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5/8/2019 Investment House Daily
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- Trump tweet tries to turn the tide but all it can do is hold status quo.
- Stocks manage to rally from negative, but INTC forecast helps sink stocks late.
- Earnings still coming out but they are no longer impacting the market.
- Indices show a doji after 2 weaker days, but it is likely not a bottom but a continuation doji.
- A continued test is not a bad thing but will the leaders continue to sport good patterns afterward?
- Trade deal not likely in many views, and perhaps that is a positive.
- Semiconductors are making key tests. It is all about the leaders and the semis.
Trump's trade tweet tried to tame the tumultuous trade, and it did, at least for a bit. At best, Trump's tweet that the Chinese vice premiere was going to attend this week and strike a deal stymied the market selling. Stocks rallied steadily from a lower open (even with the pre-market tweet) and turned positive in the afternoon session. Then a sharp selloff in the last half hour took the indices from gains in the 0.4% range (for the large caps) to a flat close. Small caps and midcaps were flat before the late selloff and thus they suffered more significant declines.
SP500 -4.63, -0.16%
NASDAQ -20.44, -0.26%
Dj30 2.24, 0.01%
NASDAQ 100 -0.30%
VOLUME: NYSE -12%, NASDAQ -8%. NYSE trade back below average; no buying on the rise, no heavy selling on the late drop -- okay, no distribution and that works. NASDAQ trade also declined but was still above average. Not a higher day, but still a solid day of trade. Upside/downside volume was just about even so it was a wash. Still, there was money continuing out of NASDAQ stocks.
ADVANCE/DECLINE: NYSE -1.2:1, NASDAQ -1.2:1. Nothing heavy here, but Tuesday was heavy enough. This was a day that the chart indicates: a pause day.
I think it is safe to say the tweet did not bring in buyers, it just paused the selling -- until the last half hour.
The late selling was fanned by comments at an INTC investor conference about single digit growth for the next 3 years. Big name, important stock and sector, the stock already on the ropes, and then this news. It dropped 2.5%, and as a Dow component, it aided the Dow's fall from 100+ points to a flat close. It also dragged SOX and other stocks in general lower with it. Despite the economic positives, this company forecast was a wet blanket on the entire market.
Okay, the action was at best a pause button day in terms of the trade deal/no deal selling. It does not change the prognosis from last night.
Leaders are struggling to hold on. Money has moved out of the market of late and it always moves out of leaders when it does because they moved up the most. The key is whether the leaders just put in normal tests. The traders are all defensive, talking the scenarios for a market drop that breaks the rally. They always do. Our focus is more immediate -- how the indices hold the support at hand and how the leaders hold the support at hand.
That prognosis is . . .
SP500, NASDAQ, NASDAQ 100 and SOX can all easily test down to the 50 day MA regardless of what happens. All showed a tight hammer doji on the session. That can mean that the pullback is ending, particularly when you look at SP500 and NASDAQ and their doji over support (SP500 the 50 day MA, NASDAQ the July 2018 peak). Or, it can simply be a continuation doji toward a full test of the 50 day MA for all these indices.
Even if it represents a continuation doji (what I believe is the most likely of the two), is testing down to the 50 day MA a major event? Perhaps for those so conditioned to the market never really selling, but a 50 day MA test is something the indices could use. They tried the breakout, SOX and NASDAQ 100 successfully while SP500 and NASDAQ just could not quite make it. A test of the 50 day lets SOX test the breakout and bounce from there. SOX also can set up an ABCD pattern along with SMH, a positive setup. It lets the other 3 come back to key support to consolidate the prior rally and gives them a launch point for another run at those highs. That is what we have discussed all along as a very likely scenario, and it looks to be playing out.
DJ30 is similar, but it has broken the 50 day MA's and could test to the 200 day. It has a toppy near term pattern, bumping below the prior highs on lower MACD -- the upward momentum was fading. A drop to the 200 day SMA puts it at the early March lows and at a potential neckline to a head and shoulders pattern. As discussed Tuesday, those are problematic in whether they fulfill or not, but given the inability to move through resistance, the formation warrants respect.
RUTX broke higher the prior Friday and was rejected Tuesday with a reversal of that move. Ironically so given the selling Tuesday was purportedly due to the issues with a trade deal with China. Wednesday RUTX tried the 10 and 20 day EMA above it and failed, closing near the low. A test of the 50 day MA's looks pretty sure (of course that confidence will come back to bite me) and that is not that far away at 1528 (45 points).
SP400 is already at the 50 day MA, showing that same hammer doji. Maybe the small caps are happy with the trade situation and rally here. If the market cracks, SP400 falls to 1850 (closed at 1932) and may form the right shoulder of its own head and shoulders starting in March. That is even farther off than DJ30's potential H&S, so the same caveats apply even more so.
THE TWIST: Semiconductors. INTC's warning on revenues and breaks in patterns such as MU are serious caution flags about the rally's sustainability. If the chips start breaking down, the overall market likely starts breaking down with it.
Afterhours DIS reported earnings. It gapped mid-April and rallied to month end. It faded in a nice test ahead of results and we liked it but wanted to see the earnings. It beat and DIS is reportedly 'popping' on earnings. It is up $1.11. Not exactly a 'pop,' but we do like the setup. Later in the session as DIS fell from the 'pop,' the CNBC headline changed to 'rises slightly.' Do we hear 'trades lower'?
Software: Still holding up very well, weathering the selling: COUP, WDAY, OKTA, HUBS, MSFT, NOW.
FAANG: Okay, but very uninspired. FB flat, still in the earnings gap test. AAPL was back above the 20 day EMA but that late selling dropped the gain. AMZN flat with a doji. NFLX gapped lower and sold to the 50 day MA where it closed. GOOG still languishing over support at 1160, giving up 14 points high to close.
Semiconductors: A serious test for this group and the market. INTC hurt the market with its investor conference warning re its growth rate. MU broke support Tuesday, still weak. Others are now at key support, e.g. AMAT, AMD, AVGO, TXN. LRCX is trying to hang on at the 20 day EMA. NVDA is weak below the 50 day MA. UCTT still looks solid, but it is looking more like an island if the big names don't start holding up.
Transports: Rails are under a bit more pressure though still at near support, e.g. CSX, KSU. UNP and NSC look pretty decent still. Airlines struggling, e.g. LUV, SAVE, AAL. Truckers are very mixed but on the overall weaker. UPS, FDX sold again below the 50 day MA.
Machinery/Manufacturing: CMI is still holding at the 20 day EMA. CAT is using up more of its lives with another drop below the 200 day SMA. DE is at support after an ugly 3 days downside. EMR still selling, MMM ditto. UTX broke Tuesday and while it regained some lost ground Wednesday, it was not much.
Financials: Hard to call it strength on the day as they gave up gains to close lower in most cases. BAC, JPM did that while C managed to hold onto some pennies but it was up before it sold back. GS, MS flattish, holding fairly well, but they need to improve their patterns again. Even regional banks started to struggle, e.g. TCBI.
Homebuilders: Started to crack with KBH breaking the 20 day MA. TOL is breaking the 50 day EMA.
Retail: So much for holding up. FTCH broke lower almost 5%, crashing the 50 day MA. COST did tap the 50 day MA and bounced positive, ditto ROST, TJX, DLTR, DG. Lots of 50 day MA tests ongoing.
Stats: -473.39 points (-1.79%) to close at 25965.09
Stats: -159.53 points (-1.96%) to close at 7963.76
Volume: 2.37B (+20.92%)
Up Volume: 419.73M (-398.05M)
Down Volume: 1.94B (+810M)
A/D and Hi/Lo: Decliners led 3.32 to 1
Previous Session: Decliners led 1.28 to 1
New Highs: 69 (-8)
New Lows: 59 (+31)
Stats: -48.42 points (-1.65%) to close at 2884.05
NYSE Volume: 917.655M (+15.47%)
Up Volume: 136.402M (-135.471M)
Down Volume: 773.827M (+266.867M)
A/D and Hi/Lo: Decliners led 4.46 to 1
Previous Session: Decliners led 1.38 to 1
New Highs: 71 (-41)
New Lows: 41 (+15)
VIX: 19.32; +3.88. Jumped to 21.84 on the high before backing off. A 2-session surge. VIX was not edging higher with the new market highs, so it was not foretelling a severe market correction. A pretty substantial jump from no worries to selling, and that frankly is a decent upside indication.
VXN: 22.86; +4.16
VXO: 20.98; +6.19
Put/Call Ratio (CBOE): 0.87; -0.18. Interestingly, the ratio fell back below 1.0 on a sharp selling session.
Bulls and Bears:
Bears continue to fall, and rather precipitously. After stubbornly holding for weeks on end, they are giving up, throwing in the towel. That is not a bullish indication after the initial money is thrown into the market.
Bulls are rising as well but are still below the 60 level that has presaged corrections.
There are still no extremes in this indicator, but with bears breaking lower, if bulls hit 60+ then near term there is an increased chance of a steeper pullback.
It did its work in the late 2018 selling with a crossover of the bulls and bears, and when that occurs you expect a recovery. That has been the case. Now with the indices bumping resistance you look for extremes, but bulls are not hitting that 60ish level that has prompted selling/corrections in this long rally from 2009.
Indicator level: green toward yellow (all is well), but rising toward the 60's that would start to represent a threat (a yellow indicator).
Bulls: 56.4 versus 53.4
Bears: 17.8 versus 18.4
Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.
Threat level: FLASHING Yellow. No current inversion but close. One prior inversion of 3 month/10 year but it was just 2 days. Curve is flat at the short end but still upward sloping.
The 3 month yield versus the 10 year: Spread rose 3BP to 5BP. Still too damn close.
The 2 year versus the 10 year: Spread rises 1BP to 18BP
10 year: 2.485 versus 2.457%
3 month: 2.434% versus 2.432%
2 year: 2.299 versus 2.284%
Historical: the last sub-2% rate was in November 2016 (1.867%). Last trade over 3% was November 2018. 2.6% for quite some time, then yields started higher, first run from November to January, then mid-March.
The Dollar: There are two schools of thought. First, those who believe a strong dollar is in the interest of the US. Reagan (though not all of his advisors) and Clinton were strong dollar Presidents. Second, there are those who believe a strong dollar prevents the US from selling US goods abroad. The Bushes (1 and 2) and Obama were in this category. The thing is, the US is always its economic strength peak when its consumers are consuming, and that is when there is a strong economy and a strong dollar: they consume both US and foreign goods. History shows this again and again, and thus it is worth watching the dollar as a gauge of how the US economy is performing.
EUR/USD: 1.11948 versus 1.11931
Historical: Back into the 6-month range formed after the euro sold off from the early 2018 peaks after a week below it.
USD/JPY: 110.03 versus 110.245. Dollar takes a breathing from the selling against the yen. Just a breather -- it did the same thing Monday before falling hard Tuesday.
Historical: Last below 109 in June 2018 then tumbled to 107 in early January 2019. 114.51 is the recent high from October 2018.
Oil: 62.12, +0.72. Surprise draw has oil higher.
Gold: 1281.40, -4.20
The trade negotiations resume and everyone expects a deal because of the President's tweet, because China needs it for its flailing economy, and Trump needs it for his reelection bid. Right? Of course not. Indeed, expectations are now reset as GS and other big banks and brokerages are now saying the chance of no deal is higher than 'deal,' a change of heart in the past 24 hours. Or 12 hours.
Could it be the sentiment is now that a deal will not happen? That could turn out to be a positive. Could.
For now, the indices are struggling. No distribution Wednesday as the indices gave up modest gains late in the session. No accumulation either as volume was lower on the gains that existed until very late session. With the modest breadth and leaders that struggled, that certainly has the looks of just a continuation doji as the indices head toward the 50 day MA test.
There are earnings beats afterhours. DIS as noted and its pop to slight rise. ROKU with a solid beat and upside surge. Ditto FOSL. ETSY unfortunately is not popping, instead dropping 4.25 on its results. What do these mean for the market? Nothing. Earnings are no longer driving the market.
What likely occurs is this continuation doji leads to more downside in the uncertainty vacuum ahead of trade negotiations. That continues 50 day EMA tests for SP500, NASDAQ, NASDAQ 100, SOX. RUTX and SP400 likely undercut the 50 day MA while DJ30 heads toward the 200 day. That is not a bad thing; the indices could use a test after the 5 week run to the resistance and struggles there.
Of course that means stocks struggle as the move lower continues. We can look at playing some downside such as MU or NVDA, the DXD as well, but as noted Tuesday, the big moves occur -- if they do -- after the bounce to test this first break lower. If that bounce fails, then you get the bigger declines that produce better downside plays.
Then there is the trade wildcard. What if a true compromise is reached where both sides give some, get some of what they want? Well, then the market surges back and new highs are likely. Odds? Slim. Can it happen? Trump seems to find a way every time others, including myself, say he is just bloviating. Hopefully I am wrong and we strike a good trade deal for the US. If it is truly a good deal that hems in China's theft, tech transfers, etc., then it would be historic, a turning point in the world because China would be acknowledging it has to change from communism. Tall order. We will see.
Have a great evening!
End part 1
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