Market Observations - as of Aug 17, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. This week we saw a reversal of roles from the prior week. This week both the S&P and Dow were up by +0.6% and +1.4% respectively while the Nasdaq was down -0.3%. The prior week we saw both the S&P and Dow were down (-0.2% and -0.6% respectively) and the Nasdaq was up 0.3%. The Russell 2000 was up a little both this week (+0.5%) and last week. We also saw a change in sector leadership this week from last week. The Utilities and Consumer Staples sectors have a strong showing this week. Oil and Gold both dropped this week as the US Dollar rallied. Volume was a bit stronger this week than the prior week. Wednesday saw broad based selling to test support in the first 90 minutes of the day, then bounced a little the rest of the day. Some markets recovered the entire Wednesday drop over the last two days of this week, and some sectors remained near their Wednesday Support levels throughout the rest of this week. The selling Wednesday morning was very structured, almost mechanical, and support was found at obvious levels, like the 50 day SMA, a trend line or a key prior level of Support. The VIX barely broke above its descending Trend line and traded above its 200d SMA briefly on Wednesday. This seemed like a typical brief shaking loose hands free event on Wednesday, as Wyckoff would call it. The Bull trend remains in place as the dip buyers were given an opportunity to enter, or re-enter at low prices on Wednesday. We also had August Options expiration occur on Friday. This is often when we see the markets seem to pause their trends for a day as large positions and Hedges are either closed or rolled out to the next month. We also had NVDA earnings come out on Thursday evening, with lots of anticipation and options activity in front of this event. Most activity was betting on a pop up in the stock price. However, other major earnings announcements this week where both top line and bottom line estimates were beat, the market reaction was rather bearish and sold the new, regardless if it was good news. With this context, as well as a rather weak Semiconductor sector all this week, it was not too much of a surprise to see the NVDA reactions negative even on positive news. When the mood of the market is to sell the news, then it does not matter much what the news is. This is an example of market behavior ignoring the Fundamentals, at least initially. As an options trader, we do not know what way the reaction may be. But we do know that the price of the options and the Implied Volatility will be high before the earnings event, and drop back to normal after the news is out. We can use this knowledge about Implied Volatility, to structure trades that sell options when they are expensive (High Implied Volatility) and buy them when they are cheap (low Implied Volatility), and hedge our position so that our losses are defined and limited. Earnings events for big tech stocks, when all eyes seem to be watching, tend to have very inflated Options (Implied Volatility) that can make this strategy of playing the Volatility Crush have higher odds and better rewards. Now let s look at the charts to see what this week tells us about the markets.
S&P 500 weekly chart as of Aug 17, 2018 Here we see a positive week this week, after one negative week last week. The Context remains this market is in a bullish trend. S&P 500 daily chart as of Aug 17, 2018 Here we can see the selling the last 2 days of the prior week continue the first day of this week then bounce a little Tuesday off of the 20 day SMA support. Wednesday saw a gap down and drop to find support a few cents above its March 13 th highs (Prior Resistance) as new Support (acted as Support from July 19 Aug 2). The lower wick on Wednesday s candle is long, and indicates a reversal during the day. Thursday and Friday rallied back above the 20 day SMA to end the week higher by 17 points than the prior week s close. The prior high on Aug 7 th has not been exceeded yet.
Let s look at an intraday chart for the S&P to see how the Reversal on Wednesday played out. S&P 500 15 min. chart as of Aug 17, 2018 Here we see some oscillations Aug 10, 13 and 14, then a gap down at the open on Wednesday Aug 15ht. The quick selling lasted only about 90 minutes before bouncing back up by more about half of this range. A second dip in the afternoon failed to deliver a lower low than what was seen in the morning, and then bounced the last 90 minutes of trading to a level higher than the earlier bounce that same day. This Failed New Low was a clear sign for the bulls that it was ok to step back in. Thursday saw a gap up and rally the first 3 hours of treading then a pull back and oscillations the rest of the week, ending on an upward move the last half of Friday. Just as a New Low (lower low) is a confirmation message of a continued bear trend, a Failed new Low is an early confirmation of a reversal message, when a bear trend may have ended and has been replaced with a bullish trend. Confirmation messages do not work all the time, but they are often good clues for the more aggressive and agile trader. Similar, a Failed New High can be a reversal confirmation of a bull trend ending and turning bearish. This is one reason why I may often say I love failures.
DJIA weekly chart as of Aug 17, 2018 Similar to the S&P, the Dow had an up week this week, with a long lower wick indicating a test for support during the week. We see five weeks up, one week down, and now another week up, showing the bull trend is still in play. DJIA daily chart as of Aug 17, 2018 Here we can see the selling the last 2 days of the prior week continued on Monday of this week, then bounced on bit on Tuesday. The 20 day SMA (Yellow) was resistance on Monday and Tuesday of this week. Wednesday saw a gap down and strong bounce off of its 50 day SMA (Blue) support during the day. The strong rally Thursday saw the highest volume and widest range day of this week. Friday continued higher and exceeded the prior highs from Aug 7 th.
NASDAQ weekly chart as of Aug 17, 2018 The Nasdaq was up last week and down this week, opposite of the moves of the S&P and Dow. The Nasdaq remains near its all time highs seen late July. NASDAQ daily chart as of Aug 17, 2018 Here we see the consolidation pattern of the Nasdaq over the past month, after making new all time highs July 25 th, and then a lower high on Aug 9 th. The 50 day SMA was support on Wednesday s dip. The rally the next two days failed to recover all of the losses of this week, closing Friday down -22.78 pts from the prior week. So far, we see clues that Big Tech did not keep up with Industrials or Financials this week.
Russell 2000 daily chart as of Aug 17, 2018 The Russell 2000 has been in consolidation (Triangle) and mostly horizontal for at least 2 months now. Note how price, the 20day and 50day SMAs are now all clustered together, indicating no real progress in 50 days or so. The Ascending Triangle consolidation pattern does have higher odds of breaking out positively. Time will tell. Next we will look at a few market Internals.
NYSE Advance/Decline Line daily chart as of Aug 17, 2018 The Advance/Decline Line has been mostly horizontal for about 6 weeks. Friday saw a break out of this narrow range, indicating some increased breadth. McClellan Summation Index daily chart as of Aug 17, 2018 The McClellan Summation Index shows us acceleration of changes in breadth, and this week we saw some slow decreases in breadth at the beginning of this week, with a quiet Wednesday and Thursday (little to no change) but an acceleration on Friday with positive breadth.
VIX daily chart as of Aug 17, 2018 Options volatility was slowly increasing last Friday and continued Monday of this week. Tuesday was quiet, and then Wednesday popped up to 16.86% briefly before dropping back down on Wednesday. Thursday and Friday saw a calming back down of the VIX with Friday closing at 12.64%, down from the prior week s close at 13.16%. OIL daily chart as of Aug 17, 2018 Oil dropped below its prior support ($66.3) on Wednesday to find support near its 200 day SMA (Purple). Thursday and Friday Oil remained inside a narrow range just above the 200 day SMA.
GOLD daily chart as of Aug 17, 2018 Gold finally broke out of its range it has been in for 3.5 weeks were $1212.5 had been support. Gold dropped hard on 3 days this week (Monday, Wednesday and Thursday) delivering new 2018 lows each time. Friday saw a small bounce off of Thursday s $1167.1 new lows to end this week at $1191.8. US Dollar Index daily chart as of Aug 17, 2018 The US Dollar rally that started last Friday, continued this week delivering new higher highs for 2018 each of the first 3 days of this week. Thursday and Friday saw a small pull back to end the week with the dollar index at 96.132 down about 0.13 from the prior week s close. Note the wide range swings on Monday and Tuesday of this week. These were likely
echoes in the various currencies used in this index as reactions to Turnkey and possible risk exposures were digested. TLT daily chart as of Aug 17, 2018 The TLT bond fund oscillated a bit this week from below to above its (mostly horizontal) 50 day SMA. The week ended up 0.32 pts. Next we will look at a few key Sectors to see what their charts tell us about this week.
Dow Transports daily chart as of Aug 17, 2018 As Oil prices dropped this week, the Transports rallied to deliver higher highs on Thursday, exceeding the prior Aug 8 th high by $0.12. XLF daily chart as of Aug 17, 2018 The Financials dropped from their 20 day SMA (Resistance) to below their 200 day SMA on Monday, then bounce and recovered most of that drop the following day. Wednesday gapped down but did not drop to its 50 day SMA. Thursday gapped up strong to open above its 200 day SMA and rally above its 20 day SMA before the close. Friday remained strong to close the week above the 20 day SMA. Thursday s rally saw the widest range day for this week.
XLE daily chart as of Aug 17, 2018 XLE remained above its Trend Line Support (Blue line) the first two days this week, just below its 20 day and 50 day SMAs. Wednesday saw a gap down and selling to break and close below its 200 day SMA (Purple). The bounce Thursday and narrow range the last two days of this week did not recover much of the losses this week, closing just a little above its 200 day SMA. QQQ daily chart as of Aug 17, 2018 Technology remained inside its Consolidation Triangles this week, above its Trend Line Support (Orange line) and below its All Time High from late July (Green Line), closing the week nearly on its nearly horizontal 20 day SMA.
SOXX daily chart as of Aug 17, 2018 The Semiconductor sector ended last week with an ugly gap down below both its 20 day and 50 day SMAs. Monday and Tuesday saw this sector remain in this same area. Wednesday saw a gap down to below its Trend Line Support (Orange line) and its 200 day SMA (Purple). The bounce Wednesday (seen by a long lower wick on that candle) was sufficient to end the day above both the Trend Line and 200 day SMA, but not fill the opening gap. The following day remained week as we saw the SOXX drop back below its Trend Line Support and close just above its 200 day SMA. No recovery on Thursday. Friday saw another gap down and a bounce from lower lows once new support was found at $177.04. The long wick on Friday shows us a big bounce that recovered most of the day s selling, but not the opening gap. The week ended with the SOXX down nearly -2.3% for the week.
XLV daily chart as of Aug 17, 2018 The Healthcare sector continued its rally this week, after a brief pause late last week that continued to beginning of this week. Important to note how this sector was minimally affected on Wednesday s selloff. This observation made for a good clue that helped to fuel the strong rally on Thursday and Friday. XME daily chart as of Aug 17, 2018 The Metals and Mining sector has been bearish since the last week of July. This week saw that bearish trend continue Monday and Tuesday, then accelerate with the big gap down and selling on Wednesday. Note the height of the big spike in daily True Range (White study in lower panel of the above chart) indicating the widest range day in nearly two months. The bounce on Thursday and Friday could only recover the selling on Wednesday and not the Gap. Look at the charts for the stocks in this sector to see how they have acted this week.
XRT daily chart as of Aug 17, 2018 The Retail sector broke out of its range (Resistance) last week, and continued this week with new All Time Highs delivered on Tuesday this week. Wednesday and Thursday saw this sector return to its range (below prior Resistance Grey Line) but the rally on Friday again broke above this range and ended the week $0.21 above its prior week s close. XLI daily chart as of Aug 17, 2018 The Industrial sector dropped hard the last two days of the prior week, and continued this week, breaking below its 200 day SMA on Monday, and its 50 day SMA on Wednesday. Thursday saw a large gap up and rally above the 20 day SMA that continued on Friday. This week closed at $76.28 which was the highest weekly close since early June.
XLU daily chart as of Aug 17, 2018 The Utilities sector has been in a narrow range for over a month. We saw this sector break out and deliver new 2018 highs on Wednesday, Thursday and Friday of this week. Next we will look at several key stocks to see what their charts tell us about this week.
AAPL daily chart as of Aug 17, 2018 Apple had been in a narrow range the prior week, and continued that way the first 3 days this week. Note how AAPL was NOT affected on the Wednesday selling most markets saw this week. Then note how AAPL gapped up on Thursday and rallied the rest of the week to deliver new all time highs both Thursday and Friday on strong volume. Remember this clue. When a stock does not sell off on a day when most of the markets gap down hard, then that is a strong stock that has just proven that it is strong and that it can ignore the overall market trends. If you are looking for a Strong Stock, then this is one big clue to learn to look for.
AMZN daily chart as of Aug 17, 2018 Amazon saw a nice rally the prior week, but saw selling and lower highs nearly every day this week. It still remains quite near its All Time Highs and above its 20 day SMA. AMZN did sell off some on Wednesday, but not a big gap down. This week mostly looks like noise and a pause in a trend. NFLX daily chart as of Aug 17, 2018 Netflix began slowly selling lower late last week, and continued that trend this week, with lower highs every day this week and breaking prior support from its July 31 st lows. The Bear trend continued from the break of the 20 day SMA on July 13 th (a Friday the 13 th ).
FB daily chart as of Aug 17, 2018 FB reversed its bounce last week, and continued to drop every day this week, remaining below its 200 day SMA, delivering lower highs, and briefly breaking below its Prior Support (Mar 2 nd Grey line) on Friday and closing this week below its Gap Day (July 26 th ) close. GOOGL daily chart as of Aug 17, 2018 Alphabet gapped up and paused last week, failing to exceed its prior highs in late July. Alphabet then rolled over this week as we saw lower highs and lower lows every day, and the lowest close since the Gap Day (July 24 th ).
MSFT daily chart as of Aug 17, 2018 MSFT is in consolidation after failing to move above its late July highs and delivering a Failed New High on Aug 9 th. MSFT crossed and closed below its 20 days SMA on Wednesday, where it remained below the rest of this week. Note the Trend Line Support (Blue line) was also broken below on Friday this week. AMD daily chart as of Aug 17, 2018 Even with the ugly Semiconductor sector charts the past seven days, AMD has held up very well, remaining in a narrow range near its new 2018 highs delivered on Tuesday this week and above its (ascending) 20 day SMA. Another CLUE for a strong stock: one that ignores its sector s behavior.
INTC daily chart as of Aug 17, 2018 A direct competitor for AMD is INTC. See how INTC has acted over the past 3 months vs. AMD over the same time period. Yet another clue - for a strong stock. JPM daily chart as of Aug 17, 2018 The Gap Down late last week, continued down on Monday of this week, to cross and close below its 20 day SMA. The rest of this week did not bounce much as it remained below the 20 day SMA and inside a narrow range.
TSLA daily chart as of Aug 17, 2018 Two weeks ago when Elon tweeted about going Private, we have seen some wild moves. TSLA sold down every day this week, with a gap down Wednesday and Friday. The Gab below the 50 day and 20 day SMAs on Friday s open drew in more sellers during the day to help TSLA break below its 200 day SMA and near fill the Gap left from Aug 2 nd. SCCO daily chart as of Aug 17, 2018 We saw the sector chart for XME and SCCO has resumed the selling since the very brief pop above its 200 day SMA at the end of July. The selling continued this week with a gap down at the open on Wednesday to deliver new 2018 lows. Thursday saw a small bounce that continued on Friday that just barely filled the gap left from Wednesday s open.
X daily chart as of Aug 17, 2018 US Steel continued its bearish trend this week, delivering new 2018 lows on Wednesday then bouncing a bit on Thursday and Friday to close the week up 10 cents from the prior week. CAT daily chart as of Aug 17, 2018 CAT began the week remaining near the lows from the prior week, and then gapped down on Wednesday to deliver new 2018 lows. The gap up and rally on Thursday and Friday recovered all the losses of this week plus some. Friday crossed and closed above its 20 day SMA and up $3.42 from the prior week s close.
BA daily chart as of Aug 17, 2018 Like CAT, BA began the week holding close to Friday s range from last week. The gap down and selling Wednesday tested support within 4 cents of the 200 day SMA then bounced, forming a long lower wick for Wednesday s candle. The gap up and Rally Thursday on strong volume recovered all of this week s losses and those from the prior week. Friday was mostly horizontal and not as wild and closed the week just below the 20 day and 50 day SMAs.
HD daily chart as of Aug 17, 2018 HomeDepot failed last week to get above its 20 day SMA, and closed last week just below its 50 day SMA. This week continued the selling form two more days to find support at prior Resistance (Grey line) from Feb 20 th highs. Wednesday retested the Support from the prior day, and closed up. Thursday continued the rally that then stalled on Friday. HD recovered most of its losses it saw in the first half of this week, by the end of this week. Note now the 20 day SMA has now turned south, and we see both lower highs and lower lows over the past 6-7 weeks. Last week we saw a reversal mid week from bullish to bearish, and this week we saw a reversal mid week from bearish to bullish. That s about a brief summary of the markets as I can state. It s also a great reminder why it is important to remain agile and prepared for about anything. Trade Smart, CJ