We use the CANSLIM trading methodology to find stocks we want to trade from a long perspective, but by using some of the methodologies metrics inversely, we can sometimes find stocks that are ripe for trip to the downside. One of the primary drivers using this trading technique to find strong growth stocks we may want to buy are sequentially strong annual and quarterly earnings per share numbers, but what goes up over time can sometimes come crashing back down when that earnings growth slows, or even stops. Casella Waste Systems (CWST) posted a long series of strong quarterly EPS growth from late 2015 thru mid 2017, and this earnings acceleration ignited several breakouts along the way with the stock chalking up gains of nearly 600% by late 2018. However, big advances can get long in the tooth as earnings growth stalls. Over the last three quarters Casella, which had made a habit of posting triple digit earnings numbers, now shows some serious earnings deceleration posting quarters of 0%, (-12%) and 0% EPS figures. The stock did break out of a very late fifth stage base in July, but an even later sixth stage base the stock had been working on in the fall has appeared to fail. We can look further into the volume pane on the chart and see several weeks of heavy distribution during this period that gave us clue that the health of this base was in question. This base failure ended with the stock crashing thru a nearly two year long uptrend line just before Christmas, but the stock is in the process of a weak recovery attempt that is approaching a bi-lateral area of possible resistance just below the previous uptrend line and the bottom of the previous base setting up a possible short trade candidate. If you would like to learn to trade using the CANSLIM trading process, join us at http://www.ttptrading.com. Hope to see you there!
MARKET GAUGE- Market in Correction
OVERVIEW- The indices put a temporary stop to the intense selling late in the week, and in the process registered an attempted rally on Wednesday. It was good to see the indices finally firm up, but there is much work to be done before any type of victory can be claimed by the bulls. History shows counter trend rallies in corrective, or bear markets can be fierce. Short sellers need to respect the ability for the markets to wipe out any gains they may have racked up, or worse send them scrambling to cover momentum style positions they may have taken at losses. Conversely, long traders need to let markets prove themselves, at a minimum with a follow thru day after an attempted rally, before getting too aggressive as we have already seen two confirmed rallies fail in November. The recent 12/26 attempted rally can set up a potential follow thru day as soon as Monday, but again, not all attempted rallies ultimately lead to a tradable uptrend. Additionally, an new lasting uptrend will need a group of leading stocks to ignite the move, and unfortunately many potential new leaders are still in the earlier stages of setting up reliable base formations, so perhaps more healing time is needed before any meaningful rally can develop. The current IBD industry group leaderboard is still being dominated by defensive type names however, some software groups have been holding up well, and this growth oriented area of the market may have the ability to lead any move higher in the indices, so we will be watching this area with great interest. There is no doubt that we are in a clear downtrend until proven otherwise, and the indices do face some challenges on any move higher, but things can change, and what may seem to be insurmountable near term challenges can be overcome quickly, so it is paramount that traders remain flexible to any changing market dynamics. With that, let’s take a look at the charts.
SPY- The S&P 500 ETF rose nearly 3% for the week and held serve at longer term support near $240 spurring on new attempted rally on Wednesday, so we can begin to look for a confirming follow thru day as soon as Monday. The best follow thru signals occur on days four thru seven of an attempted rally, so with a holiday session on tap Tuesday, the indices will have all of next week to post a follow thru session. It must be noted however, that any new uptrend will have some serious technical hurdles to overcome. Indices are still swimming well below their 50 day moving averages, and have an abundance of overhead supply to deal with. For the SPY, that thick layer of resistance begins near $250 and runs up to the old summer breakout area near $280. Remember, while the indices may have some hurdles to overcome, focus on the leading stocks on any confirmed rally because these stocks can still perform, provided they breakout of sound basing patterns, while the indices are still chewing away at resistance levels on their recovery attempt.
NASDAQ- The Nasdaq fought off the late selling Friday afternoon just enough to squeeze out a gain, making it three straight for the index. However, the rally was turned away right at a layer of resistance between 6630 and 6800 that dates back to the 2018 February and April lows. Like the S&P 500 the Nasdaq Composite has much work to do to return to former glory, but most new leading stocks will originate from this index, like the aforementioned mention software group, so as always we pay particular attention to this area of the market for new trading ideas. In the meantime, the index has plenty of overhead supply to deal with between 6800 and 7500.
QQQ- The Nasdaq 100 cut hard thru the $150 support level on Tuesday, but quickly recovered during Wednesdays rally attempt. The index followed thru late in the week, but was also turned away right at resistance near the 2018 April lows. It too will have a thick layer of resistance to fight thru on any recovery attempt. The 100 may present the most interesting case going forward as it tries to mount a new, lasting uptrend. The prior bull run was primarily fueled by the heavily weighted FANG stocks, but in most cases, new uptrends that commence after bear market conditions will be led by a new group of leading stocks, rather then the prior leaders, so it will be interesting to see where this potential new leadership will come from when a new uptrend emerges.
IWM- The small caps have been locked firmly in a downtrend since September and recently put the finishing touch on a round trip that saw the index give back all the gains chalked up dating back to the 2016 post election breakout. The good news is that the selling stopped there, aided by Wednesdays rally attempt. The index has posted three straight days of advances gaining around 7% in the process. However, the advance was turned back Friday afternoon near the $132-$134 area that marked a firm area of support for the index from late March to mid-August of 2017, so this area does have the ability to provide some resistance, at least in the short term.
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MARKET GAUGE- Market in Correction
OVERVIEW- The indices continued their recent dive this week all but guaranteeing that the major averages will finish the year in negative territory. Outside of the typical defensive groups like food and utilities, a couple of industry groups such as the software area in particular, were still managing to hold up relatively well trading near all time highs heading into the week giving traders some hope that there was some burgeoning leadership waiting in the wings to propel any new rally, but those stocks finally succumbed to the immense selling pressure late in the week. We will continue to look for a possible bottom with a newly confirmed rally, but most stocks have been severely damaged and it will take some time to repair the technical damage that has been done, even if we do get such a signal. I have said here many times that bear markets live below their 50 day moving averages, just as bull markets trend above them, and until the indices mount a serious challenge to that line on the heels of a newly confirmed rally, high cash levels and very selective trades on the short side are the focus. However, the degree and speed of the recent drop we have seen is making it extremely dangerous entering trades on either side of the market, so extreme caution is warranted right now. Traders must remember cash is a legitimate position and should have no reservations about sitting with very high levels until things improve. With indices breaking nearer term support levels, we will pan our charts back further in time using a weekly view to see where some of the next lines of support may lie should we continue lower.
SPY- The index cut decisively thru support areas near $260 and $253 this week on its way to a loss of an amazing 7.59% for the week. In the process it fell all the way to the next major support area near $240 that represents the breakout that took place back in late spring of 2017. Beyond that, the 2016 post election breakout, would represent a complete round trip for the index should bear market conditions continue. If we take a look back at weekly volume levels for the entire 2018 trading year, we can see the large number of weeks when distribution took place in comparison to weeks when price advanced, and this ultimately undermined the prior uptrend. Looking ahead, any rally attempts from current levels will be burdened by the abundance of overhead supply that sits atop the $253-$260 area making upward progress in the near term extremely challenging. That said, markets winds can shift quickly so traders should stay diligent during these times and remain flexible and prepared should signs of a change in trend start to appear, until then the bull is broken and the trend is down.
NASDAQ- The Nasdaq Composite is now down over 20% from its all-time highs set back in September, a bit ahead of the decline in the S&P 500 which is down around 17% and this stands to reason because the index will contain many more growth stocks in which corrections will generally be much more severe. The index shapes up very similarly to that of the S&P 500 as far as layers of support, but the index did stop at a level of support that lines up with a late summer break to new highs in 2017, whereas the S&P sliced right thru on its way to the aforementioned spring 2017 breakout level. Corrections in growth stocks can carry on much longer than some traders can stay solvent so cutting losses in any of these stocks traders may be holding is paramount to their survival.
QQQ- The FANG stocks were a big driver of the recent bull train and they are painting a quite bearish picture of what may lie ahead. We had a high volume break below a long term trendline that dates back to early 2016. As we take a look at the volume pane in the chart below, what is striking is the heavy distribution that has been taking place on a weekly basis for the overwhelming majority of 2018. The resulting breakdown confirms that distribution.
IWM- The Small Cap Russell 200o is now down over 25% from its peak and all that is left is to view the carnage. This index was the first to breakdown back in late September, so perhaps this more speculative area of the market will give us the first indications of when the markets may be ready to turn back around. I will warn however, that bear market rallies and retracements can be swift and severe so traders need to be very disciplined not to get heavily involved on the long side on any rally attempts until they are confirmed, and even then they should do so very slowly with lowered risk as there are no guarantees. Confirmed uptrends can and do fail as we have witnessed twice already in the month of November.
MARKET GAUGE- Confirmed Uptrend Under Severe Pressure
OVERVIEW- The market gave the bulls some hope early in the week with a Monday reversal, but by the end of the week the bears won again, and did so in style on Friday as the indices were hit hard. Similar to last week, our confirmed uptrend is technically in place as the Nasdaq Composite has not undercut its correction lows, but we are splitting hairs at this point and I can easily throw the indices collectively and officially back into correction mode with a two month downtrend firmly in place. Interestingly, distribution days on the S&P 500 and Nasdaq Composite have not been piling up, as they each show only two such days since the rally confirmation on 11/28. However, context is everything and the indices are clearly exhibiting bearish behavior and breakout attempts by leading stocks are continuing to fail at a higher rate. The Russell 2000 eclipsed some longer term support on Friday, while the S&P 500 and Nasdaq Composite are close to some inflection point themselves, so let’s take our weekly run through index charts to see where we are heading into next week.
SPY- The S&P 500 ETF posted only its second distribution day since the 11/28 confirmed rally, but that’s not much solace for the bulls as a series of bearish reversal days plagued the index this week. The $270 area has recently contained any upside for the index, while $260 has provided support now for a third time since late October. Should that level not hold, the longer term support line near $253 which marked the lows of early 2018 correction, is the next line in the sand. The bearish cross of the 50 and 200 day EMA’s was definitively completed this week, but as we have mentioned in the past, this can sometimes be a lagging indicator marking a late sell signal and market bulls can only hope that this is the case this time around. The top 20 industry group list continues to be dominated by utilities, food, beverage and cleaning products, not the sign of a healthy market.
NASDAQ- The Nasdaq Composite posted only a modest loss for the week of 0.84%, but it was the round trip behavior that was more of the concern for the bulls. For the optimist, the index has only posted two distribution days since the confirmed rally on 11/28 and has not undercut the corrective lows keeping the uptrend technically in place, but its the action in individual stocks that traders need to look at in order to round out the picture, and things have not been good in this regard. Few leading stocks have been breaking out to news highs, while many that have tried have failed in their attempts. The 6800 level on the index, which is not too far off, lines up as important support, but if that line does not hold the bulls must try to make a stand at the February lows near 6630. * (Note that Telechart Nasdaq volume figures have not been reported accurately recently but distribution days on the charts are accurately represented).
QQQ- The Nasdaq 100 has completed a bearish cross of its own this week and has three distribution days on the books since the most recent uptrend. Not surprisingly, index has suffered an almost identical decline as the Composite however, it sits more than a full percentage point above its correction lows. The bottom end of the next layer of support sits near $156.50, three percent below where the index closed on Friday.
IWM- The Russell 2000 is now down nearly 19% from its August highs and on Friday broke through important longer term support near $142.50. This index led the way to the downside and has clearly been one of the prime risk on, risk off indicators for the market. Traders should watch this index going forward as it may provide the first clue as to when the bearish tone of the market may come to an end. Should this recent breakdown in the index escalate, the next major line of support may not come into play until price approached the $132-$134 area.
TWTR- Twitter is not quite the typical breakout pattern I look for, as I generally like stocks breaking out to new highs. However, some stocks present strong and compelling technical cases and Twitter also has attributes I look for fundamentally, as it sports a stellar recent sales and earnings record, along with a lofty 93 relative strength rating. The stock printed a text book head and shoulders pattern between March and August of this year however, instead of breaking down at the neckline, the stock has recovered having gained nearly 40% since mid- October. These “failed failure” patterns can sometimes offer gains in the opposite direction of the obvious technical set up, and the stock has already done this to a great extent, but perhaps more gains could be in store. Here we can see the stock is trying to breakout of a nearly five month sideways consolidation with a pivot point of about $36.30. There is some overhead supply above, but should the stock breakout it can move 15-25% before that supply comes into play. The elephant in the room is the overall market conditions, so some serious consideration is in order before pulling the trigger on this, or any other long trade right now, but make a note of these failed failure type patterns and keep this one on your watchlist.
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MARKET GAUGE- Uptrend Under Pressure
OVERVIEW- Thursdays intraday reversal that gave the bulls some hope that the worst of the correction may be over, was crushed on Friday as the major indices turned right back around and tallied large losses. Action in some individual leading stocks during Thursdays session showed some promise, but many turned right back around on Friday and more recent breakouts continue to fail. Technically, by definition, the recently confirmed uptrend that printed on 11/28 is still alive, but contextually and practically, the indices appear to be in the early stages of a bear market. As I have stated many times, bull markets live above their 50 day moving averages and bear markets trend below them, and while the two most recent confirmed rally attempts briefly pierced back above that line, they were quickly rejected and once again are swimming beneath the current. The only beacon of light from Fridays session was that the major indices did not print a distribution day, but that is not much solace for the bulls at this point. It is easy at times like this to throw around wild predictions of what may lie ahead, but here we will continue assess the landscape from day to day. If there is one thing for sure in the markets, it’s that things can change quickly, so traders should continue to stay alert, nimble, flexible and prepared. Now, let’s take our weekend run thru the index charts.
SPY- Shortly after confirming a new uptrend on 11/28, the S&P 500 ETF quickly ran up through its 50 and 200 day EMA’s and challenged its prior breakout level near $280 giving bulls hope that the correction lows have been put in. However, that positive action was quickly squashed with three straight days of losses. Thursdays reversal of early losses that flowed thru on Tuesdays nasty day, gave traders some hope that a floor may have been put in place, but after trading slightly higher early Friday, the index trended lower all day closing near the lows of the day. It’s hard to imagine at this point that the correction lows just below $260 will not be tested, and if that level fails to hold, the 2018 first quarter low hit back in February near $253 is up next. Until the index can remount and hold above the 50 day EMA, a bear market case remains in place.
NASDAQ- The Nasdaq Composite also made a run at its 50 and 200 day EMA’s, but it too was quickly thrown back. Interestingly, these two moving averages crossed bearishly just before the confirmed rally, however this widely followed technical “death cross” can sometimes be a lagging indicator during a correction (this hasn’t proven to be the case in the Russell 2000). That said, we can clearly see that the last three rally attempts dating back to mid October have printed lower highs confirming the recent downtrend. We will be watching to see if the 6800 level on the index contains any further downside, if not, the February lows near 6630 come into play. Again here, the bearish view continues until we can remount the 50 day EMA.
QQQ- The Nasdaq 100 led to the downside on Friday with a 3.30% loss and like the S&P 500 is now in the process of printing a bearish cross of the 50 and 200 day moving averages. It too has printed a series of lower highs and FANG stocks, which have carried the index for some time, look very much broken a this point. Corrections in FB, NFLX and GOOG began up to three months before the October decline began in the major indices and if there is any doubt that bear markets live below their 50 day moving averages, one only needs to look to FB for an example.
IWM- The Russell 2000 staged a bearish cross of the 50 and 200 day EMA’s over a month ago and have not recovered since. Small caps were out in front of the correction in the major indices, and perhaps bulls can hope that they signal a bottom in the major indices by bouncing at a longer term support level they are currently visiting, but the jury is still out on that optimistic perspective. The index has not seriously threatened its moving averages since its decline got underway in earnest in October, and has been trending below the 50 day EMA for just over two months.
MARKET GAUGE- Confirmed Uptrend
OVERVIEW- The major indices posted their best weekly gains for 2018 and this helped flip our Market Gauge to “Confirmed Uptrend.” An initial rally attempt on Thanksgiving Eve was followed by a confirming follow thru on Wednesday as the major indices registered gains of over 2% on an increase in trading volume. It was good to see another potential market rally may be underway, but the indices still have some technical obstacles sitting close in front of them if they want to press higher. The recent rallies that have helped spur the markets have been primarily news driven, including the reaction to the mid-terms, Fed Chair Powell’s comments on interest rate policy and even speculation on a positive outcome in the China trade battle as President Trump meets with China President Xi Jinping this weekend. We would much prefer the market to be responding to institutional buying spurred by company earnings, and although we have begun to see some of this more recently, we will need to see much more if this market wants to challenge its old highs. Newly confirmed rallies are not guarantees of success ,as we saw earlier in the month when the 11/7 follow thru ultimately failed when the Nasdaq Composite undercut its corrective lows, but they are normally a necessary starting point. More importantly, we have to keep index behavior in context. Our ultimate barometer for our trading is the holdings in our portfolio and the continued behavior of leading stocks in the market along with a continued increase of quality stocks breaking out of soundly formed bases. Now, let’s take our weekend run thru the four indices we cover here.
SPY- The S&P 500 ETF is arguably in the best shape of the group however, the recent follow thru day (marked with a blue arrow) ran right into a confluence of technical obstacles including its 50 and 200 day EMA’s as well as a two month downtrend that began when the index topped in early October. The index did start the process fighting its way thru by breaking above the trendline with a 0.61% gain on Friday on solid turnover. Should the index overcome these near term obstacles, some serious horizontal resistance near $280, and the overhead supply sitting just above, would present the next big challenge. The good news so far is that the index has not yet marked a distribution day since the follow thru. Newly confirmed rallies marked by immediate distribution days can turn suspect quickly. There is another view of the current technical set up that I think should be on traders radar screen. When markets or individual stocks top and correct, we can draw in a Fibonacci retracement grid on the chart ranging from the market top down to the corrective lows, focusing primarily on the 61.8% and 78.6% retracement areas, as this zone can sometimes mark the last rally attempt before an index, or stock roll over in earnest. For now we can continue, as always, to monitor the landscape day to day with open mindedness and flexibility.
NASDAQ- As with most corrections, growth stocks have taken the biggest hit and the index that contains them has a further climb back to glory than the S&P 500 however, their recoveries could be equally swift and strong. The Nasdaq Composite sits with a set of similar circumstances with layers of technical resistance close in front of it. Like the SPY, it too was able to crawl back above the two month downtrend line on Friday, but a challenge of the two moving averages, which have recently executed a bearish crossover, still lies ahead. We have drawn in a Fibonacci retracement grid here as well that interestingly shows the 61.8% retracement sitting in conjunction with the top of horizontal resistance near the key 7600 level, which marked the previous breakout in June.
QQQ- As we can see by now, all three indices are portraying a similar theme, but the one thing that stands out is that the key 61.8% Fibonacci retracement level sits right in line with the former breakout area of each index. It will be very interesting going forward to see how this scenario plays out.
IWM- The small cap Russell 2000, which endured the brunt of the correction, has pretty much recovered in lock step with the other indices recently. It too is currently challenging the two month downtrend line from the October top, but I will be watching how the index responds if, and when it approaches the 50 day EMA. Bull markets live above their 50 day moving averages and bear markets live below them, so it will be interesting to see if the clear bearish crossover of the 50 day and 200 day EMA’s near the end of October signaled an end to the bull market in small caps, or if it was a lagging indicator of a correction that has already run its course.
That’s all for now. I will see you tomorrow for what should be an interesting Weekend Trading Review video. Until then, enjoy your Saturday!
MARKET GAUGE- Market in Correction
OVERVIEW- The market remains in correction following the 11/7 failed follow thru as former leading stocks continue to breakdown. All major indices are swimming far beneath their 200 day moving averages, and as a result, this will likely lead to continued volatility in the near term. The current list of the top 20 performing industry groups continue to be littered with many historically defensive names, and until we see some new market leaders emerge in more growth oriented groups, it will be extremely difficult for the market to gain much ground. Much technical damage has been done during this recent correction leaving the indices with much overhead supply to overcome with any potential rally attempt. That said, we never know what the future holds and new market rallies can spring out of nowhere, so traders should continue to monitor the indices and keep a list of stocks that are acting relatively well. In particular, traders should keep watch of what individual groups are showing the most relative strength as new market leaders are likely to emerge from these groups. However, until we see another follow thru day in the major indices, traders should continue to hoard cash and trade with extreme caution. In the meantime, remember that bull markets live above their 50 day moving averages while bear markets live below them, so traders should watch this key moving average going forward. Now, lets take a look at the four major indices we track here.
SPY- Our S&P 500 ETF gapped down severely on Tuesday and the ensuing, lightly traded holiday sessions were unable to result in much of a rally attempt. The ETF seems to be caught in no mans land between the correction lows and resistance that is setting up again in the $268-$270 area. It looks more and more like the index want to revisit and test those lows, which I do agree is a strong possibility, however, many traders are expecting this action with some type of capitulation day to the downside before any new uptrend can emerge. I would warn that the market often does not line up with the traditional expectations of its participants, so keep an open mind and be ready to maintain an unbiased flexibility in any environment. There is no guarantee that the index will test the lows, nor is there any guarantee those lows will provide the expected support many traders are expecting should they be revisited.
NASDAQ- A somewhat similar story for the Nasdaq Composite as two potential support/resistance zones are currently set up between 6800 and 7000. Another bearish development traders may be eyeing is the moving average crossover setting up on the chart. We saw this same type of action in the Russell 2000 back in late October. However, while these “death crosses” are something to note, they should only be used as one piece to the puzzle when analyzing the market landscape. These crossovers can end up being somewhat of a lagging indicator at times with an index marking intermediate to longer term lows not too long after they show up on the chart. I will also be watching the 7000 level closely, as these big round numbers can often become technical obstacles for indices.
QQQ- The Nasdaq 100 finished the week virtually on a level of support near $159. If the index were to give up this level the next layer of support would come in between $150-$154. On the upside, the $169-$170 level and the declining 50 and 200 day EMA’s are lining up to be formidable resistance on any rally attempt. The handful of former market leaders that hold such a heavy weighting in this index that helped propel it on the way up, will likely hold it down until some new leadership can emerge.
IWM- The Russell 2000 lead this correction, but unlike the Nasdaq, it has not gone down to test its correction lows and in fact, the index had the best relative performance this week of the four we track here. The index looks like it may have some long term support not too far below the market, but a break of that level would be an additional and extremely bearish development. Since this index was the first to break, I will be watching with interest to see if any relative strength here may be a precursor to a general recovery of the entire market.