Market Observations - as of Oct 5, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. The new month and quarter began with a continuation of the trends we saw over the prior few weeks, with the Dow and Industrials leading the bullish rally with the S&P not far behind. At the same time the tech heavy Nasdaq, big tech, and specially the small cap stocks were being dragged down. This changed mid week as the Bond markets saw big volume with increasing rates, specially on the long term bonds (10yr & 30yr) as the yield curve began to steepen a bit. The increasing interest rates helped the suffering financial sector a bit during the latter half of this week, while also hurting the home builders (since home sales and mortgage rates are impacted by increasing rates). The charts have indicated these divergences between the major indexes with the clearest example being the Nasdaq, which failed to exceed its prior highs early this week, while at the same time the Dow Industrial average did exceed its prior Highs. The Russell 2000 has been in a mild down trend since its highs at the end of August, and then accelerated downward this week. This divergence does not appear to have any correlation with the changes made in the SPDR Sectors implemented 2 weeks ago, since these changes in character seem to start right after the end of August when many new all time highs were made. Changes in the markets and their trends can happen at any time, and it cannot be clearly observed until a day or two (or three) after the fact, when your focus is on the Daily charts. Shorter term trends and changes happen more often on the smaller time frame charts (1, 5, 10, 15, 30 or 60 min. charts) but those small changes more often are just noise on the larger time frame charts, with only a few short term changes persisting to then impact the larger and larger time frame charts. This is why picking a time-frame, and sticking to it, is so very important as a trader. By clearly defining the criteria that you are looking for to confirm a change in trend on your primary time frame chart, and then being consistent with flawlessly implementing your process, these are the keys to achieving consistent results. Of course, managing risks is job #1 when you develop and implement your systematic trading methods. Let s look at the charts, to see what they are telling us about this week.
S&P 500 weekly chart as of Oct 5, 2018 We see a small pull back last week and a larger one this week, as the S&P appears to return to its prior Resistance as new Support, as was defined by the Jan 2018 highs (Dark Blue Line). S&P 500 daily chart as of Oct 5, 2018 On the daily chart we see quiet chop near the all time highs the first 3 days of this week, then larger range down days on Thursday and Friday. Thursday the S&P opened below its Trend Line Support (Orange line) then crossed below its 20 day SMA (Yellow). On Friday the S&P briefly dropped below its 50 day SMA (Blue) and Jan. 2018 Highs (Dark Blue line) before closing above both levels.
DJIA weekly chart as of Oct 5, 2018 The Dow has broken above its Jan. 2018 highs (Orange line) and has remained near those highs the past two weeks. DJIA daily chart as of Oct 5, 2018 The Dow rallied the first 3 days of this week, delivering new all time highs on both Tuesday and Wednesday, exceeding both the Jan. 2018 highs (Orange line) and the prior highs from Sept. 21 st. On Thursday the Dow dropped to test its Trend Line Support (Grey Line) below its Jan. highs, and Friday dropped again to briefly dip below its 20 day SMA (Yellow) before bouncing up the last 2 hours to close the week above the 20d SMA but below its Jan. highs.
NASDAQ weekly chart as of Oct 5, 2018 The Nasdaq had been inside a consolidation pattern for all of September. This week the Nasdaq clearly broke below the Sept. Support level. NASDAQ daily chart as of Oct 5, 2018 Here we can see the late Aug record highs (Yellow line) as resistance, and the 50 day SMA as support all during September while the Nasdaq was in a non-trending pause. On Thursday the Nasdaq broke below its 20 day SMA (Yellow), its prior Resistance (July highs Dark Blue Line) as new Support was broken, as well as the 50 day SMA ( light Blue). Friday saw more selling as the Nasdaq remained below its September lows (Support). Note the increased volume on the last 3 days of this week, as well as the increased price volatility with the True Range (1-day) in the lower portion of the above chart.
Russell 2000 weekly chart as of Oct 5, 2018 We can see that the Russell made record highs at the end of August, and has been pulling back slowly all during September. This week, the drop accelerated strongly as the Russell crossed below its 20 week SMA (Yellow). Russell 2000 daily chart as of Oct 5, 2018 Here we can see the Russell cross and closed below its 50 day SMA (blue) last week, then this week spanned from its 50 day SMA as Resistance and touched its 200 day SMA (Purple) as Support on Friday. The Russell closed this week with the lowest close since May 29 th. Next we will look at a few Market Internals to see what the overall markets did this week. The next two charts are based on data from all 2,800+ stocks listed on the NYSE.
NYSE Advance/Decline Line daily chart as of Oct 5, 2018 Last week we saw a decline in breadth, and this week began with a gap up that closed down each day this week, crossing below the 50 day SMA on Thursday and Friday. McClellan Summation Index daily chart as of Oct 5, 2018 Here we see the acceleration of the changes in breadth, and each day this week we saw a decline and widening spaces (gaps) between the days this week, indicating broad based declines in the overall market that sped up during this week. Note the separation growing between the 20 day and 50 day SMA as another indication of the changes this week.
VIX daily chart as of Oct 5, 2018 The Options markets remained quiet and below both the 20 day and 50 day SMAs the first 3 days of this week. On Thursday we see a pop in Volatility above the descending Trend Line (Orange line) and above all 3 of the SMAs. Friday saw a greater increase to briefly above 17% before dropping back down to end the week just below the 200 day SMA (Purple). Oil daily chart as of Oct 5, 2018 The Oil rally we saw last week, continued the first 3 days of this week to exceed the prior highs from early July (Yellow line) and set new multi-year record highs each of these 3 days. Oil then pulled back on Thursday and Friday back below the July highs.
Gold daily chart as of Oct 5, 2018 Gold rallied a little on Tuesday, but remained mostly unchanged this week, just below its 50 day SMA. US Dollar Index daily chart as of Oct 5, 2018 The US Dollar rallied above its 50 day SMA the first 3 days this week, breaking above its Sept highs on Wednesday and Thursday, then pulled back to close Friday and end the week back below its Sept. highs (box). The Dollar did remain above its mostly horizontal 50 day SMA all of this week. Next, we will look at the data forming the Yield Curve for this week, which steepened a little.
US Treasury Rates daily table as of Oct 5, 2018 Here we can see the larger changes in the longer term rates this week, while shorter term rates changed very little. This is a lifting or steepening of the yield curve by mostly the longer term rates increasing. This reduces the worries about a flat or inverted yield curve. Increased interest rates tend to help the banks a bit, as their profits come from the spread in rates between the rates they pay and what they collect. Increased rates also tend to hurt home sales a bit, as fewer buyers may be able to afford the mortgage payments. TNX daily chart as of Oct 5, 2018 Here we can see the large movements in the 10 year this week, mostly increasing on Wednesday and Friday this week.
TYX daily chart as of Oct 5, 2018 The 30 year also shows large increases on both Wednesday and Friday of this week. Next, we will look at a few key Sectors to see what happened this week. This is one way to see changes like sector rotation, as money moves between sectors seeking greater returns.
Dow Transports daily chart as of Oct 5, 2018 The Dow Transportation index pulled back a little this week, crossing below its 50 day SMA (blue) on Thursday and Friday. More expensive fuel is a common concern for most all modes of transportation, as oil prices increased again this week. XLE daily chart as of Oct 5, 2018 The Energy sector improved a little more this week, as oil prices moved higher.
XLF daily chart as of Oct 5, 2018 Here we see the dramatic decline in the Financial sector last week. This week we saw a pause on Monday and Tuesday, without further declines, then a rally from the gap up on Wednesday s open. XLF found Resistance at its 20 day and 50 day SMAs on Friday, pulling back down to close this week (a second week in a row) below its 20d, 50d and 200d SMAs. We saw a small improvement over last week, but not exactly a strong showing this week. The Financial sector is a key element we look for confirmation of Economic Growth, and the XLF has given us concerns this year. QQQ daily chart as of Oct 5, 2018 The Tech sector could not quite break above its late Aug. highs this week, and dropped hard on Thursday and Friday, to break below its 20 day SMA (Yellow) its Trend Line Support (Orange line), its prior July highs Resistance (new Support Green line) and its 50 day SMA (Blue) all on Thursday. Note the Volume on Thursday and Friday was at over 2.4x average volume.
XLC daily chart as of Oct 5, 2018 There is not much history for this new sector ETF, but we can see the larger range days on Thursday and Friday of this week, as the XLC crossed below both its 50 day and 20 day SMAs on Thursday. SOXX daily chart as of Oct 5, 2018 The Semiconductor sector has been inside a consolidation triangle pattern for the past 2 quarters, and broke below its Support this week when it crossed below its 200 day SMA and the Trend Line (Red line) on Thursday, and below both on Friday of this week. The Semiconductor sector is often looked at as a leading indicator for Technology (hardware) since chips need to be ordered and fabricated months before they are installed into tech products for sale.
XLY daily chart as of Oct 5, 2018 The XLY dropped hard every day this week on very strong volume. XLY Broke below its 20day SMA and Trend Line Support (Purple line) on Tuesday then broke below its 50 day SMA (Blue) on Thursday. The Consumer Discretionary ETF has as its top two holding, 23% Amazon and 11% Home Depot. The other holdings are all 5% or less. So this tends to be a heavily weighted sector by these two stocks. Check out the charts of AMZN and HD to see what similarities you may find with the XLY chart above. XLV daily chart as of Oct 5, 2018 Healthcare has been in a slow and steady bull trend for months, and held up relatively well this week, pulling back Thursday and Friday only to its 20 day SMA.
XLI daily chart as of Oct 5, 2018 The Industrial sector has been strong until 2 weeks ago when it pulled back to its 20 day SMA. This week it rallied a little, remaining above its 20 day SMA most of this week as well as above its March 2018 highs (Green line). Wednesday s highs this week was a little lower than its prior high, so we know the XLI is now in a consolidation pattern. XLB daily chart as of Oct 5, 2018 The Materials sector dropped hard with the Financials last week, then saw a small bounce the first 2 days of this week. However, Wednesday Thursday and Friday saw selling return, as Bonds and Interest rates increased. This could likely be due to the expectation that Building Materials will have less demand if Home Building slows due to increases in Mortgage rates. XLB close Friday on its long term Trend Line Support (Orange line). Let s look at the Home Builders sector to see what happened this week as interest rates popped.
XHB daily chart as of Oct 5, 2018 The Homebuilders have been in a steady decline since mid September after crossing below its 50 day SMA (Blue). The steady selling accelerated the last few days of this week, as seen by increased volume and increased True Range. Support was found Friday near the 200 week SMA, as we can see below in the weekly chart for the XHB. XHB weekly chart as of Oct 5, 2018
XLU daily chart as of Oct 5, 2018 Here we see the Utilities sector bounce off of the 200 day SMA (Purple) support late last week, and continue this week to find Resistance Tuesday at the 50 day SMA (Blue) and prior July highs (Grey line). Wednesday and Thursday saw a small pull back and pause before another surge Friday that broke above the converging 50 day and 20 day SMAs. Utilities are a classic flight to safety strategy when concerns increase in the markets. This does not seem to happen when there is an all out panic. What we saw this week was a classic rotation into lower returns lower volatility sectors. Next we will look at a few key stocks for this week, starting with the largest companies, which also tend to be some of the formerly known as faang stocks. Faang is not dead, but it has been broken up a bit between different sectors (as of Sept 21 st ). Big Tech does make up the largest portion of the S&P, with Financials now the second largest.
AAPL daily chart as of Oct 5, 2018 AAPL held up well this week, making a new All Time High on Wednesday this week, before pulling back on Thursday and Friday. It briefly pieced its 20 day SMA on Friday, but managed to close above. AAPL remains near its all time highs and above all three of its SMAs at the end of this week. AMZN daily chart as of Oct 5, 2018 Amazon started this week failing to exceed its prior highs (from Sept. 4 th - Green line) and sold off every day this week after this FNH (Failed New High). On Wednesday AMZN closed below its 20 day SMA near its Trend Line Support (Orange line). Thursday AMZN broke and closed below its 50 day SMA, likely drawing in more Volume. Friday remained below its 50day SMA, on strong volume, and closed just above its Prior Resistance (Grey line) level from its July highs. Friday did briefly drop below its Sept. 24 th prior lows, confirming now with both a lower high and a lower low. This confirmation suggests that the odds have increased for us to see more lower lows ahead.
NFLX daily chart as of Oct 5, 2018 NFLX found Resistance early this week near its Gap Day Highs (Grey line) before dropping hard Thursday below its Trend Line Support (Orange line) and 20 day SMA. Friday saw NFLX drop more to cross and close below its 50 day SMA. The consolidation Triangle (Orange lines) has now been broken below, suggesting increasing odds of more selling. The Sept and Aug lows have not yet been exceeded, so consolidation is still the prevailing mode with increasing bearish odds. FB daily chart as of Oct 5, 2018 FB spent the entire week below its descending 20 day SMA, and exceeded the prior lows from September. Support was found Friday near the April lows (Green line). We continue to see both lower lows and lower highs since the July gap, so that continues to be the trend, until we see that violated.
GOOGL daily chart as of Oct 5, 2018 Alphabet started the week with confirming Resistance at the 50 day SMA before dropping this week nearly to retest its September lows (Red line) as Support. We see lower highs in late Aug. and another at the beginning of this week. We do now see a lower low, yet, until the September lows are exceeded. Persistent retesting of those Sept. lows increases the odds of that Demand eventually being fully satisfied, at which point prices must drop to satisfy the remaining persistent sellers. NVDA daily chart as of Oct 5, 2018 The NVDA roller coaster pop late last week continued on Monday of this week, then stalled for two days before dropping hard on Thursday and Friday to give back all of the gains since the Sept. 28 th gap open. Note the prior Resistance (Green line) from June 14 th highs, acted like Support on Friday of this week.
AMD daily chart as of Oct 5, 2018 AMD continued its horizontal pause near its Sept. lows (Orange line) and 20 day SMA (Yellow) on Monday of this week, then broke down Tuesday and Wednesday to find new Support late this week near prior Resistance from its Aug. 27 th highs (Purple line). Note the strong volume on Tuesday and Wednesday. INTC daily chart as of Oct 5, 2018 INTC, nearly the inverse of its competitor AMD, rallied the first 3 days of this week from its 20 day SMA to its 200 day SMA, crossing above its 50 day SMA along the way on Tuesday. Note the strong volume on Tuesday and Wednesday. Thursday and Friday saw selling that nearly gave back all of this week s gains, closing the week just above its 20 day SMA. Higher Highs and Higher Lows are a good confirmation of a bull trend, but INTC got knocked back down late this week. We still see both higher highs and higher lows, since the Sept. 28 th low has not yet been exceeded, so we stick with the odds until there is evidence confirming that the odds have changed.
MSFT daily chart as of Oct 5, 2018 MSFT made new all time highs the first 3 days of this week, before selling hard on Thursday and Friday. It ended the week below its 20 day SMA, and above its July 25 th highs (Grey line). We still see both higher highs and higher lows, so we stick with the bullish odds until evidence tells us the odds have changed. SQ daily chart as of Oct 5, 2018 SQ has a huge week last week, and began this week with a pause near its new All Time Highs. Thursday and Friday saw some selling, however SQ ended the week above its 20 day SMA Support and not far below its record highs.
V daily chart as of Oct 5, 2018 Visa was similar to SQ this week, with a pause near its new highs the first three days of this week, then pulled back on Thursday and Friday. Unlike SQ, V did cross below its 20 day SMA on Thursday to find support at its 50 day SMA on Friday. WFC daily chart as of Oct 5, 2018 WFC has been in a steady bear trend since crossing below its 20 day, 50 day and 200 day SMAs in early September. The Orange trend line Resistance from this trend was broken on Thursday when WFC bounced sufficiently. Friday gave back 2/3 of the prior day s gains, so the Trend Remains bearish, until we see a confirmation of change from a higher low. ** Bearish trend trading often needs a bit more aggressive tactics (Entry & Exits) since most bearish moves occur much quicker than the equivalent sized bullish move. You can see this non-symmetry in the above chart. We can see that it took WFC about 3 months to move from $52 to $59, but only about 1 month to drop from $59 to $52.
GS daily chart as of Oct 5, 2018 GS has delivered both lower highs and lower lows over the past month, is Inside a Descending Triangle consolidation pattern, and is near its 2018 lows (Yellow line). All of which are clues to the weakness of this key Financial sector stock. MS and WFC are others in this sector with similar situations this year. LMT daily chart as of Oct 5, 2018 LMT rallied last week, and mostly paused horizontally this week, keeping most all of its gains from the past month, while most of the market pulled back this week. Just the fact that LMT stayed horizontal this week, is evidence of Strength, when you view it in context. Other stocks (but not all) in the Industrial sector, or defense contractors, also did well this week, on a relative basis.
BA daily chart as of Oct 5, 2018 BA broke out the first 3 days of this week, delivering new All Time Highs each day, on strong volume. Thursday and Friday did not pull back much at all, showing relative strength those 2 days. BA was the leader in the first few days of this week. UTX daily chart as of Oct 5, 2018 UTX began the week with a small bounce, but then pulled back on Thursday and Friday, forming a lower high Tuesday and Wednesday, and testing Support Friday at its 20 day SMA and Sept. 27 th prior Lows (just below its Jan Highs Green line). UTX remains in Consolidation for a second week.
CAT daily chart as of Oct 5, 2018 CAT also road a roller coaster this week, with a rally Tuesday and Wednesday to Higher Highs (exceeding Sept. highs) then giving most all of those gains back on Thursday and Friday. Increased Volatility can be a sign of a trend that could be nearing its end, as exhaustion can create some brief volatile moves. We do not predict, we only watch for the evidence (facts) that a trend has changed. Until those are actually seen, we stick to our plan and the odds. Higher highs and higher lows = a bullish trend. COP daily chart as of Oct 5, 2018 As oil prices broke out a few weeks ago; COP broke above its Aug highs on Sept. 17 th and has continued. This week began with a strong spike higher on Monday, followed by a pause the rest of this week as COP held onto most all of its Sept. gains. A strong sector is just a clue for where we may look to find an opportunity. However, it is completely up to the chart of the stock that we are considering to trade, that must meet our criteria before we consider actually trading it. The sector trend does not have to agree with the stock trend, but it s usually higher odds when they do agree.
TSLA daily chart as of Oct 5, 2018 TSLA gets the best roller coaster award. TSLA often is one of the most volatile stocks, but the news the past weeks regarding Elon, the SEC, tweets, etc, continue to add fuel to what is already a favored stock (and options) play ground for ACTIVE traders. Volatility = Opportunity. However, to be successful trading this creature, you must be very agile and decisive, and excellent at managing risks. This week TSLA retraced the gap whip saw of the prior week, finding Resistance Monday at the 50 day SMA, Tuesday at the 200 day SMA, and dropping back to Last week s lows on Friday, just above the long term Trend Line (Orange line) at the close of the week. White knuckles can come from either riding the stock, or their electric cars. As always, be prepared from anything, because it can happen. Rehearsing in your mind what you will do if is a power tool to help you be prepared, not panic, and do the right thing when the markets show you it time to do so. Trade Smart, CJ