After a surge higher from the indices last week, the major averages took a rest this week. We have been peppered with many headlines from unprecedented weather events to threats of nuclear war from that crazy man in North Korea. While we need to be aware of what’s happening in the world around us, we can not be distracted from reading what the markets are telling us. Try and pay less attention to media noise and focus on the price action of your individual stocks and the major averages. Most importantly, don’t formulate a bias as to how the markets will react to the numerous news items or world events because it will be very hard for you to separate yourself from those biases should price action unfold contrary to your opinion. Currently, we have to respect the uptrend with the indices near all-time highs but we remain slightly on guard and slow to jump in with both feet in regards to new long positions until the markets can prove themselves further by making new highs. We say it here often but it bears repeating, let your portfolio evolve naturally in response to market conditions. It doesn’t take dozens of open positons at a time to handily outperform the markets, but carefully selected positions in line with your methodology along with proper money management will keep you ahead of the competition.
Just another reminder that I will be on vacation next week, so likely there will be no new positions opened and I will only touch base if need be. Remember to honor your stops and profit targets and use discretion if appropriate. With that, let’s dive into the charts.
SPY- The S&P 500 notched two fresh distribution days this week and now has six such days under its belt in the last 20 trading days, however, the August 10th session will come off the count after Mondays close. Remember that five distribution days inside 20 trading sessions signals us to proceed with some caution. The index strung together three tight closes to end the week nearly unchanged but remains above its 50 day EMA and above the key 245.00 level. The action this week didn’t tell us too much other than the bears still have been unable to wrestle control away from the bulls. A breakdown below key support and/or the 50 day EMA on conviction may put talk of a double top formation on the table.
NASDAQ- The distribution picture here is better as the Nasdaq Composite only has four selling days over the last month and will also have the August 10th session removed from the count after Mondays close. The index sits nicely above its 50 day EMA but is only 20 points above its prior breakout support level near 6340. A hold of that level next week along with a close back above the 6400 level would be a nice scenario for the bulls. Conversely, similar to the S&P, a sell-off on volume and a close below the 50 day EMA could put a possible double top formation in play.
QQQ- The Nasdaq 100 sold off more than its index counterparts this week but still rest above its 50 day EMA. Although the index has only four distribution days in the current count, it registered two of those this past week. Like the other indices, the index is not far from all-time highs, however, we do note a lack of robust volume on up days when compared to days when the index has sold off. All said, the index is less than 1.5% away from all-time closing highs.
IWM- The picture with this small cap index continues to improve but it still has plenty of work to do to break out of a nine month consolidation. An attempt to breakout back in late July failed and sent the index back to the bottom of its range. However, The Russell 2000 bounced nicely over the last three weeks with an improving distribution picture, as it has only three such days in the current count, with the August 10th session coming off the books after Mondays close. A breakout in the small cap arena would do wonders for the markets, but with Fridays close we are still over 4% away from that occurrence.
Now on to our open positions.
GILD- Biotech has been rolling and our LONG position in Gilead Sciences has been along for the ride. We opened the position on 7/13 at a price of $70.81 and took swing trade profits on half our position at $74.13 on 7/25. The gains were modest and short of our initial swing trade target as we ran into an upcoming earnings report, so by rule we sold half of our shares to limit excessive risk. However, we are now up over 20% on the remainder of our shares as the stock has responded well to its acquisition of Kite Pharmaceuticals. We feel this has a chance to be a fairly big winner so we are giving the stock some room and placing our current stop near $77.00.
SEDG- We took our LONG position in SolarEdge on 7/12 at a price of $21.47 and similar to our GILD trade we needed to take some shares off the table prior to earnings but notched a decent gain of 9.32%. A big post earnings gap gave us an opportunity, in what was an iffy market at the time, to lock in more gains on a quarter of our position for gains of 28.59%. The stock has been working of that gap in a descending wedge type formation since and is putting our stop, which currently rest near $24.00, in striking range. A Friday close of $25.70 still leaves us up over 19.5% on the remaining shares. We will monitor the action when and if the stop comes into play and use some discretion if warranted.
SUPN- This is our newest trade taken last Friday, also in the biotech arena. We went LONG at a price of $47.00 on 9/1 and placed our protective stop near $44.25. Our initial swing trade target on the first half of our shares is near $51.00. The stock perked up nicely Friday trading just shy of $50.00 before settling back in afternoon trade closing at $48.60 leaving us up 3.4% one week into our trade. This is a breakout style trade and will be dependent on the markets staying firm. As a result, we are being conservative and bumping up our stop in accordance with this weeks advance and setting it near $45.00.
LUV- On to the short side starting with Southwest Airlines. We took our SHORT position on 8/7 at a price of $55.38 and were able to lock in swing gains on half our shares for a 6% gain. The stock got a bounce this week from extremely oversold conditions and closed at $52.87 leaving us up 4.54% on the remaining half of our trade. We still think the industry is vulnerable to further selling so we will leave our stop on the rest of our position near the breakeven level.
AXTA- We took our SHORT position here on 8/25 at a price of $29.23 about two weeks after an earnings miss by the specialty chemicals company. We took advantage of a pullback in price after the big post earnings sell off to set up a nice risk/reward entry. The stock traded slightly lower this week enabling us to further lower our downside as we edged our stop down to near $30.50. Our initial swing target is near $26.00 but remember, we use much discretion on our short trades and can call off the dogs at any time or take gains in their entirety rather than scaling out of the position. With a close of $28.45 we are up 2.65% thus far on Axalta.
That’s all for now. Enjoy the rest of your weekend and be careful out there!