, but decreases back down much slower, with smaller swings, to eventually return to the prior complacent levels. Using the % values of the VIX as an indicator of market sentiment tends to be skewed as a result, so I looked at other ways to measure the volatility of the volatility. ATR (Average True Range) can be applied to the VIX to measure the size of its swings, and removed the base value from where these swings may have originated. Keltner channels on a chart create a band around the base data (VIX) to show an ATR based band above and below the data value. The width of the band expands as data swings get wider and contract as swings get narrower. Setting the same valued (time period) for both a Keltner Band study and an ATR study, help to see the width of these changes. The width of these bands expand and contract, and when the base value is removed (or made a straight line) the ATR study is what we see as a result. Below we show 30 min charts over the past 6 weeks of the VIX and the ATR of the VIX, and the SPY.

9 The Red Box highlights when the VIX swings exceeded 0.5% change in the (14 bar) average of 30 min VIX data. During this expanded Volatility period (Red Box) seen in the markets, the VIX began this from a 16% value and ended at a 20% value. According to this study, market volatility calmed back down by April 11 th. Whereas, if one were waiting for the VIX to return back to its prior level of 16%, you would wait until April 17 th. This is a different way to look at VIX data that takes a relative view of the size of the VIX s 30min swings, and not its absolute value to gauge market sentiment. This is one tool that can help a bullish only investor decide when they may be comfortable to re-enter the markets, after the dust has settled. No method is perfect, and each has its pros and cons. I hope this creative analysis causes you to think of other ways to look at market data and compensate for some of its behaviors. It is creative thinking that can help add to your overall edge.

10 Oil daily chart as of Apr 20, 2018 Oil pulled back only a little on Monday of this week, paused on Tuesday and then surged upwards on Wednesday this week. Thursday briefly saw multiyear new highs then a small pull back to end the week Friday up about 1% for the week. Gold daily chart as of Apr 20, 2018 Gold remained in a narrow range and horizontal this week.

11 US Dollar Index daily chart as of Apr 20, 2018 The US Dollar Index chopped sideways under its 50d SMA most of this week until moving up on Thursday and Friday to close this week above its 50d SMA and just above 90. Next we will look at a few key market Sectors to see how this week played out. DJ Transports daily chart as of Apr 20, 2018 The Transports crossed above its 50d SMA on Monday as well as broke above its Trend Line Resistance (Orange line). The Transports remained above both this TL and its 50d SMA all this week. The peak on Wednesday was $1.35 higher than the prior High seen on March 13 th. The small drops on Thursday and Friday did not give back all of this week s gains.

12 Note the unusually high volume on Wednesday this week. This is the largest volume in over two months for the Transports. If we look at a 5min. chart for this week (below) we can see when most of this volume spike occurred. DJ Transports 5min. chart as of Apr 20, 2018 Note the large volume spike about mid-day on Wednesday. This is far larger than any other volume spikes. The Dow Transportation Index is made of 20 stocks, and if we look at the 5min. charts for all 20, we quickly will see two that show extreme volume near the same time on Wednesday. (Hint: look at FDX and MATX). Sometimes thinking like a detective can reveal some interesting data, and once in a while, possibly some opportunity. XLF daily chart as of Apr 20, 2018 The Financials remain horizontal this week, in spite of some very strong earnings reports.

13 XLE daily chart as of Apr 20, 2018 With the strength in Oil prices again this week, no surprise to see the Energy sector continue its rally this week. Note the very small pull back on Friday did very little damage to this week s gains. XLE was often one of the strongest sectors most days this week. QQQ daily chart as of Apr 20, 2018 The Tech sector was hit hard this week, ending the week flat after a brief pop above the 50day SMA the middle of this week. Like the Nasdaq, we also applied a Fibonacci Retracement study on the QQQ chart to see a very similar story for this week, finding resistance at the 61.8% level and Support Friday near the 38.2% level. (Same story with the XLK if you prefer to use that ETF.)

14 SOXX daily chart as of Apr 20, 2018 The Semiconductor sector was hit very hard this week. The brief peek above the 50d SMA on Tuesday ended Wednesday with Thursday and Friday dropping the SOXX back to nearly the lows of the first week of April and the two year Trend Line support (Red line). XLV daily chart as of Apr 20, 2018 The XLV tried to move above its 200day SMA this week, but found resistance at its 50day SMA on Wednesday, just to return all of this week s small gains on Thursday and Friday to end the week back below its 200day SMA.

15 XRT daily chart as of Apr 20, 2018 The retail sector continues to be hurt by Amazon fears. The tiny gains in the first half of this week were all given back and then some by the end of the week with the XRT crossing and closing below its 20d SMA. Note how all the SMAs are nearly horizontal now. XHB daily chart as of Apr 20, 2018 Homebuilders again dropped this week, after testing the 50 day and 200 day SMAs as resistance. XHB is back down near the lows of this year.

16 XME daily chart as of Apr 20, 2018 The mild rally last week from the cross above the 20 day SMA continued this week, with a gap up at Wednesday s open that also broke above the Trend Line Resistance (Orange line) the same day. Thursday and Friday saw a narrow range pause while price kept most all of this week s gains. When we dig deeper, we see the few stocks that account for most of these sector gains while others have moved little. Next let s look at some key stocks that we have been following to see what these charts tell us.

17 AMZN daily chart as of Apr 20, 2018 As we have seen over the past few months, Amazon and Netflix have been the strong leaders in Tech, while the other f.a.a.n.g. stocks have shown some weakness. Amazon rallied strong this week to not only cross above both the 20d and 50d SMAs, but also above its Trend Line Resistance (Orange line) this week. The pull back on Friday was not enough to cross below any of these three references. AMZN is not far from a retest of its All Time Highs. Remember, AMZN reports earnings next week on April 26 th after the close. NFLX daily chart as of Apr 20, 2018 NFLX did deliver new all time highs after reporting earnings Monday (Apr 16 th ) after the close. Most of these gains were kept as this week remained inside of Tuesday s range (aka Gap-n-chop ).

18 AAPL daily chart as of Apr 20, 2018 Apple was hit hard this week, giving back nearly all of its April gains on Thursday and Friday of this week, as well as crossing back below both its 20d and 50d SMAs. The 200 day SMA provided support on Friday. Apple reports earnings on May 1 st. GOOGL daily chart as of Apr 20, 2018 Alphabet gapped up on Tuesday to then hover near its 50day SMA the rest of this week. It is also back near the middle of its range for the past 3 months.

19 NVDA daily chart as of Apr 20, 2018 NVDA pulled back a little this week to close below its 50d and near its 20d SMA. Considering the ugly sector this week, this is not too bad. MU daily chart as of Apr 20, 2018 MU was mostly horizontal this week then crossed below its 50d SMA on Friday. Not too bad considering how ugly this sector was this week.

20 SQ daily chart as of Apr 20, 2018 The Financial sector has been mostly horizontal the past two weeks, and SQ has been one of the very few to move up this week. MU crossed above its 50d on Tuesday and above its 20d SMA on Wednesday where it remained above both the rest of this week. GS daily chart as of Apr 20, 2018 GS reported earnings last week on Tuesday before the open, and was knocked down like most of the Financial sector has been.

21 BA daily chart as of Apr 20, 2018 BA moved up a little this week, from its 20d SMA support on Monday, and above its 50d SMA on Wednesday. BA hovered near its 50d SMA the rest of this week. BA reports earnings next week on April 25 th before the open. The prior (Jan 31 st ) earnings were responded to with a gap up. We will see what happens this next week. LMT daily chart as of Apr 20, 2018 LMT made a nice slow, steady, low volatility rally off of its 50day SMA last week. Lockheed reports earnings next week on Apr 24 th before the open. Increased military spending should give a positive outlook, you would think. However, as we know, anything can happen.

22 X daily chart as of Apr 20, 2018 US Steel has been mostly sideways for over a month, with only a tiny move up on Wednesday this week. SCCO daily chart as of Apr 20, 2018 SCCO continues to ignore the market trends, and move on its own path. SCCO again delivered a new all time high this week on Wednesday.

23 FCX daily chart as of Apr 20, 2018 FCX crossed and closed above its 50d SMA on Tuesday (Apr 17 th ) then gapped up at the open Wednesday, above its Trend Line Resistance (Orange line). FCX ended the week not far below its Feb 26 th prior Highs. AA daily chart as of Apr 20, 2018 AA has been a beast the past two weeks. AA reported earnings on Apr 18 th this week and delivered nine year new highs on Thursday. The pull back on Friday remained above the Jan 2018 highs (prior Resistance as new support).

24 CAT daily chart as of Apr 20, 2018 CAT crossed above its 50d SMA Monday, and remained above this SMA Tuesday thru Friday this week. Friday gave back part, but not all, of this week s gains as a $0.78 dividend was paid. HAL daily chart as of Apr 20, 2018 HAL continued to move up this week along with oil prices. HAL slowed to a horizontal channel the last 3 days of this week.

25 RIG daily chart as of Apr 20, 2018 RIG continued higher this week, exceeding Jan highs on Wednesday this week. Note the increased volume the past two weeks. We continue to see markets that seem to have quick responses to news events and less so to Earnings data. Overall, we continue to watch the charts for changes, and adapt with them. Anything can happen next week: a drop that continues from Wednesday s highs (Apr 18 th ), or a rally to resume an uptrend started after the April 2 nd lows, or mostly horizontal oscillations & chop for a while longer. The key is to establish your clear criteria for when you see sufficient evidence in the charts to make your decisions. Trade Smart, CJ