Market Observations - as of May 18, 2018 By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice. After about 4 weeks of a relatively flat horizontal market (in consolidation) we saw a brief 1 week rally last week. This week, however, even with a gap up at the opening on Monday that soon faded, then a gap down at the opening on Tuesday, a range was defined and the remainder of the week quieted down to a horizontal week as May options expired at the end of this week. It is not uncommon to see markets pause for a day or so in front of Options expiration, then trends resume the following Monday. We saw a Consolidation week in most markets this week, that remained inside the narrow range defined on Monday and Tuesday of this week. The exception this week was the small cap Russell 2000 index that rallied and delivered new all time highs every day this week but on Tuesday. Overall market breadth expanded a this week, not so much due to horizontal markets, but more likely due to the many small listed cap stocks stock attracting investors. One of the strongest sectors this week was again Energy, as Oil continued its rally to deliver more new multi-year highs. One of the weakest sectors was Utilities as money appeared to rotate out of this defensive sector this week. Options volatility (VIX) also remained low this week, as the US Dollar strengthened some more and Gold dropped to new lows for this year. Ten year Bond Yields broke above their 3.03% resistance level to deliver higher rates this week. Earnings season is winding down this week as reactions have been mixed, even with mostly very strong data being reported. John Deere reported strong earnings Friday morning before the open, and was positively received. Applied Materials reported a beat after the close on Thursday, and was slammed down at the open on Friday. It is impossible to know what will be reported (top line, bottom line and forward looking outlook) and how the market will react to it. Sometimes reactions could be based on the outlook statement vs. expectations, sometimes it s the conference call language and how it is perceived. Even if you read the reports and listen to the conference call, it is very hard to know how the market reacts. I found trying to interpret the financial data vs. expectations, or the conference call language difficult to impossible to use to base trading decisions upon. Instead, I choose to just focus on the charts and how they react. The charts just use actual transaction time, price and volume, and are nearly instantaneous. I have no expectations. There are no right or wrong reactions. Reactions may not be rational, but by watching the action in the charts, and the over-reactions, I find much more useful clues that I can use to make my trading decisions. It works well for me. Other traders use other methods, and that s perfectly fine, as long as it works for them. Each trader should find what works for them, stick to it and become an expert at their system. Remember, there would be no market if all its participants had the exact same beliefs and took the same actions. As we do each week, we first look at the overall market Indexes, then a few Market Internal statistics, next a few key commodities or currencies, key sectors, and then a dozen or so key stocks. This is an example of a Top-Down approach to market analysis, where each step can provide us with clues or market context than we can then use to help direct our focus in the following steps. Is there an overall trend in the markets (or not)? Then we can focus on identifying the strongest (or weakest) sectors, and
then from here we can narrow down our focus on stocks within those sectors, to find the strongest (or weakest). If we use a trend following type of trading strategy, then we know that our odds are greatly improved when we focus on finding key stocks within key sectors that are all moving WITH the overall market trend. There are opportunities that can be found that do not correlate with the overall market trend, but these tend to occur less often. Now, let s look at the charts to see what they are telling us this week. S&P 500 weekly chart as of May 18, 2018 On the weekly chart we can clearly see the up week last week and a flat week this week that closed nearly on the 20 week SMA (Yellow).
S&P 500 daily chart as of May 18, 2018 The Orange trend line Resistance was broken last Thursday (May 10 th ) a day after breaking above the 50 day SMA (Blue). Monday (May 14 th ) saw higher highs in the first hour but then pulled back for a small loss for the day. Tuesday gapped down and tested the prior trend line Resistance (Orange) as Support. The rest of the week formed a consolidation triangle centered near 2720. After Thursday s close we had 3 days after Monday s new highs/higher highs, and thus were allowed to draw a shallower Trend Line (Green) per our TL Rules. S&P 500 15 min. chart as of May 18, 2018 You can see the consolidation pattern formed for this week (Orange Trend Lines) in the above 15 min. chart.
DJIA weekly chart as of May 18, 2018 The Dow, like the S&P also rallied last week and paused this week. This week ended with the Dow remaining under its 20 week SMA (Yellow). DJIA daily chart as of May 18, 2018 We can see the higher high on Monday this week, that then pulled back to form a consolidation triangle for this week. After the close Thursday we were allowed to draw the shallower (Green) Trend Line from Monday s highs.
NASDAQ weekly chart as of May 18, 2018 - The Nasdaq rallied last week off of its 20 week SMA support, then pulled back a little this week, as the prior week s rally paused. NASDAQ daily chart as of May 18, 2018 Here we can clearly see the rally last week crossing above the 20 day and 50 day SMAs. That rally peaked this Monday (May 14 th ) in the first hour, and then pulled back. Tuesday gapped down and bounced off of support, and the remainder of this week oscillated within the range defined by Monday s highs and Tuesday s low. After the close on Thursday, we could draw the shallower trend line (Green).
Russell 2000 daily chart as of May 18, 2018 The Russell rallied to new all time highs every day this week but on Tuesday. The Trend Line (Orange) Break out late last week was a good signal that confirmed conviction in the small cap index as funds seemed to continue to rotate into this sector again this week. We see a two week rally from the 50 day and 20 day SMAs starting on May 4 th. Next we will look at a few Market Internals that based upon statistical studies of the entire overall (NYSE) market.
NYSE Advance/Decline daily chart as of May 18, 2018 We see a similar pattern in this chart as we saw in the Russell 2000 for this week. This shows broader participation with more stock symbols moving up than down. The data used for this study does not consider the size of a company, it just counts of the number of stock Symbols moving up vs. down. McClellan Summation Index daily chart as of May 18, 2018 Like the Adv/Decl Line above, the McClellan Summation index shows the increasing breadth of participation in the (Russell) rally this week.
VIX daily chart as of May 18, 2018 Options Volatility continued to remain relatively low this week, with only a small increase on Tuesday when the markets gapped down at the open a little. Next we will look at a few key commodities, currency and interest rates. OIL daily chart as of May 18, 2018 Oil remained strong this week, and rallied to deliver another multiyear new high on Thursday. We have seen 6 weeks in a row with higher oil prices.
Gold daily chart as of May 18, 2018 Gold prices dropped hard on Tuesday (May 15 th ) to deliver new lows not seen since late Dec. 2017. Price remained near these lows the rest of this week. US Dollar Index daily chart as of May 18, 2018 The US Dollar popped on Tuesday (May 15 th ) to new 2018 highs and continued higher the rest of this week. This is week s US Dollar chart is almost the inverse of the Gold chart.
US 10 year Yield daily chart as of May 18, 2018 The US 10 year bonds yield increased this week to break above the long term resistance at 3.03%. Next we will look at a few key sectors for this week. Dow Transports daily chart as of May 18, 2018 The transports remained horizontal in a narrow range this week, retaining most all of its gains from the prior week, and remaining above its (Orange) Trend Line Resistance.
XLF daily chart as of May 18, 2018 The Financial sector had a difficult week this week. The rally from last week was over, and some of those gains were given back this week as XLF fell back towards its 50 day SMA by the end of this week. We were able to draw the shallower trend line (Green) on Wednesday this week, drawn to the high of Friday (May 11 th ). XLE daily chart as of May 18, 2018 - We saw a strong week this week for the XLE, with most of the gains coming on Thursday this week as the XLE delivered new three year highs. Note the correlation between this chart and Oil (above) where most of the gains this week were on Thursday.
QQQ daily chart as of May 18, 2018 The Tech sector ended its rally early this Monday, then pulled back Tuesday and remained horizontal the rest of this week. On Thursday we could draw the shallower (Green) Trend line using Monday s highs. The QQQ remains above both its 20d and 50d SMAs. SOXX daily chart as of May 18, 2018 The Semiconductor sector oscillated this week after delivering a higher high early on Monday. We drew our shallower trend line on Thursday (Green) and the SOXX closed this week still above its 20d and 50d SMAs. The SOXX was not as quiet and narrow this week as were most of the markets.
XRT daily chart as of May 18, 2018 The Retail sector broke above its Trend Line Resistance on Monday this week, and rallied each day but Friday. The week ended above both its 50d and 20d SMAs. XLV daily chart as of May 18, 2018 The Healthcare sector was flat this week after briefly delivering a higher high on Monday. On Thursday we could draw our shallower trend line (Green). XLV is clustered here near its 20d, 50d, 200d, and trend lines, showing us it had not really changed much over the past three months.
XME daily chart as of May 18, 2018 Last week the XME ended the week on its Trend Line (Orange). This week we saw a quiet Monday, dip on Tuesday s open followed by a rally ending with a pause on Friday. Four days this week clearly closed above the Trend Line, as well as above all 3 SMAs. XLU daily chart as of May 18, 2018 - The Utilities sector gave us a clue last week when it briefly broke below its 50d SMA (Blue) and Trend Line Support (Orange). This week began at the 50d and TL, and then broke down every day this week to clearly show its break down in price. Seems money is rotating out of Utilities and into small cap this week. Next we will look at a few key stocks.
All five of the FAANG stocks gave back some gains this week. AAPL daily chart as of May 18, 2018 About half of the prior week s gains in AAPL were given back this week as AAPL mostly chopped sideways just below its new All time highs from last week. AMZN daily chart as of May 18, 2018 AMZN gave back some gains on the gap down on Tuesday, and chopped sideways in a narrow range the remainder of this week. AMZN remains above all three of its SMAs and not far below its all time highs.
NFLX daily chart as of May 18, 2018 NFLX chopped mostly sideways in a narrow range this week. NFLX remains above all 3 SMAs and just below its all time highs. AAPL, AMZN and NFLX remain the strongest of the five FAANG stocks. FB daily chart as of May 18, 2018 FB ended its rally last week, recovering its losses from the data scandal two months ago. Like the sector, FB gave back some gains on Tuesday this week, and remained quiet and horizontal the rest of this week. On Wednesday we could draw the shallower Trend Line (Green).
GOOGL daily chart as of May 18, 2018 Alphabet had a negative week with a lower close every day but Monday. On Thursday we could draw the shallower Trend Line (Green). This week ended near the 50 day SMA. NVDA daily chart as of May 18, 2018 NVDA pulled back this week, after the strong rally the prior week. Support this week was found near the May 7 th gap open as those lows were retested on Tuesday this week (May 15 th ). NVDA remains above all 3 SMAs at the end of this week. The All Time High we saw on May 10 th before earnings after the close that same day.
MU daily chart as of May 18, 2018 MU remained above its 50d SMA all week, with a peak in price on Wednesday. By the end of this week, MU gave back a lot (but not all) of this week s gains. It ended the week above all 3 SMAs. GS daily chart as of May 18, 2018 GS began this week with another test of Resistance at its 200 day SMA (Purple) were it failed to break higher. Price dropped every day this week after the test of Resistance and closed near (below) its descending 20 day SMA (Yellow). The entire sector had a difficult week this week with GS being one of the weakest.
CAT daily chart as of May 18, 2018 CAT had a strong week last week from its 20d and 50d SMAs. On Monday we saw a pause of this trend, then a pull back on Tuesday, and then a small rally on Wednesday and Friday to end the week positive by about 85 cents. All of the prior week s gains were retained and CAT remains above all 3 SMAs. The Trend Line (Yellow) resistance is near and we will see what happens next week. DE daily chart as of May 18, 2018 DE reported strong earnings before the open on Friday, and then saw a strong rally that day, mostly occurring during the first hour. DE crossed above its 50d SMA with big Volume. Since CAT had been doing well the prior week, maybe this context helped DE have a positive reception Friday?
LMT daily chart as of May 18, 2018 LMT dropped below its 200d SMA on Monday then chopped sideways the rest of this week. BA daily chart as of May 18, 2018 Boeing chopped sideway most of this week. On Thursday we could draw a shallower Trend Line (Green) based on Monday s high. Friday saw price break above this new Trend Line, and the prior week s highs. This week ended with the highest close since about March 12 th.
RIG daily chart as of May 18, 2018 With rising oil prices and a strong Energy sector, RIG broke above last week s highs this week on Wednesday and Thursday. TSLA daily chart as of May 18, 2018 On Monday this week TSLA broke below its 50 day and 20 day SMAs. News last weekend about a Tesla car crash did not help. Tuesday thru Thursday was a narrow range, and then another drop on Friday briefly exceeded the prior lows from May 3 rd (Grey line) and provided the lowest close since April 3 rd.
There are many ways to draw Trend Lines. Nearly every book I have read, or trader I have learned from, has their own way to draw Tend Lines, and that is ok. There is not one correct way in my opinion. What I find that is important to me, is that I have my own specific method, and that I STICK to that same method all the time. It is consistency that is important, especially if you are going to Trend Lines in you your trading decisions. As you have likely seen in the many of the charts I have shared, I have a specific way that I use to draw my trend lines, as well as rules to define when and how I can re-draw them. By having a consistent methodology, I can then learn to read the messages (clues) that I can see in price behavior relative to these Trend Lines. I hope this helps you think out what you choose to use in your charts, how you use them, and what value they provide you. Trade Smart, CJ