Market Observations - as of Mar 23, 2018

Transcription

1 Market Observations - as of Mar 23, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. The markets all broke down below their consolidation triangles (Support) as volatility increased this week. There was no shortage of news events to fuel uncertainty in the markets, and after the brief pause last Friday (Mar 16 th ) as quad witching took place, Monday saw the sellers step in to resume the bear trend we saw begin back on March 13 th. We shared a 15 min chart of the S&P in last week s Market Observations to show the trend reversal (from bullish to bearish) and the confirmation that occurred on March 13 th. This same short term trend change was also seen in the Nasdaq and the Dow on the same day (ref. 15min charts). We saw the VIX increase this week as the markets dropped hard Monday, Thursday and Friday. On Tuesday and Wednesday saw some markets pause or even bounce a little bit. We will look at some weekly charts below as well as some additional Market Internals to see how market breadth and other broad based market statistics help us see how this week s actions may compare to other market corrections we have seen so far this year. Let s look at the charts to see what they tell us about this week.

2 S&P 500 weekly chart as of Mar 23, 2018 On the weekly chart for the S&P we can see the large red candle for this week that found support almost at the 2-year Trend Line (Red line). This week appears to be the largest candle on the entire chart covering just over two years. However, if we look at the True Range in the lower section of this chart, we can see the (1 week) White True Range spike for this week formed a pt range. This week was larger than the range for the prior spike for the week ending March 2 nd (141.8 pts.), but not as large as the range for the week ending Feb 9 th (230.7 pts). You may remember that the spike for the week ending Feb 9 th was the largest range week that we had seen since the bear market in late Using True Range (1-period) and Average True Range (14 or more periods) indicators is an easy way to have your charting tool do the math for you so you can quickly compare volatility and volatile events in the past. In the above chart, we see that Support has been broken at the short term consolidation (Orange Triangle) and at the 20 week SMA, but not yet at the long term trend line (Red line), the 50 week SMA or the prior Feb 9 th lows. These could be key areas to watch to see how price acts if and when it tests those levels. These levels are not where we predict price action, there is no way to know what may occur next. These levels are simply sign posts along the path that prices may take. How price acts at or near these levels is how we can gain clues about market behavior. It doesn t really matter why market behaviors may change, and there are no special powers giving these indicators or levels. They are simple a measuring tool (yard stick) or reference point for us to use to help see relative behavior in a market, and if the behavior changes character or not. There are lots of psychological studies about behavioral finance that actually can help explain why there are similar (human) reactions by market participants to market events base on perception and natural biases. But that is a whole new field of study that is very interesting but not necessary for a trader to understand. As a Trader, the key is that we have objective tools and perceptions that can give us an edge, and if that is combined with good discipline and risk management we can achieve consistent results over time.

3 S&P 500 daily chart as of Mar 23, 2018 In the Daily chart we can see that Monday opened below the 50 day SMA (Blue) and soon crossed below the 20 day SMA (Yellow) and broke below the consolidation triangle (Orange line) Support on the same day. Tuesday and Wednesday saw mostly horizontal chop as price remained below all 3 levels. Thursday saw a gap down as the market opened at the 100 day SMA (Grey) and sold off strong followed by more selling on Friday down to the 200 day SMA (Purple) within 67 cents. Also note the long term (2 years +) Trend Line Support (Red line) just below the 200 day SMA. We will see if these areas provide support next week, or not (200 day SMA, Red Trend Line, or Feb 9 th lows)?

4 SPY 15min chart as of Mar 23, 2018 On this 15 min chart we can see the bearish Trend Line Resistance (Brown) ending on March 2 nd when price confirmed by crossing above this Trend Line about 2 hours after the open (Green Arrow). This Rally lasted 7 days, and ended on March 13 th when the Trend Line Support (Grey line) saw price break below mid day on the 13 th (Red Arrow) to confirm a change from a bullish to a bearish trend. Even though the Bottom of the prior move occurred at the open on March 2 nd, we could not know at that time that this was the bottom. It is impossible at the time it occurs. However, by using a Trend Line as an early confirmation tool, we had confirmation of the trend reversal about two hours later. We saw the same thing happen at the top of the prior move with the highs at the open on March 13 th. There is no way to know at that time that this was the top. So we waited for our confirmation. That confirmation occurred when price crossed below the Trend Line (Grey line) about mid day on the 13 th. Since there is no way to know at the moment a pivot high or low occurs, we must be patient for our confirmation signal to occur, so we can then make a decision based on some clue that a change has indeed occurred. It s easy to see the tops and bottoms well after they occur, yet impossible when they occur. The key is to use objective measurement to determine sufficient evidence is now seen to confirm the change in trend. Trying to capture tops and bottoms is a foolish game or goal. Patiently waiting for your confirmation gives you some improved odds, if you have the discipline to stick with it, and know what to do when it fails. Note the steeper slope of selling on Monday, Thursday and Friday of this week. There are many ways to confirm a change in the trend, and no one is perfect, since each can have false triggers. Different time frame charts can either have similar or different trends simultaneously. The idea of using the 15 min chart to draw my trend lines is my way to adjust based upon the increased volatility seen in the markets since early February. Knowing that bear trends (moves) can be much faster than bull trends, I chose a shorter time frame to monitor trends, and will stick with it until market volatility changes. Using adaptive trading criteria allows one to change with the markets. This is a more advanced way to trade and requires a well tested plan that allows for these dynamic conditions, and defines exactly when I can shift gears. If I did not define exactly when & how I can adjust my criteria, then there would be in effect no real objective controls or discipline, and can become very subjective.

5 DJIA weekly chart as of Mar 23, 2018 The Dow weekly chart is similar to the S&P, with a break below both the short term trend line consolidation (Orange line) and the 20 week SMA. However, unlike the S&P, the Dow also broke below its long term Trend Line (Red line) this week. The True Range this week was less than for both the week ending March 2 nd and Feb. 9 th. DJIA daily chart as of Mar 23, 2018 The Dow broke below its (Orange) trend line support at the open on Monday, paused Tuesday and Wednesday, then resumed downward Thursday and Friday. Friday broke below the long term Trend Line Support (Red line) but did not break below its Feb 9 th lows or its 200 day SMA (yet). FYI, we saw the Dow drop -598 pts in the last two hours of trading on Friday. Increased volume suggests more than just a few traders (funds) wanted out of their long positions before the weekend.

6 Nasdaq weekly chart as of Mar 23, 2018 The Nasdaq had saw a more volatile range this week than it saw on the week ending March 2 nd (or 9 th ) but not as wild as on Feb 9 th. Price broke below both the 20 week SMA and the short term trend line support (Orange) this week. Nasdaq daily chart as of Mar 23, 2018 Here we see the Nasdaq breaking below its Consolidation support (Orange line) at the open and then crossing below its 20 day SMA on Monday. Monday saw support at the 50 day SMA (Blue). Tuesday and Wednesday was mostly horizontal chop. Thursday saw a gap down below the 50 day SMA followed by even a wider range day on Friday. Volume was well above average on Monday, Thursday and Friday, confirming sellers had conviction.

7 IWM weekly chart as of Mar 23, 2018 The Russell showed some strength two weeks ago, but it too broke down this week crossing below its consolidation trend line (Orange) and its 20 week SMA. IWM daily chart as of Mar 23, 2018 Here we can see the ascending triangle (consolidation) formed by support and resistance (Orange lines) over the past two months. The Russell held up Monday with a test of both its 20 day and 50 day SMAs as support. Tuesday and Wednesday were mostly horizontal and remained above both the 20 day and 50 day SMAs. Thursday saw a break below both the 20 day and 50 day SMAs as well as the consolidation Trend Line Support (lower Orange line). Friday also saw a wide range day and a break below prior Resistance (Yellow line). Next levels to see a test of support would

8 be at the 200 day SMA, long term Trend Line (Red line) and then Feb 9 th lows. The IWM saw above average volume on Thursday and Friday. VIX daily chart as of Mar 23, 2018 Note the wider range candles increasing on Monday, Thursday and Friday of this week. This correlates with the stronger selling days. The VIX did not exceed the highs from March 2 nd. Selling this week was strong, persistent and methodical. We did not see the panic like we saw back on Feb 5 th, when Algos slammed the Dow Futures down 795 pts in fewer than 7 minutes, and the market makers stepped away from the Options markets, making it impossible to compute the VIX during the last hour of trading that day. { Read my Market Observations for the week ending Feb if you would like to review what a brief panic and broken market can look like.}

9 NYSE Advance/Decline Line daily chart as of Mar 23, 2018 Note the large drop on Friday, showing breadth of the selling was significant that day. McClellan Summation Index daily chart as of Mar 23, 2018 Note how each day this week saw increased negative acceleration to market breadth, with Friday showing the most significant acceleration. Since we ve had an exceptional week, let s look at a few additional Market Internals that may help us see the scope of this week s bearish market moves.

10 26-week New High/New Low Ratio daily chart as of Mar 23, 2018 This statistic is built by counting how many stocks made a new 26 week high, and those stocks that made a new 26 week low, and creating a ratio with these two quantities. This is then presented as a value in a 100 pt range that can only go from 0 to 100 and never beyond. (If there are only new 26 week new highs in the count, then the value is 100. If there are only 26 week new lows in the count, then the value is 0.) Note how often the 100 level was touched over the past six months (Blue box), and then how often the 0 level was touched over the past two months. Do these days when the value touched 0 look familiar? Additional Market Internals are computed by the CBOE (Chicago Board Options Exchange) that tracks the volume of Puts and the volume of Calls traded each day. If a lot more Puts are traded, that is assumed to be more bearish as participants are likely buying insurance and fears of a market drop would motivate them to do so aggressively. If more Calls are traded, then it is assumed to be more bullish, as participants may want to speculate with leverage. A ratio is computed by the volume of Puts / volume of Calls. Since Index Options and sector ETFs may have a different use than Equity Options (speculation vs. hedging), these are tracked separately by the CBOE. Below are Descriptions for these three types of Put/Call Ratios that data is available for use as a sentiment indicator. Symbol Name Description $CPC CBOE Options Total Put/Call Ratio Indicator showing the ratio between total put (EOD) option volume and total call option volume. $CPCI $CPCE CBOE Options Index Put/Call Ratio (EOD) CBOE Options Equity Put/Call Ratio (EOD) Includes both equity options and index options. Indicator showing the ratio between total put option volume and total call option volume for CBOE index options only. Indicator showing the ratio between total put option volume and total call option volume for CBOE equity options only.

11 CBOE Total Put/Call Ratio daily chart as of Mar 23, 2018 This chart shows all Option contracts used to compute a Put/Call Ratio. A value of 1.0 would show equal number of Puts and Calls were sold. Ratios greater than 1.0 would mean more Puts were traded than Calls. Ratios less than 1.0 would show more Call contracts were traded than Puts. Note the Spike on Friday in the Ratio, indicating serious volume of Puts being traded. This combined with the increasing VIX on Friday suggests that there was serious Put volume and participants willing to pay up for their protection. CBOE Index Options Put/Call Ratio daily chart as of Mar 23, 2018 Here we see only the volume of Index Options, and the higher number on Friday suggest lots of Funds were putting on hedges or increasing their insurance coverage by using index options (a common strategy for hedge funds).

12 CBOE Equity Put/Call Ratio daily chart as of Mar 23, 2018 The Equity Only Options volumes were more normal on Friday, suggesting the increased volume was mostly seen in the Index Options and not in Equity options. Fund managers are often wrong, but when a lot of money is committed to buying insurance with derivatives, then it may be worth taking notice, since someone believes strongly in their strategies. Now let s look at some key commodities, then some key sectors.

13 Oil daily chart as of Mar 23, 2018 Oil crossed above both its Trend Line Resistance (Green line) and its 50 day SMA on Tuesday, and continued up on Wednesday to find Resistance just below $66. Oil remained under this level for the remainder of this week. The next key level would be at the lat Jan. highs at $ Gold daily chart as of Mar 23, 2018 Gold rallied above its 20 day SMA and its Trend Line Resistance (Green line) on Wednesday this week, to then hovers near its 50 day SMA Thursday. On Friday Gold rallied again to close the week up at $1,347.

14 US Dollar Index daily chart as of Mar 23, 2018 The US Dollar Index mostly chopped sideways again this week but did drop on Wednesday and Friday (as Gold and Oil rallied) to end the week just above 89. Now let s look at some key sectors for this week. DJ Transports daily chart as of Mar 23, 2018 The Transports hovered below the 50 day SMA the first 3 days this week, then broke down on Thursday below its 20 day SMA and Friday, nearly to retest its Support from Oct 13 th Highs (Orange line) at 10,080. The Transports remain inside the descending triangle consolidation pattern, and near its Support level. The rally in oil this week is inversely correlated with the Transports, and that is the normal relationship, since fuel is the primary operating cost in most every form of transportation.

15 XLF Weekly chart as of Mar 23, 2018 Note the Trend Line Support (Red Line) over the past three years in this sector, and the parallel nature of the 50 week SMA (Blue) that bent upwards after the US Election in Nov This week ended with a test right on that trend line. XLF daily chart as of Mar 23, 2018 We noted how the XLF crossed below and ended last week below both its 20 day and 50 day SMAs. Monday of this week we saw the XLF cross below its recent trend line support (Orange line) where it closed below every day this week. Thursday saw the XLF drop hard below its 100 day SMA (Grey) and then drop hard again Friday to retest its Feb 9 th lows within 1 cent right on the three year Trend Line Support (Red line) just above its 200 day SMA. The Financial sector is a very important sector we use as a longer term confirmation of economic growth, and the drops we

16 saw the past two days will put some major concerns about real growth in the minds of many market participants. XLE daily chart as of Mar 23, 2018 The Energy sector continues to chop horizontally near its support level (Red line) for the past five months. This has often been one of the weaker sectors lately. QQQ daily chart as of Mar 23, 2018 The tech sector has often been a leader, but even this changed this week. Last week we saw a break out to new highs (Blue box) above prior Resistance. This changed with a gap down on Monday, leaving the blue box forming what is called an Island Reversal with a gap up and then a gap down isolating the 6-days as a price cluster, or Island. Monday s gap was with strong volume, and broke below both the prior Support and Resistance of the Ascending Triangle

17 consolidation pattern formed over the prior two months and below the 20 day SMA (Yellow). Tuesday and Wednesday was mostly horizontal chop between the 20 day and 50 day SMAs. Thursday gapped down below the 50 day SMA with strong selling and volume, that continued on Friday as price crossed below its 100 day SMA (Grey). Next potential support could be tested at the long term trend line (Red), the 200 day SMA (Purple) or the Feb. 9 th lows. The XLK chart looks about the same as the QQQ. The F.A.N.G. stocks make up a major portion of this sector and we will look at those charts below. SOXX daily chart as of Mar 23, 2018 About two and a half weeks ago, we saw the SOXX break above Resistance (Green line) that was also a Cup-n-Handle pattern at the time. There were only a few days of follow thru to the up side after this break above Resistance. Last week we saw strong selling on Mar 13 th with significant volume. This is also the day we saw the short term trend lines break support on the major indexes on the 15 min charts. This week began with the break of the Trend Line Support (Orange line in place since Feb 9 th on Monday. Thursday we saw the prior Resistance (Green line) break as failed support as well as the 20 day SMA. On Friday we saw the 50 day SMA fail to provide support. Note the above average volume on Monday and Friday of this week. Cup-n-Handle patterns do fail, and this one worked for a few days before the trend changed on March 13 th. Remember that date?

18 XLU daily chart as of Mar 23, 2018 The Utilities sector is one that is often seen as a flight to safety when markets get ugly. However, that brief rally Thursday did not hold, and Friday saw sellers even in this sector as price returned to below both its 20 day and 50 day SMAs. XLP daily chart as of Mar 23, 2018 Another sector often used as a refuge when markets get ugly is Consumer Staples. However, the chart tells us otherwise. We see steady selling every day this week. Prior Support (Orange line) from November lows was broken at the open on Wednesday, as volume increased for the remainder of this week. Clearly this was not a sector to seek safety, and fears about possible trade wars may have added to the selling.

19 XME daily chart as of Mar 23, 2018 This sector was one of the weakest this week. The cross below the 20 day and 50 day SMAs last week, saw more selling as price dropped to prior Resistance, new Support at Oct highs (Yellow line) where the XME closed this week. Both the 200 day SMA (Purple) and the long term trend line (Red) are near the same level that could be next tested for support. Since the short term trend changed to bearish back on March 13 th, we have kept an eye on the weakest sectors to help identify bearish trade ideas. The XME has often been the weakest sector over the past two weeks, so that helped us narrow our search for opportunities. Now let s look at a few key stocks to see what the charts tell us.

20 AAPL daily chart as of Mar 23, 2018 AAPL dropped from making new all time highs early last week, to testing prior Resistance from Sept 1 st last year, by the end of this week. The Prior Resistance (Yellow line) from Sept 1 st highs of $ was where AAPL found support and closed this Friday, exactly. How random is that? AAPL quickly crossed below its 20day SMA on Monday, pause Tuesday, and continued down to cross below its 50 day SMA on Wednesday. Thursday and Friday saw more selling as AAPL closed the week down over 7.3%. Remember how big AAPL is and now many funds likely have significant holdings of AAPL. The next areas to possibly test for support would be the 200 day SMA (Purple), the long term Trend Line (Red line) and then the Feb. 9 th lows. Over the past few years, the F.A.N.G stocks have often been the strongest performing stocks in the market. If you are a manager of some Hedge Funds or Mutual Funds, or even Index Funds, you likely have to hold a large portion of these few stocks just to be able to match or beat the S&P benchmark you are compared to every quarter. This creates an even more significant role these few stocks play in the overall markets. Also, with the news this past week questioning how well FB manages its business model, data, and customer access, there is an elevated sense of worry what it may mean for the future of social media platforms and protecting/using Data. We have seen over the past two to three months how half of the f.a.n.g. stocks have done very well (AMZN and NFLX), while the other half has mostly chopped sideways (FB and GOOGL). AAPL and NVDA tend to also be grouped with these tech stocks. The separation of strength also correlates with those companies mostly dealing with social media services (FB and GOOGL) vs. those more closely related to technology to provide entertainment (NFLX) or products (goods) (AMZN). This may serve as a clue to how you look at each business, their activities and business models as being more (or less) at risk from security issues or possible future regulations. Just something to think about, that could account for the divergences seen in this sector.

21 FB daily chart as of Mar 23, 2018 Note the very high volume every day this week. Remember, FB (and most of the fang stocks) are widely held in many funds, so when it breaks below its 200 day SMA, many funds could be required to eliminate their holdings or at least reduce their size. If so, they are motivated to do so sooner rather than later. Breaking below both the long term trend line (Red line) and the 200 day SMA (Purple) on the same day (Monday) and then remaining below both the four following days, sends a strong message.

22 AMZN daily chart as of Mar 23, 2018 AMZN has been one of the strongest f.a.n.g. stocks over most of this year, and it broke below its 20 day SMA on Friday of this week. NFLX daily chart as of Mar 23, 2018 NFLX crossed below its 20 day SMA on Thursday this week, and remains well above its 50 day SMA.

23 GOOGL daily chart as of Mar 23, 2018 GOOGL broke below both its 20 day and 50 day SMAs on the gap down at the open on Monday this week. Tuesday and Wednesday it chopped near its Trend Line Support (Lower Orange Line) to then gap down Thursday on strong volume. Friday dropped even more and closed less than $3 above its 200 day SMA. If GOOGL breaks below its 200 day SMA, that could trigger more selling. Time will tell. NVDA daily chart as of Mar 23, 2018 NVDA held up well the first three days this week, near Resistance (Blue line). Thursday saw price cross and close below the 20 day SMA (Yellow). On Friday more selling volume appeared as price broke below both the 50 day SMA and the Trend Line Support (Orange line).

24 MU daily chart as of Mar 23, 2018 MU also held up well this week, until Thursday, when the short term Trend Line Support (Grey line) broke. Earnings were announced (beat) after the close on Thursday, but with such a negative market sentiment Thursday and Friday regarding both the Tech and Semiconductor sectors made it rough for MU to hold on and it too sold off down to and below its 20 day SMA on Friday. MA daily chart as of Mar 23, 2018 BA has been one of the stronger stocks in the Financial sector lately, and it actually held up well the first three days this week. BA broke down below support (Yellow line), below its 20 day SMA and below Trend Line Support (Orange line) all on Thursday. Friday saw more wide spread selling in all sectors to take BA down below its 50 day SMA where it closed the week.

25 SQ daily chart as of Mar 23, 2018 SQ, like MA, also held on well the first three days this week. Thursday saw some selling but did not take SQ below Tuesday s lows. Friday saw stronger selling that took SQ below its Trend line (Grey) support and closed the week near its 20 day SMA. GS daily chart as of Mar 23, 2018 GS spent the first three days this week between its 20 day and 50 day SMAs. Thursday saw a strong gap down to break below both the Trend Line Support (Orange line) and the 50 day SMA. Friday saw more selling down to and below prior Resistance (Yellow line) from Oct 6 th highs. The 200 day SMA and the Feb 9 th lows have yet to be tested as support.

26 BA daily chart as of Mar 23, 2018 BA broke below its 50 day SMA on March 13 th. This Wednesday saw BA test its 50 day SMA as Resistance, then gap down on Thursday to retest support at its long term Trend Line (Red line). The approval of the Budget in D.C. briefly helped some defense related stocks. LMT daily chart as of Mar 23, 2018 LMT has been below its 50 day SMA for about two weeks. The Budget approval news on Friday briefly helped some defense related stocks, like LMT, but could not help LMT remain above its 50 day SMA.

27 X daily chart as of Mar 23, 2018 Last week we saw X drop below its prior Support at the 20 day SMA (Yellow) and the at the Jan 29 th highs (Green line) both on March 13 th. This was the same day we saw all the indexes break their short term trend line support (ref. 15 min charts). X dropped below its 50 day SMA the next day (Mar 14 th ) to then bounce on Friday (Mar 16 th ) up to test its 50 day SMA as new Resistance. As the Markets opened on Monday, X briefly rallied up to $40.25 (within 11 cents of the 50 day SMA) in the first 30 min where it saw Resistance, and then we saw sellers step in as prices turned downward. This was our opportunity to get bearish near $40 on Monday morning as Resistance was respected and odds favor a drop to below the prior lows (Mar 15 th ) and a potential test of prior support at Feb 5 th lows (Orange line) or the 200 day SMA. The large drop on Thursday (Mar 22 nd ) with volume broke below the 100 day SMA (Grey) as Tariff news and reactions continued. Note: the quick three wave pattern with the first wave down as X moved from $45 to the $40 area, wave two was horizontal for a week, then wave 3 dropped to below $34 the last two days this week. During wave two the 50 day SMA was respected as Resistance. FYI, Bearish swings are often much faster than bullish trends, and therefore require prompt and flawless decision making. Effective risk management is always required.

28 SCCO daily chart as of Mar 23, 2018 SCCO has held on well, even when the sector has been ugly. SCCO actually made new all time highs on Wednesday of this week. Thursday saw a test of the 20 day SMA as support, to then break below this level and prior Resistance/new Support (Purple line) on Friday. CAT daily chart as of Mar 23, 2018 CAT remains inside its descending triangle consolidation pattern, and ended the week near its Support level.

29 DE daily chart as of Mar 23, 2018 Last week DE closed Friday nearly right on its 50 day SMA from below. As the Markets opened on Monday (Mar 19 th ) DE sold off at the open, confirming the 50 day SMA as Resistance. With a stop above the 50 day SMA and a potential of retesting support at the Trend Line (lower Orange line) the potential Risk/Reward met our trading criteria. We saw our opportunity to get bearish since this Resistance was respected and the trend in DE had been bearish since March 12 th. Just like the example above with US Steel ( X ), DE is another example of a common pattern where: price drops down thru the 50 day SMA as failed support, then soon bounces up to test the 50 day SMA as new Resistance. If this Resistance is confirmed, then the odds favor a drop lower than the prior lows just before the test of the 50 day SMA as Resistance. This past week we saw another volatile week in the market, and we hope you learned something from our chart observations we shared above. By using various Market Internals we can better reveal the underlying nature of the market s behavior, and how that may be similar and/or different than prior actions. Markets moves are never exactly the same (since there are far too many variables all affecting the markets simultaneously and differently) but human reactions to events do have sufficient similarities that we can learn to recognize and use to our advantage, statistically. As the late Mark Douglas has said, the Markets offer a paradox, you can never know the outcome of the next trade, but you can know the outcome of a series of trades. Trade Smart, CJ