Market Observations as of Aug 25, 2017 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. We saw a confirmation of bearish behaviors last week, and not much changed this week, as most markets oscillated in uncertainty. We see very few significant new lows or new highs this week. Most markets were quiet and horizontal. There were but a few exceptions, that we will look at below. The US Dollar broke down late this week to multi-year new lows. A weak dollar helps make Dollar priced Commodities (and stocks) appear to be higher in price when their real value might be not at high. It s like relative value as seen through the eyes of a weaker dollar. Oil remained horizontal and consolidating this week, while Gold tried to rally to test $1300 per ounce price Resistance and failed. The question came up why do I do a weekly market analysis? Great question. There are several reasons: 1. Having a regular routine to objectively view overall market behavior gives me a fresh perspective to use when comparing a stock, or sector, to the overall markets. This comparison helps identify and confirm if a stock (or sector) is behaving in a way that appears to be sympathetic with the overall markets, or, is it acting in a way that seems to be ignoring the overall markets. This is a very good way to gauge strength (or weakness) and use that information in making trading decisions. 2. Using a Top-Down approach when evaluating the markets helps to identify what behaviors are common and what is different between key Indexes, Sectors and Stocks. This comparison helps identify trading opportunities if you are looking for the strongest (or weakest) Stocks or Sectors. If I seek a Trend to ride, than I must look for them diligently and regularly since I never know when one may appear. 3. Recognizing Trends early enough to be able to have sufficient probabilities and rewards to justify the risks. Too early and the odds are poor, too late and the rewards are poor. You know how the Goldie locks story goes. 4. Comparing markets via the same process over time (week to week) helps one to recognize changes in behaviors over time. 5. Using a Top-Down approach allows me to be self sufficient. I prefer to not be dependent upon any publication, service, or proprietary software. All I need are reliable charts from any source (free or paid) and my time to evaluate them. I prefer to take 100% responsibility for all my decisions. If I were to depend upon someone else s custom indicator, study, list, tools, publication or opinions, I would not really be learning. If something happened to that service or person, I would be shut down. It s completely fine to learn concepts from others, but you must learn and adapt so that you can soon become fully self sufficient. 6. Discipline is required, and it s easier to be consistent when you have created your own process, stick to it, and keep GOOD RECORDS. Over time, you can see how well your process is working as well as what may need improving.
7. Correlations between different or related markets are easier to identify when you have a regular process to follow. Correlations help give hints when you find them, since one may lead the other slightly. The top-down analysis I do each week is an example of one way to do so. There are many ways one can go about it. I share my analysis as a tool for others to use to practice their own analysis. By doing your own analysis first, then read my weekly observations and compare is one way to learn and to build your own chart reading skills. Now, let s look at some charts to see what the markets are telling us this week. S&P 500 weekly chart as of Aug 25, 2017 We can see the prior two weeks were down weeks, and this week saw a small bounce off of the 20 week SMA (Yellow) support. On the weekly chart, the bullish trend this year appears to be at least taking a pause now. A break below the 20 week SMA would be a clue on this weekly chart. Now let s look at a daily chart to see what additional detail we see.
S&P 500 daily chart as of Aug 25, 2017 As we noted last week, we saw both lower highs and lower lows last week as the 50 day SMA was broken Aug 17 th. This week started out with a lower low on Monday (Aug 21 st ) then a bounce Tuesday to just barely above the 50 day SMA (Blue) but below the prior Resistance (Yellow line) from June highs (Yellow arrow). This resistance level was again tested and held on Friday (Aug 25 th ). Note now 4 of the 5 days this week the S&P 500 closed under its 50day SMA, and on Tuesday (Aug 22 nd ) the one day when the S&P closed above its 50 day SMA, it closed only $2.4 above. As of the end of this week, we are still in bearish territory in the S&P with the week closing again under both its 20 day and 50 day SMAs. We will remain in this mode until the high of Aug 16 th (Resistance) is exceeded. When you simplify it, there are only three possibilities, [a]the markets rally and break above the Aug 16 th highs Resistance, [b] the markets break down and move below the Aug 21 st Support, or [c] the markets oscillate within the range between this Support and Resistance for a while as they consolidate.
DJIA daily chart as of Aug 25, 2017 The Dow also made a lower low on Monday (Aug 21 st ) then bounced Tuesday and remained horizontal and quiet the remainder of the week. The Dow closed the week again below its 20 day SMA and above its 50 day SMA. The 20 day SMA and the Aug. 16 th high are potential areas for Resistance, and the Aug 21 st low as Support. No change in trend this week, still bearish.
DJ Transports daily chart as of Aug 25, 2017 We keep an eye on the Dow Transports, as an economic indicator (ref. Dow Theory). The Transports closed last week and this week below its 200 day SMA (Purple). The Transports should have been rather profitable this year, with relatively cheaper fuel (their primary expense) but that is not what we ve see in the charts. This chart shows the transports remain stuck in a box for nearly 9 months. This gives us a clue that the overall demand for (air, sea, rail & truck) transportation (of raw materials and finished goods) remains weak, and thus very little overall economic growth. The Transports remain a good overall gauge of economic health.
NASDAQ weekly chart as of Aug 25, 2017 The Nasdaq has had four down weeks in a row, then a small bounce this week. Like the S&P, the Tech heavy Nasdaq found support this week at its 20 week SMA (Yellow) but only bounced a little bit from there.
NASDAQ daily chart as of Aug 25, 2017 We saw a lower low on Monday (Aug 21 st ) this week, followed by a bounce Tuesday, and then mostly quiet and horizontal the remainder of the week. Similar pattern as we saw in both the S&P and the Dow. Note the close both last week and this week below both the 20 day and 50 day SMAs. Note the lower low (Support) defined on Aug 21 st. This chart continues its bearish trend, until Resistance (20 day SMA or the Orange line) is broken. We have seen about 4 weeks of lower highs and lower lows now.
IWM daily chart as of Aug 25, 2017 The Russell has been weaker than the Dow, S&P and Nasdaq over the past four weeks. Unlike the other three indexes, the Russell broke below its 200 day SMA (Purple) last week, and remained below that SMA all of this week. This 200 day SMA could now act like Resistance going forward. It did act like support back in Nov 2016, and earlier this month (Aug 10 th & 11 th ).
US Dollar Index weekly chart as of Aug 25, 2017 Note the support (Yellow line) on the Dollar from the summer of 2015 lows (Yellow arrow). Also note the 200 week SMA (Purple) support broke this week. US Dollar Index daily chart as of Aug 25, 2017 You can see how the Dollar broke below multiyear support this Friday (Aug 25 th ).
OIL daily chart as of Aug 25, 2017 Oil continues to consolidate near $48, and below both its 20 day and 200 day SMAs and above its 50 day SMA.
VIX daily chart as of Aug 25, 2017 The one day spikes in Options volatility in the prior two weeks have settled back down slowly this week.
NYSE Advance/Decline daily chart as of Aug 25, 2017 Market breadth as shown above by the NYSE Advance/Decline Line shows a convergence and small bounce this week. Note how the 20 day and 50 day SMAs have come together now. McClellan Summation Index daily chart as of Aug 25, 2017 The Acceleration of the changes in market Breadth are shown by the McClellan Summation index, and we see that velocity has flattened this week after breaking below its support at the trend line (lower Green line) just over two weeks ago.
XLF daily chart as of Aug 25, 2017 The Financial sector is also a key sector to watch for signs of real Economic Growth. The XLF has been inside its box most all of the past 8 to 9 months and remained under both its 20 day and 50 day SMAs all this week.
XLE daily chart as of Aug 25, 2017 The Energy sector has been weak all this year with only a brief pop above its 50 day SMA and trend line (Red) Resistance last month. This sector broke down to make lower lows the prior two weeks. This week saw a small bounce off of new support at $61.80.
XME daily chart as of Aug 25, 2017 We have looked at this ETF over the past several weeks and saw both the higher lows (Green arrows) and higher highs (Yellow arrows) forming in this chart. We saw three confirmations early this week with [1] the next higher low from last week (Blue arrow), [2] the cross of price above the 50 day SMA (Blue) and [3] the cross of price above the 20 day SMA (Yellow). The bullish changes in this sector, lead us to next look at some key stocks that could be leaders in this sector, such as US Steel, Alcoa and SCCO (copper). This is how Top-Down analysis works; Look for strong markets, sectors, and then stocks. If you trade primarily ETFs, then your analysis might end here as you begin to look for triggers for a trade in this ETF. There are pros and cons to trading ETFs, and you should know both before deciding to trade an instrument. Pro: A sector ETF represents a group of related stocks and thus less affected by the occasional pops in volatility of one component stock. Con: A sector ETF represents a group of related stocks and thus less affected by the occasional pops in volatility of one component stock. If you trade an ETF, it will not do as well as the stronger stocks in that ETF, nor will it do as bad as the weakest. You decide what fits your risk profile and objectives. I usually prefer to trade options on the strongest (or weakest) stocks only when they meet all my criteria. Occasionally, when there is not a clear leader in that sector and the ETF meets all my trading criteria, I will trade options on the ETF. If you take your analysis to the next step, and seek the strongest (or weakest) stocks, AND you manage your risks effectively, then your overall performance can be greater with Stocks than ETFs. Higher volatility works both ways, so it is really a matter of keeping your losses small, AND letting your winners run. If you can do so, then volatility = opportunity and you have little to fear but yourself.
XLV daily chart as of Aug 25, 2017 Healthcare sector remains horizontal this week and under both its 20 day and 50 day SMAs. QQQ daily chart as of Aug 25, 2017 The Tech heavy Qs also remained horizontal this week and between their 20 day and 50 day SMAs and under June Resistance (Orange line).
XSD daily chart as of Aug 25, 2017 Semiconductors, a key leader in the tech sector, remains in bear mode with lower lows again this week (Yellow arrow). XHB daily chart as of Aug 25, 2017 Homebuilders sector remains bearish this week with lower lows as well (Yellow arrow).
XLU daily chart as of Aug 25, 2017 We looked at the Utilities sector last week as an example of an indication of investors seeking safety when the major market gets bearish or unsettled. The idea of safety is a bit misdirected since there are risks in EVERY form of investment. Regardless of what is truly safe, we can see the price breakout of this ETF continue this week. Regardless of why investors are doing what they are doing, we can see the price movement in this chart as a form of confirmation of a bullish trend in the Utilities sector while other sectors are mostly hinting at bearishness.
V daily chart as of Aug 25, 2017 One of the exceptions we spotted several weeks ago in the Financial sector, was Visa. It completed its 90 to 100 run last month, and has continued to remain bullish, in spite of the overall market changes the past four weeks. This is a true sign of strength. Remember to ride your winners, since a trend may go on for a while, and if on occasion you catch a big one, and then ride it until it s done. A clear break below 20 day SMA is one way to get a clue that Visa s bull move is done. That could happen on any day. You never know when a trend ends until after the fact, and that is OK. Once your trigger has occurred, then do not delay to take the appropriate action. Charts we have been following, but not shown this week include: CAT delivered a new high this Friday (Aug 25 th ) and remains above all its SMAs (20d, 50d, and 200d) and in a bull trend. BA was mostly quiet and flat this week, retaining most of its recent gains. TSLA oscillated down, up, down this week, to end this week near its 50 day SMA and near where it ended last week. FANG stocks did not do well this week either. All but GOOGL had a mild down week, and GOOGL was only up a tiny bit this week ($4). Apple continues to oscillate horizontally around $159 +/- $3.
LMT daily chart as of Aug 25, 2017 Mostly a horizontal pause in the trend this week as Lockheed keeps most all of its recent gains. DE daily chart as of Aug 25, 2017 Deere broke down after earnings late last week, and as you can see in the chart it has not recovered any of this gap. This forms an Island Reversal with the gap in May and the gap in August forming a detached Island of price action between these two gaps. Deere is more likely dead flat for a while as it tries to heal from its bear wounds.
Remember that we saw a bullish trend change in the XME (minerals and mining) ETF a few weeks earlier. Let s now look at some key stocks we have been following in this sector. X daily chart as of Aug 25, 2017 US Steel has been bullish, but without much conviction so far. We do see both higher highs (Red arrows) and higher lows (Green arrows) the prior month, and price remaining above its 50 day SMA. However, this chart has been more horizontal that upward trending the past month. Even though our bullish trend is confirmed, we do not see any momentum or volume. Note now all three SMAs (20 day, 50 day, 200 day) are nearly horizontal, another sign of a lack of momentum for a while.
SCCO daily chart as of Aug 25, 2017 Unlike US Steel, Copper made new record Highs a few weeks ago, and a strong stock we identified in July was SCCO. Note how it moved from a quiet horizontal period in late July and early Aug, to a more volatile and bullish moves the past two weeks. See how price has move well above the 20 day SMA (Yellow) this week, and how the space between the three SMAs is both widening and all are sloping upward. This gives lots of confirmation of bullishness. Compare this to X chart above, note the differences in the SMAs and price action. Clearly SCCO has delivered more opportunity than X or XME.
AA daily chart as of Aug 25, 2017 Look at AA and compare it to X. We see a similar story with AA as we saw with SCCO. AA broke above its 20 day and its 50 day SMAs in late June, and then the 20 day SMA crossed above the 50 day SMA by mid July. The 20 day SMA has been acting like support the past month as more new highs were delivered this week.
CMG daily chart as of Aug 25, 2017 Chipotle has been a bear example the past few months, as more bad news hit in June. The beginning of this week CMG dropped lower to find Support Wednesday below $300 at $296. The small $12 bounce Thursday and Friday of this week showed a bit more volume as both Shorts were buying to cover, and bargain hunters were buying a little once support was found. Overall, we did not see much change this week, and most markets remain in their trends from the prior few weeks. Remember that Anything can happen, so prepare accordingly. Trade Smart, CJ