Market Observations - as of Jul 27, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week began with most markets continuing their bullish trends from the prior week. However, we saw many signs of a change in behavior by the end of this week. We will look at some intraday charts for both the S&P and the NASDAQ this week to see exactly what signs we saw and when they occurred. These changes could be an early clue to major changes in market sentiment that could continue next week, or they could be an over-reaction to events this week and a shake out of the weaker hands with the bulls soon resuming control. Either way, we are wise to be prepared for multiple scenarios ahead. Part of the action this week was likely related to Earnings from key f.a.a.n.g stocks due to their broad impact (weighting) on indexes and Funds (ETFs). Last week we saw a large negative reaction to NFLX earnings. This week we saw a positive reaction to Alphabet (GOOGL), a huge negative reaction to FB and a positive reaction to AMZN that sold off during Friday to give back all of that day s gains. AAPL reports this next week on July 31 st after the close. The selling on Friday was broad based, not just Technology, with many sectors showing a change in character or strength. We can see this with various Market Internals indicators. This occurred in the context of strong GDP (4.1%) reported Friday morning before the open. An important way that helps us remain Objective with our trading, is to focus on the charts and what we see and not on the news events of the day. Now, let s see what the charts are telling us this week.
S&P 500 weekly chart as of Jul 27, 2018 The S&P broke above its consolidation triangle Resistance (Yellow) three weeks ago, but has yet to exceed its Jan 2018 prior record highs. Note this week s candle has a tall wick on top, this shows a higher high then a reversal could have occurred during this week. S&P 500 daily chart as of Jul 27, 2018 Here we see the small rally on Tuesday to a higher high than the prior week followed by a large range rally day on Wednesday to higher highs. Thursday was a pause here these new highs, and Friday was a drop that gave back most all of Wednesday s gains. An intraday chart (30 min.) will show us more details of the change this week in momentum and trend.
S&P 500 30 min. chart as of Jul 27, 2018 Here we can see the gap up Tuesday, and rally on Wednesday to higher highs. Thursday was narrow and quiet, then Friday was a sell off that accelerated mid-day right when the short term Trend Line (dark Blue) was broken along with the 30 min. 50 SMA (Blue). The largest 30 min. candle on Friday occurred right after this support broke. The last two and a half hours on Friday saw mostly horizontal chop. S&P 500 5 min. chart as of Jul 27, 2018 Here we can see the 5min 50 SMA (Blue) acted as support on the Wednesday rally and continued the first half of Thursday. On Friday the 5min 20 SMA (Yellow) acted like Resistance during the sell-off. Also note how both the 5min 200 SMA (Purple) and the Trend Line (Dark Blue) each briefly acted like support, where price paused before resuming the selling. Also note the acceleration in selling after the Trend Line support broke. The behavior of price at or near these key areas helps us gauge the trend and conviction of the market s participants.
DJIA weekly chart as of Jul 27, 2018 We see the Dow hover near its Consolidation Resistance (Orange) Trend Line last week and clearly break above that level this week. Last week was a very narrow range, and this week was wider and bullish. DJIA daily chart as of Jul 27, 2018 Here we can see more clearly the Dow hover near its Trend Line Resistance on Monday, then rally on Tuesday Wednesday and Thursday with higher highs each day. Friday saw a small pull back, but most of this week s gains remained.
NASDAQ weekly chart as of Jul 27, 2018 Here we see a narrow range week last week and a wider range candle with a tall upper wick this week. This type of candle suggests a mid-week reversal after delivering a higher high. Note the past three weeks have been in a similar range. NASDAQ daily chart as of Jul 27, 2018 On the daily chart we see the two new record highs this week occurring on Tuesday and Wednesday, then a drop on Friday to below the Trend Line Support (Dark Blue) and the 20 day SMA (Yellow). Also note the daily True Range (ATR-1) in white in the lower panel of this chart indicating that Friday was the widest range day since June 25 th. Both June 25 th and 27 th were prior wide range down days.
NASDAQ 30 min. chart as of Jul 27, 2018 The Nasdaq had been in a horizontal range the prior week, then this week the NASDAQ spiked early on Tuesday and again late Wednesday to deliver new record highs followed by a return to the prior chop zone after each rally, forming a Double Top pattern. A Double top is often a reversal pattern. The Trend Line (Dark Blue) is drawn between the lows on July 2 nd and July 23 rd. This Trend Line Support was again tested on Tuesday and early Thursday. Thursday saw the Nasdaq cross below this Trend Line in the last half of the day, but without any price movement up or down (narrow chop) as the Trend Line is sloping upward. On Friday the behavior changed as price gapped up and then filled the small gap in the first half hour of trading. The NASDAQ dropped below: the short term Trend Line (Blue) in the first 30min., then below the 30min 200 SMA (Purple), and the prior week s chop zone Support near 7780. The Orange Trend Line was drawn between the lows of June 28 th and July 2 nd on an intraday chart and extended to the right. Note how this area acted like Support on Friday (July 27 th ) for the NASDAQ near the 7700 Round number. Sometimes keeping prior (old) Trend Lines on a chart can again be useful.
Russell 2000 weekly chart as of Jul 27, 2018 The Russell was in a narrow range near its all time high the prior two weeks, but sold off this week to break below its Trend Line Support (Yellow). Russell 2000 daily chart as of Jul 27, 2018 Here we can see the Russell bounce off of its 20 day SMA (Yellow) twice over the prior weeks, then break below: its 20 day SMA, its Trend Line Support (Yellow) and its 50 day SMA all on Friday of this week. The Russell has not closed below its 50 day SMA since May 3 rd. Remember, the Russell is made up of 2000 small cap stocks, so it is likely there is plenty of market breadth breaking down on Friday as well.
NYSE Advance/Decline Line daily chart as of Jul 27, 2018 Here we see market breadth in a horizontal chop zone the past 3 weeks, with Friday s (July 27 th ) range being the widest since July 12 th and a close this week below its 20 day SMA. The last time this breadth study closed below its 20 day SMA was on July 2 nd. McClellan Summation Index daily chart as of Jul 27, 2018 Here we see little change in market breadth acceleration as it remains below its 20 day SMA (Yellow). The only real changes this week were seen on Tuesday and Friday, both being bearish in breadth.
VIX daily chart as of Jul 27, 2018 Options volatility has remained low for several weeks with both the VIX below all its SMAs, and True Range (ATR1) of VIX below its Average (ATR-14) until Friday of this week. The True Range of Friday was 2.66 (Purple arrow) and had not been this high since June 25 th and 27 th. (Note my comments about these same two days in my Nasdaq daily chart comments above.) Next we will look at a few key commodities and US currency. Oil daily chart as of Jul 27, 2018 Oil rallied a little this week from support tested last week at $66.29. Oil crossed above its 50 day SMA on Wednesday and closed this week nearly on its 50 day SMA. We saw a narrow range from 67.56 to 69.92 this week.
Gold daily chart as of Jul 27, 2018 Gold traded within a narrow range of 1218.1 to 1236.5 this week. US Dollar Index daily chart as of Jul 27, 2018 The US Dollar Index remained within a narrow range this week and within the range it has seen over the prior two months.
TLT daily chart as of Jul 27, 2018 The TLT 20 year Treasury Fund crossed below its 50 day SMA on Monday and remained in a narrow range the remainder of this week. Next we will look at a few key sectors this week to see what the charts tell us. Dow Transports daily chart as of Jul 27, 2018 The Transports did a whip saw this week with a strong down day Tuesday, strong up day Wednesday, and a rally on Thursday to test Resistance at the 2018 Consolidation Triangle Trend Line Resistance (Orange line). Friday pulled back only a little as most of this week s gains were retained. The Dow Industrials broke above its TL Resistance back on July 17 th ; however the Transports have yet to do so this year.
XLF daily chart as of Jul 27, 2018 Last week the Financials broke out above their key moving averages and consolidation Trend Line Resistance. This week the rally off of the Trend Line (Green) prior Resistance as new Support, started strong Monday, but then mostly chopped the rest of this week with a small positive trend, to close the week above all the major Moving Averages. Friday did not see a pull back like was seen in many sectors. XLE daily chart as of Jul 27, 2018 Energy rallied this week crossing above to 20 day (Yellow) and 50 day (Blue) SMAs. The week ended with this sector near the middle of its range from the prior 2 to 3 months.
QQQ daily chart as of Jul 27, 2018 The Tech Sector looks similar to the overall Nasdaq, with new highs on Tuesday and Wednesday, a quiet Thursday and then a strong sell-off on Friday. Both the QQQ and XLK have very similar charts. The week ended with the QQQ nearly on its 20 day SMA after giving back all of this week s gains. SOXX daily chart as of Jul 27, 2018 The Semiconductor sector has been in a horizontal range for nearly three weeks. Thursday closed above its 50 day SMA and Friday closed just below. The SOXX did exceed its Jan highs by 3 cents briefly Friday morning before closing down on the day.
XRT daily chart as of Jul 27, 2018 The Retail sector remained inside its range this week, a range it has seen for two months. XME daily chart as of Jul 27, 2018 The Metals and Mining sector gapped up Tuesday just to sell off slowly most of this week to close nearly flat for the week, below its 50 day SMA and above its 20 day.
XLI daily chart as of Jul 27, 2018 The Industrials had a strong week this week, with most of its gains coming on Wednesday (crossed above its 50 day SMA and 200 day SMA) and Thursday when the XLI broke above its Trend Line Resistance (Orange line) drawn from its Jan and June highs. Friday saw a higher high and a small down close for the day, keeping most of the week s gains. XLU daily chart as of Jul 27, 2018 The Utilities sector has been mostly sideways this week, testing Support on Tuesday (when markets rallied) and Resistance on Friday (when markets sold-off). Next we will look at a few key stocks for this week. We will start with the f.a.a.n.g. stocks since they play a significant role in the overall markets due to their size and weighting.
AAPL daily chart as of Jul 27, 2018 Apple is the one remaining f.a.a.n.g. stock yet to release its quarterly earnings reports. Apple reports next week on July 31 st after the close. AAPL rallied Tuesday, Wednesday and Thursday, providing new all time highs on both Wednesday and Thursday. AAPL gave back all of this week s gains on Friday this week. AAPL found support Friday near its 20 day SMA. AMZN daily chart as of Jul 27, 2018 AMZN oscillated this week between delivering record new highs on Wednesday and Friday, while testing support near 1800. Reactions to Earnings after the close on Thursday were wild with both -98 and +88 pt swings. AMZN opened up nearly 70 points the following day (Friday) just to sell-off most of the day to end the week nearly flat.
NFLX daily chart as of Jul 27, 2018 NFLX reported last week, dropping hard on July 17 th. This week was quiet, and remained within a narrow range near the middle of the range defined on July 17 th. FB daily chart as of Jul 27, 2018 FB reported on Wednesday after the close this week, after delivering new all time highs each of the first 3 days of this week. The Expected Move as derived by Options Pricing on FB before the close on Wednesday estimated a + or - $12 move. FB actually dropped $44 in afterhours trading. $19 of that drop was after the numbers were released, and the additional $25 drop came during the conference call an hour to 90 min. later. The open on Thursday showed FB down just over $42. Thursday and Friday did not see much of a bounce as prices remained within a $7 range. March 2 nd lows seemed to provide new Support Thursday and Friday (Grey line).
GOOGL daily chart as of Jul 27, 2018 Alphabet gapped up after earnings this week to deliver new all time highs every day but Monday this week. Friday saw a record high in the morning before returning the gains after the gap up Tuesday, while respecting the gap range as new Support. MSFT daily chart as of Jul 27, 2018 MSFT, like much of the Tech sector, saw a rally Tuesday and Wednesday, a pause Thursday, and then selling Friday to return most of the week s gains. Note the prior week s highs (Grey line) were Support for this week, and the Trend Line (Dark Blue) was mostly respected as Support on Friday s dip. The week ended positively for MSFT.
AMD daily chart as of Jul 27, 2018 AMD has been in a strong bullish trend since early May (Wave 1) and then has been in a pause (Wave 2) in that trend since mid June. We entered a new long position with Options on July 6 th when AMD crossed above its 20 day SMA. We had to exit that profitable position last Friday (July 20 th ) since those options contracts would expire that day at the close. Immediately after exiting this position, we put AMD on our watch list to remind us to look for a good re-entry point. The AMD Trend appears to be in a wave 2 pause at the time (on July 20 th ). On Monday of this week (July 23 rd ) AMD fell the first 7 min. after the open, then bounced after finding support near its 20 day SMA. We waited to see if this support would hold and if a bounce would continue. After seeing a good bounce in the first half hour of trading, we chose to enter with a new long position but using Aug. Options contracts. AMD confirmed the next day by showing support at the 20 day SMA on Tuesday. We knew that Earnings were scheduled for July 25 th after the close. The Dip below the 20 day SMA on Wednesday caused some concerns, but we held on since our stop was not triggered. If earnings reactions were ugly, using options limits our risk very precisely and our position size kept us within our comfort level, even if those options went to zero. In this case, AMD reactions were positive after earnings. It is interesting to see where AMD found Resistance on Friday, near the prior Trend Line (Orange) that was support during wave 1 (May first half of June). We did not move our initial stops until Thursday. On Thursday we moved our stops up (now called Trailing Stops) and did so again on Friday, once the position had moved in our favor, as per our plan. The whole point of having a written and well tested trading plan is the goal of consistency. There will be always be trades that do not work out, and we limit our risks per our plan. There will be trades that go in our favor, and we let them continue to work for us until they tell us that they are done. And done is clearly defined in our trading plan. There will be a distribution of small, medium and large winners, but there should never be any big losses, IF we follow our plan. Successful trading is a matter of discipline and accurately following our plan. Keeping good records helps us know clearly when either our Trading Plan has a weakness, or when the Operator has not followed the plan. Without good records, how will you ever know what specific part needs improving? Consistent success comes from a consistent process.
JPM daily chart as of Jul 27, 2018 Last week we commented about JPM crossing above its 50 day SMA on July 16 th (although we did not post a chart). The remainder of last week was mostly sideways. This week JPM rallied and delivered higher highs every day this week, exceeding prior highs from May and April this year. GS also continued its rally this week, but with less momentum than JPM. V daily chart as of Jul 27, 2018 V continued its rally this week, delivering new all time highs on Wednesday, Thursday and Friday this week. Daily ranges became a bit more volatile (wider) later this week, as Support from July 18 th lows (Grey line) were respected all week.
SCCO daily chart as of Jul 27, 2018 SCCO was quiet on Monday, remaining near its 2018 lows from the prior week. Tuesday saw SCCO gap up and rallied Tuesday thru Friday this week, ending the week with a test of its 50 day SMA as Resistance. Tuesday s gap leaped above: Trend Line Resistance (Green), prior Support new Resistance (Yellow line) and the 20 day SMA (Yellow). DE daily chart as of Jul 27, 2018 DE crossed above both its 20 day SMA (Yellow) and it s Trend Line Resistance (Green line) on Tuesday, but could not close above these two levels. On Wednesday DE did this again, and this time was able to close above both levels. Thursday rallied a little higher, but Friday saw these gains given back as the week ended just above its 20 day SMA.
BA daily chart as of Jul 27, 2018 BA oscillated this week, testing support at its 20 day SMA on Wednesday and Resistance at its Feb 1 st highs (Purple line). The week ended with a wider range week and a gain of $5.75 over the prior week. HD daily chart as of Jul 27, 2018 HD was quiet on Monday, and then began a sell-off on Tuesday by first breaking below its short term support Trend Line (Red Line). On Friday HD broke below both its 20 day SMA (Yellow) and its long term support Trend Line (Yellow line). We still see higher lows and higher highs over the prior three months, so we will wait for HD to find and confirm support. If that next support level is above its 50 day SMA, or a higher low than the prior lows seen on July 2 nd, then there could be another opportunity for a long position. Time will tell. Unfortunately, the Home Builder sector has become weaker lately, so odds are not strong for a positive change, yet.
As you have likely noticed over the prior weeks, we try to keep most all your observations focused on the charts. By looking for clues in the indexes, and Sectors, we can quickly find candidate stocks to consider for either bullish or bearish opportunities. This is called a top-down market analysis, and is an efficient way to quickly find the strongest of the strong stocks, or weakest of the weak. Our time is limited, and the available data is unlimited, so a structured process that is an efficient use of our time is a productive way to operate as a trader. I hope you find the observations I share useful, and they may help you to build up your own chart reading skills. Reading charts is like learning a new language. It takes time and practice, lots of practice, to get proficient are recognizing the messages and market behaviors that act as clues and help us identify our edge, and when the odds make it worthwhile taking a measured risk. Trade Smart, CJ