Market Observations as of Sept 15, 2017 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. We saw a quiet week last week, with consolidation wedge patterns forming on the Dow and the S&P, while the Nasdaq formed an Ascending Triangle. Markets opened this week with a rally to aggressively break above the wedge Resistance on the Dow and S&P, while the Nasdaq was a bit slower to get going. Both the Dow and S&P went on to make new all time highs this week as prior Resistance was broken. The Nasdaq retested its prior highs twice, but failed to clearly break above that Resistance this week. This week we saw a major product announcement with Apple on Tuesday (Sept 12) as well as Quad Witching on Friday (Sept 15). Quadruple witching refers to the third Friday of every March, June, September and December. On these days, market index futures, market index options, stock options and stock futures expire, usually resulting in increased volume. Positions using September options contracts that have any intrinsic value would need to be exited before the close of the markets on Friday. Since many funds use index options or futures contracts as a portfolio hedge, we usually will see a significant increase in volume on expiration Friday as these hedges must be rolled to the next month or quarter. Those traders that use volume information should take this affect into account. With the Major product news at Apple this Tuesday, given the large size of Apple (liquid stock) and the large number of eyes that would be watching this event, and, with Sept Options expiration only 3 days later, we saw a perfect set-up of criteria for an options trade that is designed to profit from the increased IV ( Implied Volatility) in front of the event and then the rapid decrease of IV afterwards as expiration Friday approaches. The details of this trade are rather esoteric and likely only advanced options traders would understand. However, I share the idea as an example of how flexible Options contracts can be when you fully understand their nature and can use a strategy that matches the opportunity you see in the market. Lots of folks lose money trading options, simply because they either do not fully understand them, or they do not match their strategy with the markets. You never know what will happen next in the markets, but you can profit from selecting only the higher odds opportunities when you see them. Now, let s look at some charts. We will start by looking at the major indexes, followed by key sectors, and then some selected stocks. I share this as an example of how I do a top-down market analysis. There are many ways to do this, and you may find your own preferred method. The objective should be for you to learn to do your own analysis in your own way. You may start by looking at other examples, and then practicing doing it yourself. Over time you will develop your own skills. My goal is not for you to depend upon my Market Observations, nor anyone else s analysis. My goal is for you to become fully self sufficient, do each step yourself and find your own trading opportunities in an objective way. To accomplish this, I suggest folks first read my Market Observations for several weeks to build an knowledge of the process, then try doing your own analysis at the end of a week BEFORE you read mine. Compare what you saw to what I saw. Maybe you missed something, and can make a note to remember to look for it next time. Maybe we both saw the same things. Maybe you saw something I did not. Either way, you are learning some key skills of Objective Market Observation. Over time, with plenty of practice, you will build some valuable skills that you can make part of your regular approach to the markets, while not being dependent upon any publication or expert.
Building your own unique process is valuable for another important reason. When there is any widely published news letter, market analysis, service or list of suggested stocks, with lots of folks following that service, the Pros know it too. They will also get these publications in order to front run or lean the markets to take advantage of the retail trader s weak hands. Don t ask how I know. It happens all the time. If there is easy money to be made, the pros know what to do to get it. By having your own unique process, and not doing the exact same thing as the crowd, you will improve your probabilities by not looking like easy pickings. Now, on to the charts. S&P 500 weekly chart as of Sep 15, 2017 The Uptrend resumes this week, after the small pull back to the 20 week SMA in August. The weekly chart found support also at the Trend Line (Grey) drawn between the Nov 2016 election lows and the mid August lows.
S&P 500 daily chart as of Sep 15, 2017 On the daily chart we can clearly see how the S&P sprang upwards strongly on Monday (Sept 11 th ) to break above the wedge resistance line (White) very early in the day. Tuesday, Wednesday and Friday saw new all time highs being made as the Horizontal Resistance from the prior (Aug 8 th ) high was broke at the open on Tuesday. Also, the round number of $2500 was pierced at the very end of the day on Friday. Note that most of the velocity of this rally was seen on Monday (Sept 11 th ) as measured by the one day Average True Range (White ATR) at the bottom of this chart.
DJIA daily chart as of Sep 15, 2017 Similar to the S&P, the Dow popped up Monday (Sept 11 th ) to break above its consolidation wedge (Trend Line Resistance - White) just after the open. Every day this week saw up moves in the Dow, with the prior all time highs being exceeded on Thursday and Friday, when new all time highs were delivered. Note the 50 day SMA (Blue) was confirmed as support several times in the prior weeks. ** A careful study of consolidation patterns reveals that the probability favors a break out in the same directions as was the trend prior to the consolidation period. This is often called a Continuation of the trend. Much of Technical Analysis and the study of chart patterns can be boiled down to the simple question of Continuation or Reversal. Knowing this probability, and really believing it after having done my own study, I intentionally favor continuation patterns over reversals. I do this by requiring more confirmation of a Reversal than I do of a Continuation.
NASDAQ daily chart as of Sep 15, 2017 The Nasdaq was noticeably less aggressive this week, when compared to the S&P or Dow. Prior to this week, we saw and drew on the charts the Horizontal line for Resistance (white) and the upward Trend Line as Support (Red) that together forma an Ascending Triangle pattern. Unlike the Dow and S&P, the Nasdaq did not break above this consolidation pattern this week. However, the probability is for a positive breakout due to the trend that has been in place prior to this consolidation pattern. This could occur early next week? The other pattern I see in this chart is my favorite. I have shown many examples of this pattern before. It is formed by the repeated tests of a Resistance level with shallower dips following each successive retest. Let s look at a 30 min. chart below to see this pattern more clearly.
NASDAQ 30 min. chart as of Sep 15, 2017 I have drawn three arcs that follow the selling patterns after each of the tests of Resistance. If it helps, I encourage you to draw on your charts to highlight the patterns. After many years of practice, my eyes can see these patterns without drawing them in. Drawing them in, however, helps me communicate to others what it is that I am seeing. If you have been reading my Market Observations for a year or more, then you will likely already be able to see these patterns and opportunities. This pattern does not always work out, but a higher percentage does, and that is enough to form a statistical edge over time.
IWM daily chart as of Sep 15, 2017 The Russell also broke above its Wedge Resistance on Monday and delivered 4 of 5 up days this week. The Russell remains inside its 2017 box, but is moving upwards towards its box-top.
US Dollar Index daily chart as of Sep 15, 2017 The US Dollar remained flat for the week. The small bounce Monday and Wednesday was mostly given back on Thursday and Friday. Overall, no change in the down-trend of the Dollar this year, as it remained under its 20 day SMA (Yellow) this week.
GLD daily chart as of Sep 15, 2017 The run in Gold the prior few weeks looks done (or taking a pause) as Gold dropped from its high of $1,362 late last week, to close this week at $1,323.
Oil daily chart as of Sep 15, 2017 Oil rallied off of its 50 day SMA (Blue) Support this week to close at $49.41 after retesting Resistance at $50.5 briefly on Thursday. Closing Thursday and Friday above its 200 day SMA (Purple) while still under its $50 area Resistance.
VIX daily chart as of Sep 15, 2017 Options Volatility fell this week as the VIX crossed under its 50 day SMA (Blue) early on Monday, and dropped lower a little each day this week. Quad Witching Expiration did NOT increase volatility, but it did increase Volume in many indexes.
NYSE Adv/Decl daily chart as of Sep 15, 2017 The Advance/Decline made new highs 4 of 5 days this week. This looks at all the NYSE listed stocks, and shows us the rally this week had lots of participation of lots of stocks. This shows us the market Breadth of the rally this week. Now let s look at some key sectors for this week.
DJ Transports daily chart as of Sep 15, 2017 The Transports moved up Monday and Tuesday this week, then hovered at that area the remainder of the week. It is a confirmation of economic growth to see the Dow Transports to be moving WITH the Industrials. The Transports remain inside their 2017 box. This chart shows us that economic growth continues to be slow, as the Transports are not showing us new all time highs like the Industrials have. Again, part of this story is tempered when seen thru the lens of a 10% drop in the US Dollar this year.
XLF daily chart as of Sep 15, 2017 The Financials saw an increase on Monday and Tuesday this week, then hovered just under the 50 day SMA Resistance for the remainder of this week. This sector remains INSIDE its 2017 box, as economic growth seems rather slow.
XLE daily chart as of Sep 15, 2017 This Energy sector ETF bounced off of its 50 day SMA (Blue) Support at the beginning of this week to then break above the downward Trend Line Resistance (Orange line) on Tuesday. Friday saw a small pullback but it was not enough to undo most of this week s gains.
QQQ daily chart as of Sep 15, 2017 The Tech heavy Qs, like the Nasdaq, saw retests of Resistance this week. Note the prior Highs (White line) from Sept 1 st that acted like Resistance this week. Do you see a pattern here? Do you see a cup and handle? Do you see multiple cups and handles? Do you see multiple retests of Resistance with successively shallower dips in-between them? Do you see a progression of new Resistance Levels? ( Orange, Yellow, White )? Do you see Support? (Red Trend Line)? (50 day SMA)? What might be more likely next? Keep up the practice.
XLK daily chart as of Sep 15, 2017 Similar to the QQQ, the spider sector etf XLK shows the same patterns, but with about 1/3 the volume. Compare these etfs by looking at their components (Stocks) and the weightings of each component.
XLV daily chart as of Sep 15, 2017 Do you see a familiar pattern? We saw a break of Resistance (Red line) late last week, right after a two day shallow dip that happened after the Aug 31 st Resistance test. This week was about flat for XLV, as the peak Tuesday rolled over a little. IBB remained mostly quiet and flat this week, similar to last week. BIIB retested its peak of Friday (Sept 8) several times this week, and then rolled back down a little to close the week near where it closed on Sept 1 st. EXEL rallied back up to return the middle of its range for the past month and just above its 20 day SMA.
XHB daily chart as of Sep 15, 2017 XHB spiked to new highs on Tuesday then returned those gains on the very next day. XHB closed this week just a little below where it closed on the prior week.
XME daily chart as of Sep 15, 2017 Metals and Mining took a hit this week, as Gold dropped along with some of the metals. Now let s look as some stocks we have been following.
CAT daily chart as of Sep 15, 2017 Caterpillar continues its rally this week, remaining a similar amount above both its 20 day and 50 day SMAs. It you are riding this trend, then all you need to do is to manage your trailing stops per your written plan.
BA daily chart as of Sep 15, 2017 Boeing had been resting and remaining quiet and mostly horizontal over much of August and the first part of September. This week saw a rise off of the 20 day SMA Wednesday, and a climb to higher highs, breaking above prior Resistance (White line) on Friday. Boeing came to within a nickel of the $250 round number on Friday. ** Round Numbers are another place where we often find either Support or Resistance. Why? I do not know. I suspect it s a quirk of human nature for some traders to place orders at such places. The why is not important to me to know or prove. What is important, is how price behaves when it reaches an area of Support or Resistance. Support and Resistance are like road signs on a highway. They do not predict where price is going. They do help us to observe when price comes to the sign, if it exits and reverses, or if it continues on past the sign. It is how price acts at that key place - that gives us a clue. LMT was mostly quiet and flat this week.
AA daily chart as of Sep 15, 2017 Unlike the XME, Alcoa recovered last Friday s dip early this week, and held on to that value all week. We see repeated tests of Resistance this week, with shallow dips. Hint. Ten days of marking time, does not break the up-trend yet.
SCCO daily chart as of Sep 15, 2017 Unlike AA, SCCO did see more selling this week, to remain under its 20 day SMA and drop briefly below its 50 day SMA on Thursday, to then find support Friday at the 50 day SMA.
X daily chart as of Sep 15, 2017 US Steel sold off most of this week, to close the week under its 20 day SMA.
AAPL daily chart as of Sep 15, 2017 Apple had its big product release event on Tuesday this week. You can see the wild oscillations on Tuesday as news was coming out, and market participants acted and reacted and over-reacted. This is what I call the freak show, when active scalpers try to capture a piece of the wild swings as or after news comes out. The bigger the company, the more liquid the stock (huge volume), the more eyes watching the news event, the higher the volatility of the reactions can be. By the end of the day Tuesday, price had settled down to close at the 20 day SMA. By the end of this week (with options expiration Friday) we saw Apple return to approximately the middle of its range it had seen over the prior month. With the large Open Interest of Apple Sept 160 strike Options contracts, it was not a surprise to see Apple stock get Pinned to its $160 strike price on Friday.
AAPL 15 min. chart as of Sep 15, 2017 On the 15 min chart we can see better the wild swing during and after the news event on Tuesday (Sept 12 th ) and the stock price Pin to $160 on Friday.
HD daily chart as of Sep 15, 2017 Home Depot continued its trend, with less velocity this week. After it retested Resistance (White line) Tuesday, it delivered a higher high briefly on Wednesday. The weakness shown after this higher high is seen by the lack of follow thru to the ups side on Thursday and Friday. This could be due in part to the Expiration cycle on Friday, holding back trends briefly. So far, most of the gains from the prior week have been retained. We will see what next week brings.
HTZ daily chart as of Sep 15, 2017 Hertz saw a little drift upwards as the trend continued the first half of this week until the Test of prior highs (Resistance White line) from March 1 st, then it pulled quickly back (Thursday and Friday) to its 20 day SMA, returning most of the prior week s gains.
V daily chart as of Sep 15, 2017 Visa continued its trend this week, delivering more new all time highs. Remember, this stock came to our attention earlier this summer as it was hitting $90 for the first time. The old axiom that suggested it could be a $90 to $100 candidate got us to take a look at its trend. That trend has continued, with two tests of support at the 20 day SMA in the mean time. The Objective of riding a trend is to ride it until it ends. This sounds easy, but the challenge it when is the end? The end will not be clear until AFTER it happens. That is ok. It is nearly impossible to pick tops (or bottoms) WHEN they occur. If we are patient to wait for some confirmation, we can then clearly pick an exit point (or entry) that captures the high odds Middle section of that trend move. If I can capture 50% of the overall move, I consider that an excellent trade. You will never be able to measure the size of overall Trend move until well AFTER it is all over. So post analysis is one way to see how you actually did. Hope this helps. Trade Smart, CJ