Market Observations - as of Aug 24, 2018

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1 Market Observations - as of Aug 24, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week we mostly saw quiet changes in leadership as sector rotation continued from last week as well as the divergence between the Nasdaq (Tech) and the S&P and Dow (Industrials) alternated with light summer volume. This changed on Friday when we saw most markets get in sync together and rally to deliver new record highs by the end of the day. The Nasdaq composite, S&P-500 and Russell 2000 all delivered new all time highs on Friday, as well as new high Closes. The Dow Industrials lagged a bit, but still was able to exceed its Feb highs on Tuesday of this week, and then pulled back a little to end the week back below this prior Resistance level. The Russell closed up 1.9% for the week, followed by the Nasdaq that closed up 1.6%. The S&P closed up 0.86% for the week, and the Dow closed up 0.47%. On many charts we have seen a common theme over the past few weeks, that of consolidation within the context of a bull trend. This week we saw Resistance break as the long term BULL market showed that it was still in place, and resumed to deliver higher highs. We also saw this bull market break the record this week for the longest duration bull market in US history. These are reminders that Trends do not go in a straight line, but alternate between periods of expansion and compression of momentum (and volatility) as price makes its longer term progress. A pause in a trend (retracement or consolidation) more often ends with the prior trend resuming. That what we saw again happen this week in many charts. As technical traders, we cannot and do not try to predict what the markets will do next. We can, however, study chart behaviors and learn to identify when there is a likelihood of the odds favoring one outcome (continuation) over another (reversal), and use that statistical advantage over time (over many trades) to give us and edge. This is what Mark Douglas calls the Trader s Paradox, we cannot know the outcome of the next trade, but we can know the outcome of a series of trades. Trading is a probability or numbers game. Now let s look at the charts, to see what they tell us this week.

2 S&P 500 weekly chart as of Aug 24, 2018 Here we can see the S&P has advanced 7 of the past 8 weeks, and exceeded its Jan highs (blue line) this week. The S&P has been above its 50 week SMA since Mar 2016, with a brief test (but not a weekly close below) in late June The bull trend has resumed as confirmed by the new All Time High this week. S&P 500 daily chart as of Aug 24, 2018 The S&P advanced by small steps each day this week but on Thursday. Every day this week saw lighter than average volume and narrow range days, with Friday delivering the widest range day of this week, but that was really just an Average range day. Wednesday and Thursday saw very small corrections.

3 DJIA weekly chart as of Aug 24, 2018 The Dow has also been above its 50 week SMA (Blue) since March It has yet to exceed its Jan highs this year. DJIA daily chart as of Aug 24, 2018 Here we can see the Dow exceed briefly its Feb highs (Grey line) on Tuesday this week, then pulled back and remained below this Resistance level the rest of this week. Each day saw an advance in price but on Wednesday and Thursday of this week where we saw small corrections after delivering Tuesday s highs. Every day this week we saw below average volume and narrow range days as the Dow mostly chopped just below 25,820 level.

4 Nasdaq weekly chart as of Aug 24, 2018 The Nasdaq delivered more new all time highs again this week. The Nasdaq has remained above its 50 week SMA (Blue) since July Nasdaq daily chart as of Aug 24, 2018 Unlike the Dow, the Nasdaq advanced on Wednesday and Thursday saw only a small pull back after delivering a higher high than the prior day. Friday saw a small gap up at the open and both a new record high and highest close.

5 Russell 2000 daily chart as of Aug 24, 2018 The Russell saw a large range day on Tuesday when it broke to new record highs on a wide range day. The other days this week were rather quiet with below average ranges. Next we will look at a few Market Internals to see what messages we can see from the overall markets and what they were doing this week.

6 NYSE Advance/Decline Line daily chart as of Aug 24, 2018 Here we see the breadth of the market s advance last Friday and this Monday (Aug 20 th ) then remain relatively flat the rest of the week. Thursday saw some pull back, but Friday ended the week back where it was on Tuesday and Wednesday. This study is based on the number of listed stocks that are moving up vs. moving down. McClellan Summation Index daily chart as of Aug 24, 2018 Here we see advances each day this week with increased rates of changes in breadth, with Friday showing the least change.

7 VIX daily chart as of Aug 24, 2018 The VIX remained below its 50 day SMA all of this week, as if slowly drifted lower as the week progressed. OIL daily chart as of Aug 24, 2018 Oil rallied off of support this week, above its 200 day SMA (Purple) to cross above its 20 day SMA (Yellow) on Wednesday and briefly pierce its 50 day SMA (Blue) on Friday. Oil closed the week near the middle of its Box and between its 20 day and 50 day SMAS. Note how flat the 50 day SMA has been for over a month, indicating little overall change in price for a while.

8 GOLD daily chart as of Aug 24, 2018 Gold dropped hard last week, and then began to bounce off of new support. This week Gold continued its bounce until Wednesday when it stalled. Thursday and Friday wider range days as Gold dropped Thursday then bounce Friday as the US Dollar was doing the same, but in the opposite directions. Gold closed on Friday back above both its Trend Line and its 20 day SMA. US Dollar Index daily chart as of Aug 24, 2018 The US Dollar Index chart is nearly the mirror of Gold, with the Rally last week, that then fell back down the last two days of last week, and continued the first three days this week to find support at the 50 day SMA (Blue). The Thursday whips up and back down Friday again tested support at the 50 day SMA.

9 TLT daily chart as of Aug 24, 2018 The 20 year bond fund saw 4 of 5 days close above its 200 day SMA this week, while remaining below the March highs Resistance (Grey line). Next we will look at a few key Sectors.

10 Dow Transports daily chart as of Aug 24, 2018 The Dow Transports actually delivered new all time highs on Tuesday this week, the same day that the Dow Industrials briefly broke above its Feb 2018 highs. The Transports then pulled back Wednesday and Thursday and paused on Friday to end the week up 0.5% from the prior week. The Transports have often moved in opposite directions as Oil, since fuel is the primary expense for most all modes of transportation. XLE daily chart as of Aug 24, 2018 The Energy sector often moves with Oil, but not always. We see the brief dip below the 200 day SMA last week and the bounce this week to end the week just below the 20 day and 50 day SMAs.

11 XLF daily chart as of Aug 24, 2018 The Financials have struggled and have not made much progress over the past 5 months. We see the March 22 gap day Resistance (Grey line) continue to act as Resistance 5 months later. However, we also see a bit more persistence by the bulls at retesting this Resistance several times, and if that persistence continues, then Supply at that Resistance level will be consumed and price will have nowhere to go but up to find the next source of Supply. This is forming a cup-n-handle formation, but in a trendless sector, so it may not have the strongest convictions as would be seen in a cup-n-handle found in the context of a longer term Bull trend (ref. see AMD below). Context matters, when we are looking for a statistical edge.

12 QQQ daily chart as of Aug 24, 2018 While the Nasdaq composite has delivered new all time highs the end of this week, the QQQ came up a bit short of doing the same. The QQQ remains inside its ascending triangle consolidation pattern, and odds still favor a positive break out. Dip buyers have found good entry points the past few months at or near the 50 day SMA support. Note how both the 50 day and 20 day SMAs are sloping upwards, but the space between them is getting a little narrower, this is one way to see the overall slower advances the past few weeks while the consolidation pattern has formed since the July highs. SOXX daily chart as of Aug 24, 2018 The Semiconductor sector is a key component of Technology, and we see oscillations of the SOXX above and below its 50 day and 20 day SMAs several times over this year, as price consolidates in a nearly symmetrical Triangle. Price we below both its 20 day and 50 day SMAS every day this week but on Friday, where it was above both SMAs. Price is now near the middle of

13 its 2018 range. When we look at some stocks in this sector, we will see a mix of both strong and weak components. XLY daily chart as of Aug 24, 2018 XLY increased by 2.1% this week and ended with a new all time high. When you look at the components that make up this ETF, and their weightings, you will see that AMZN makes up over 24% of this ETF. (AMZN was up over 1.2% this week.) The top 5 holdings in the XLY etf are: AMZN, HD, DIS, CMCSA and NFLX, and these 5 account for over 47% of the total Holdings. XLV daily chart as of Aug 24, 2018 The Healthcare sector has been in a steady bull trend since early July. The XLV advanced another 0.8% this week and closed Friday with new all time highs, exceeding the prior Resistance from Jan 2018 highs (Green line).

14 XRT daily chart as of Aug 24, 2018 The XRT advanced strong the first 3 days this week to deliver new all time highs on Wednesday. Thursday and Friday saw lower highs and a test of new Support on Friday at the prior Resistance from the prior week (Aug 14 th ). Friday s close was up 1.4% over the prior week. XME daily chart as of Aug 24, 2018 The metals and mining etf tried to bounce the first part of this week after making new 2018 lows last week. However, Wednesday saw a stall in this bounce followed by a strong drop on Thursday, also the widest range day this week. Friday saw a gap up and recovery of most of Thursday s losses. The week ended mostly flat, with only a $0.40 advance from the prior week, and this sector near the lows of its 2018 range.

15 XLI daily chart as of Aug 24, 2018 Industrials oscillated again this week as they remained near the middle of their 2018 range. This sector seems to oscillate with daily and weekly political comments about trade and tariffs. XLU daily chart as of Aug 24, 2018 The Utilities sector rallied last week, and took back most of those advances this week. The prior Resistance from July 6 th highs (Grey line), the 20 day SMA (Yellow) and the Trend Line (Orange line) all acted like Support this week. The week closed down 1.4%. Next we will look at a few key stocks.

16 AAPL daily chart as of Aug 24, 2018 Apple was mostly flat this week after delivering new record All Time Highs on Monday. AMZN daily chart as of Aug 24, 2018 Amazon was quiet this week after delivering new all time highs on Aug 13 th. This week closed within $20 of the record new highs.

17 NFLX daily chart as of Aug 24, 2018 The downward slide in NFLX seemed to reverse this week as Price broke above the descending Trend Line (Green Line) on Tuesday, above the descending 20 day SMA (Yellow) on Wednesday, and above the Aug 7 th (Orange line) highs on Friday. The week closed with NFLX still below its 50 day SMA. FB daily chart as of Aug 24, 2018 FB remained mostly horizontal and quiet this week, as the prior week s slide seemed to stop. FB remains below its 50d, 200d and 20 day SMAs and above its July 30 th lows.

18 GOOGL daily chart as of Aug 24, 2018 GOOGL was mostly quiet and horizontal this week, with a failed rally on Thursday, and a small rally on Friday to end the week nearly right on its 20 day SMA. NVDA daily chart as of Aug 24, 2018 NVDA saw a lot of volume last week around earnings (Aug 16 th ) and began this week (the first hour of Monday) with a dip to find new support. About 3 hours into trading on Monday, NVDA found the Nitro Switch, and speed rally was on. NVDA blasted past its 50 day SMA then fell back some during the last 90 minutes of trading on Monday. Tuesday crossed and closed above both the 50 day and 20 day SMAs with volume. Wednesday broke above the May highs (Grey line), Thursday above the Aug 15 th highs, and Friday above the June 14 th highs (Green line). Friday s highs and close both set new all time records. Each day this week saw well above average volume, and

19 most days this week were wider range days than average. There likely was some significant news early this week, but those particulars don t really matter too much. The chart tells us a significant story. AMD daily chart as of Aug 24, 2018 AMD has been in a strong rally since early May this year. We have seen several break outs over the past few months. This week we saw something different, a parabolic move. Monday started out quiet. Tuesday saw a small rally to break above prior Resistance (Green line) that continued on Wednesday. Note the below average volume and below average range for each of the first 3 days of this week. Something happened on Thursday and Friday, with gap ups at the open and very strong conviction shown by the bulls as new highs continued, on well above volume and wider range days. Earnings were reported back on July 25 th, so it may have been some other news this week? We closed our Aug options position on Aug 17 th expiration day. We re-entered with Sept options the following trading day (Aug 20 th ) since the trend remained strong and price was very near Resistance for a potential break out, as we had seen before in May and July. If you are lucky to find yourself in a parabolic move, hang on. With the expansion in volatility, a reversal can come at any time, and will likely be fast and furious, so manage your trailing stops appropriately.

20 AMAT daily chart as of Aug 24, 2018 The above examples of strong stocks in the Semiconductor space (NVDA & AMD), there has also been a bearish candidate at the same time. AMAT has been making lower highs and lower lows since March, and continues to do so. A bearish strategy is to sell rallies as soon as they seem to stall out after making a lower high. With earnings due Aug 16 th there is a risk of a gap up response. Remember how last week the markets seemed to be selling news, regardless if companies beat their estimates. AMAT made their numbers, but the market sold off AMAT just the same. The above examples (NVDA, AMD, and AMAT) are all in a sector that is stuck in the middle of its consolidation pattern (SOXX) but can still make moves either way. This suggests that the chart of the stock you are considering to trade takes priority, and its parent Sector or overall market conditions are helpful (when they all agree on the trend) but not required. These are what I call Outliers, Stocks that seem to behave in their own war, regardless of the overall markets or sector they are in. When I identify that the stock is an outlier, I don t need confirmation from the parent sector or overall markets, but I do require confirmation in the form of the absolute best (excellent) chart patterns and parameters that support my trade decisions. These keeps open the best opportunities when found, but I must first confirm their outlier status and behavior before trading them. Speaking of Outliers, the weak Financial Sector is made up of sub-sectors, the big banks (BAC, WFC, C) and the big Firms (JPM, GS, MS) and consumer credit (V, AXP, MA). While most of the Financial sector (XLF) has struggled this year, the Consumer Credit are has been strong the past few months. We have seen this with not only V and MA, but also with SQ. AXP has been the weaker one of this sub-group.

21 V daily chart as of Aug 24, 2018 V made new highs in July, and then pulled back two days to find and confirm support at its 50 day SMA. A rally followed to return V to above its 20 day SMA. V has been quiet and horizontal just above this 20 day SMA for the past few weeks. On Thursday of this week, V rallied above its July 20 th highs (Grey line) and continued Friday to break above its July 27 th highs (Green line) to close Friday with new All Time Highs and close. SQ had a very strong week this week while MA had a very strong Friday. TSLA daily chart as of Aug 24, 2018 TSLA gapped down on Monday and fell the first hour find and confirm support near its July 30 th lows (Grey line) before bounci1ng and closing above the prior Friday s close. The bounce continued Tuesday to take TSLA back above its 200 day SMA. The rest of this week TSLA was in a narrow range horizontal chop to end the week just above its 200 day SMA.

22 SCCO daily chart as of Aug 24, 2018 SCCO remained in a narrow horizontal range this week just above its July lows (Yellow line). X daily chart as of Aug 24, 2018 US Steel began this week with a continued bounce from last week s lows, but then stalled on Wednesday and chopped mostly sideways the rest of this week after finding new Resistance at prior Support (Grey line) from May 1 st lows and near the 20 day SMA.

23 CAT daily chart as of Aug 24, 2018 CAT chopped sideway between its 20 day and 50 day SMA the first 3 days this week then dropped on Thursday below both SMAs. Friday bounce a bit to close the week nearly on its 20 day SMA and May 3 rd lows (Orange line). The 50 day SMA continues to provide Resistance this month. HD daily chart as of Aug 24, 2018 HD rallied Monday above both its 20 day and 50 day SMAs and continued Tuesday to close above its Aug 9 th highs. Wednesday saw a sympathy pop-n-drop after LOWs reported its earnings. Thursday and Friday saw HD continue its rally for the week to close near its June highs (Blue line).

24 JNJ daily chart as of Aug 24, 2018 Since the Healthcare sector has been in a rally over the past two months, we looked for opportunities and JNJ is the biggest (10%) holdings in the XLV sector etf. You can see a series of break outs above Resistance over the past two months, with Resistance levels drawn in Orange, Grey, Blue and Green being broken, and the next one shown in Yellow. You may also see this chart as a set of nested Cups (cup-n-handle) insides of larger cups, inside of larger cups, as the sequence of price breaking above Resistance progresses. Top down Analysis (like we share each week) is one way to find opportunities. But ultimately it s the charts and learning to read them and recognizing opportunities in those charts that is how potential trades are identified and evaluated. Hope this study of a variety of this week s charts has helped to show how to read the messages in the charts, and what opportunities may look like. Trade smart, CJ