MARKET GAUGE: Uptrend Under Pressure
*Weekly Sector Watch Highlights several industry groups that have experienced a measurable change in strength or weakness relative to other groups over the last 3-6 week period.
SECTORS EXHIBITING RECENT STRENGTH: Energy (Solar), Oil/Gas (Field Services), Oil/Gas (Exploration/Production), Oil/Gas (Drilling), Oil/Gas (Refining/Marketing), Transportation (Ship), Retail (Restaurants), Apparel (Manufacturing), Retail (Specialty), Beverages (Alcoholic), Metals (Mining/Ores).
SECTORS EXHIBITING RECENT WEAKNESS: Electronic (Semiconductor Equipment), Electronic (Semiconductor/Fabless), Electronic (Scientific Measuring), Electronic (Semiconductor/Manufacturing), Software (Gaming), Internet Content, Financial Services (Specialty), Financial Services (Mortgage Related).
OVERVIEW: We discussed last week just how delicate the recent confirmed uptrend was and this week past weeks trading bared that out as the markets were throttled back into uptrend under pressure mode. It has been a tough trading environment as of late, especially in regards to many of the trend trading set ups we like to trade. We had a prospective client email us recently and he mentioned that it has been somewhat boring at times in regards to his trading. To that I say, perhaps you are on the right track. As much as we may enjoy our trading and consider it a passion, if we are serious about making money and growing our accounts we have to realize that there will be periods of reduced activity as our trading style may not be offering up good opportunities every day, week, or month. The longer I trade the more I realize the importance of patience. The patience of waiting for a good set ups that are in line with my methodology and the patience to let the process of each trade play out. To borrow a line from another veteran trader I admire, “if you are looking for excitement have an affair, it will be a lot cheaper.” Your trading should be run like a business with your account equity acting as your inventory and should you run through that inventory, you will be out of business. Preservation of capital is paramount and yes, that can be boring. With that, let’s take a look at our four major indices which are struggling to remount their key 50 day moving averages.
SPY- The S&P 500 has not made any progress since February as it has traded in a sideways chop back and forth across its 50 day exponential moving average for three months now. In doing so the SPY ETF, which we use here to track the index, has printed a series of lower highs since the beginning of the year. The index has tried to remount its 50 day EMA on three occasions and has failed each time. It tried again late this past week to rally up through the key level but was stopped just short. If we look at the volume pane below we can see that each of the last three days that the index has rallied volume has decreased incrementally which shows a lack of conviction by the bulls. The indices need to remount their 50 day lines, take out their most recent lower high and do so with some conviction before we can get too excited from a bullish prospective. The ETF currently sits with four distribution days over the last 14 sessions and with our current uptrend already under pressure, any additional distribution days next week will set off serious caution flags.
NASDAQ- Unlike the S&P500 the Nasdaq Composite was able to post a higher high, which occurred back in March, but the general theme has been the same here with the index caught in a trendless chop for most of 2018. Good news has been bad news as a slew of solid earnings reports have been aggressively sold into, this is at best the sign of an unsure market and at worst the sign of an unhealthy market. More big reports are slated for next week with Apple taking the limelight on Wednesday and we will be watching how those numbers are received by the market. The Nasdaq also tried to retake its 50 day line on Friday but the early rally failed with the index closing back below the line by the final bell. On a positive note the index did hold round number support at the 7,000 level on Wednesday and has only two distribution days on the books since the 4/10 follow through day.
QQQ- The Nasdaq 100 has virtually the same look as the Nasdaq Composite and Fridays activity supplied the same fate with the index failing to close above the key 50 day EMA. Upside volume for the index has been better recently relative to the S&P 500 however, the index also sports four distribution days over the last 14 sessions. With most FAANG stocks earnings out of the way the short term fate of the index may be provided by traders reactions to quarterly earnings by Tesla (TSLA) on Tuesday and Apple (AAPL) on Wednesday.
IWM- Of the four indices we cover here the Russell 2000 has been the relative winner as it sits only about 3.5% away from its all-time highs set in January and is the only index that currently sits above it 50 day EMA, albeit barely. Similar to the other indices, selling has been a bit more aggressive on the downside compared to up days for the index. The index did escaped a technical distribution day on Friday as the small decline of 0.14% did not qualify but we did take note of the pick up in volume when compared to Thursdays positive session. As it is, the index officially sits with three distribution days on the books since the markets confirmed a new uptrend on 4/10. Remember, that five to seven such days in the indices over 20-25 sessions warrants serious caution.
Now from our Sector Watch this week. We can see that the restaurant group has been showing some recent strength so let’s take a look at some stock here that have caught our attention.
EAT- Brinker International has advanced over 30% since late March. That’s a strong move in a short period of time putting this stock on our momentum watch list. Although the recent trend supports a possible trade on a qualifying pullback the stock has traded right up to an area of overhead supply from last spring which tempers the possible set up. The stock is set to release quarterly results on Monday so we will be standing aside and letting the price pattern continue to develop. A poor reaction to earnings may send the stock right back into its previous base which would squash the set up for us. A continued move higher however, would keep this stock on our momentum watch list and we would be watching for a pullback to possibly get involved here. Our first chart goes back nine months on a daily basis showing a great looking set up with no overhead supply, but as we pan back a few months further on the second chart, we can see that the stock is trading into some overhead supply. It is true that the further back the supply of stock is in any congestion area it may present less resistance, however some stocks can have long memories so it always pays to survey the charting landscape from several time perspectives before jumping in to a trade. Here is a look at the two separate time perspectives that offer up much different looks.
CAKE- Cheesecake Factory popped up on our list as a potential breakout set up in this group and it too looks solid. An early breakout in April checked up quickly and the stock has formed another brief four week consolidation offering traders who may have missed the initial move a second opportunity to get in. A move above $53.70 could signal a possible entry with a stop just below the $50 level. However, as we pan back a bit further we can see again, similar to EAT, a big area of over head supply that sits between $57.00 and $64.00 which may limit the possible upside to this trade, especially for intermediate term position traders. Now, if we take a third look with a weekly chart going back even a bit further into mid-2016, we notice a congestion area between $47.00 and $53.00 which the stock is butting up against right now. The lesson here is to know the time frames in which you are looking to trade and make sure each individual set up coincides with your methodology. For our purposes here we look to swing out half our trade for hopefully shorter term gains but since we look to retain the other half for longer term potential we ideally like to see set ups that do not have an area of overhead supply too close by. Here is a look at all three charting time frames.
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