InvestmentHouse - A Further Selloff Would be Best (Weekend Newsletter)
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- Dow posts a devilish 666 point drop as sellers hit the market like demons.
- Dow's 600+ loss is only the sixth in history over 600.
- Jobs report takes a back seat to the current market mood.
- Wells Fargo gets an afterhours rebuke and a lid on new assets gratis the
Fed
- Market is dealing with Yellen gone: barely out the door and Kaplin is
talking tough. Market is not used to that.
- A further selloff would be best before a rebound attempt.
- The various scenarios from here.
- Don't get too eager to move back in for more than short term plays. If
they turn into long term plays, that is okay. Unlikely, but okay.
The upside typically comes slow and steady. The downside starts quietly and
can disguise itself as just part of the same trend higher. The trend
remains solid, albeit quite extended. Distribution sessions start popping
up, but the trend holds. Sentiment hits extremes; this time it was record
bullishness and bearishness at 30 year lows. Then stocks start giving up
breakouts. Airlines, big biotechs broke out then reversed hard. AAPL broke
out in mid-January but then fizzled. But the big names still soldiered on.
Indeed, Thursday I noted that NASDAQ and SOX still held very well in good
patterns and if the market wanted again to shake off the issues it could do
so. It didn't.
Stocks started lower as futures gapped downside, dropped at the open, failed
a 45 minute bounce attempt after a half hour of trade. Then it was a steady
downtrend all session, exacerbated by the Fed's Kaplan who devilishly kicked
the market while it was down, saying if the Fed waits for inflation it will
be too late, that the tax cuts could cause an over-leveraged condition, and
that 3 hikes in 2018 was the base case, that there could be more. That set
the market into an afternoon panic that ended with the Dow down 666. Could
get worse on Monday; afterhours as Yellen's last official move, the Fed
placed Wells Fargo on restriction, saying WFC cannot add assets until it
replaces four board members and puts in place the protocols necessary to
preclude further malfeasance. Slap on the wrist, really; some people should
go to jail. Anyway, I am not sure if that will help the market in the
current climate where any reason is a good one to sell.
SP500 -59.85, -2.12%
NASDAQ -144.91, -1.96%
DJ30 -665.75, -2.54%
SP400 -2.02%
RUTX -2.06
SOX -2.74%
NASDAQ 100 -2.05%
VOLUME: Volume bounced on NYSE (12%) to farther above average, but it was
lower than Wednesday trade. NASDAQ volume (+13%) spiked to the highest
since mid-December. Lots of downside volume.
ADVANCE/DECLINE: NYSE -8.5:1, NASDAQ -5.2:1. That is extreme breadth. On
the NYSE open it was -10:1. Yes, extreme, and extremes indicate levels that
can cause things to head the other way. It will take more than just this,
however.
Ominous? Closes such as Friday can lead to really hellish Mondays and
Tuesdays. If that is the case, that probably sets a near term relief move,
but likely not the end of the selling. A lot depends upon how much damage
is done to leadership patterns, i.e. if they are in position to recover or
were just broken up. Well, actually, a reflex or relief bounce doesn't
care. It can jump up stocks in patterns as well as stocks that were broken.
It is the sustainability of the relief move that the patterns impact. If
there are no real leadership patterns, the move will fail. You can play a
reflex move of broken patterns upside and make some money, but as soon as it
looks to be stalling it is best to take the profits and see what happens
next. Without good leadership patterns, the relief rally will typically
fail.
In the big picture this is kind of what you had to expect, though the
reality is always rather harsh. This is something like only the sixth time
in history the Dow has dropped more than 600 points on a close. Elite
company. But then again, the move upside was an elite move.
The overall question everyone is asking is when do you buy in. That depends
on when this selling round lets off enough pressure. It also depends upon
what type of buying you want. If you are looking to buy positions with the
intent of holding for steady gains as seen of late, you have to have the
good patterns to lead the market higher again and hold up on the test of the
rebound. If you don't have those patterns, likely you won't be happy unless
you morph your plan of action into playing the surges and selling out when
they start to slow. Indeed, until the market shows it can hold a rebound
after a test and continue higher, it is wise to treat all rallies as simple
relief moves that will surge, rather violently at times. Once the market
has the leadership and holds a test, that is a different story. That is
also potentially a long way off.
So, this weekend you sift through the selloff, find what stocks held the
line and look decent. Then you see if they hold up during further selling
Monday and Tuesday. If there is further selling and they hold up, you have
some great candidates to play upside -- along with the usual favorites that
people pile into when they think the buying light is on when it really is
not.
You then play a bounce, take what you can until the bounce starts to
stumble, then get out. Then you look to play downside with stocks that
rebounded but ran into resistance such as the 50 day MA, prior lows, etc.
Also some of the index plays and ETF's are not bad, e.g. SDS, QID. The next
drop is likely rather violent as well.
After that drop, you see the relief move again and then note where the
rebound stalls. If at the 10 day EMA, that is the making of a strong
downtrend. If that occurs you start shifting your mindset from buying for
long term holds to selling the rallies back up to near resistance, playing
the drops lower as that becomes the trend.
Just look at SDS as an example. It trended lower and lower below the 10 and
20 day EMA. The play would be to sell it (or buy puts against it) each time
it touched the 10/20 day EMA and threw a doji. It is the reverse of playing
a strong trend upside such as the DJ30.
If there is no more selling come Monday, the move is really suspect and
certainly any bounce would be treated as relief. There will be, however,
good patterns because as of Friday, even after the trip-sixes, there are
good normal pullbacks. You always fear the head fake if stocks start higher
versus sell more then reverse. That is a tough place to play for sure. You
can do some sample buys with some quality patterns and stocks, but this is
considered even more of reflex type bounce. May not be, but it is very
difficult to ascertain in its early stages.
Either way, i.e. more early week selling or none, the big test for the
indices comes at the 50 day MA's and certain retracement levels. They will
try to find support there. They can be the bounce points for the relief
moves. HOW the indices and stocks react upside off of these, and then how
that move holds tells a big part of the tale as outlined above.
So for now it is a matter of watching for potential bounce points, watching
stocks and indices as they approach those and see what looks as if it is in
position to make a good bounce. Then play the bounce and see how it plays
out so to speak. Strong volume, good breadth or weaker trade and narrow
breadth? The former is upside positive, the latter more bearish and
suggests the move fails once the pressure is released. Once you gauge the
rebound, then you set up for the next move whether upside or downside. That
is something no one knows for now, though my experience would suggest the
relief bounce off this selling fails and the market goes down more. When
the relief move fails, that is when you start loading up on the downside for
the first time as outlined above.
NEWS/ECONOMY
Most of the news was what you would expect in an improving economy.
Jobs Report, January
Jobs were better than expected at 200K. Wages improved 0.3% month/month and
2.9% year/year. Interestingly, the workweek dropped a lot, down to 34.3
from 34.5. Ah the 'bomb cyclone' or whatever it was in January did serious
damage to the number of hours worked across the entire nation. I can attest
to that; it was hard to get anyone to go anywhere.
Factory Orders, December: 1.7% versus 1.3% expected versus 1.7% prior (from
1.3%)
Good news with final December durable goods orders at 2.8%.
But . . . business investment missed big: -0.6% versus -0.3% in November.
This was the fastest drop since September 2016. Business investment should
start ramping up, and with the promised investment post-tax reform it will.
At some point. At some amount.
THE MARKET
CHARTS
What do you say about these? Breaks of support for certain, and now you
start looking at potential bounce points. It is a game of patience on this
first selloff to see where it bottoms, being ready at each point with plays
to participate in the move.
NASDAQ: Was in a decent test along the 20 day EMA but broke down through
the 20 day on the close. Of course volume ballooned to the highest since
the December expiration. Logical support at 7100 to 7068, then the December
peak at 6995. Bare minimums for the selloff I would think, but for now
those are just levels to watch for a hold and bounce. A rip below the 20
day EMA Friday and want to go ahead and get the trip to the 50 day MA or
December peak out of the way on this move. That will be a good scare-off
selloff.
SOX: Gapped below the 20 day EMA and fell close to the 50 day EMA BY THE
CLOSE. Below the November high, and the first January high. From a pretty
decent consolidation to back to the drawing board to try to set up a new
upside pattern.
DJ30: Definitive break lower, only the sixth ever 600+ point loss on the
Dow. Heading to the 50 day MA (25,000) to the December consolidation at
24,860 as a logical first stopping point.
SP500: Similar to DJ30, SP500 crashed the 20 day EMA in a big way. Higher
volume; oh, sellers were in the majority. Surprise. The 50 day MA looks
logical at 2725 on the high end, 2685 from the December lateral
consolidation.
RUTX: Small caps were down harder than the large cap indices before Friday,
and Friday they were actually better than DJ30, SP500 in terms of percentage
losses. As if that matters; over 2% and that is big regardless. Already
breaking below the 50 day MA's, now right at the late November high and
December consolidation. Below that, 1515. Closed at 1547.
SP400: Cracked below the 50 day MA and closing in on the November high and
December consolidation -- just as the other indices. Those look like
logical support points.
LEADERSHIP
Somewhat of an oxymoron in this market, but there are stocks that are
holding well. The question is if they can continue doing so if there is a
sharp early week plunge.
BA: Of course it is strong, just a modest test to the 10 day EMA.
FAANG: AMZN of course, NFLX holding the 10 day EMA in a nice test. FB also
solid.
Chips: NVDA testing the 20 day EMA on high volume. Nice breakout and
initial rally, good initial test. One to watch for certain. MSCC holding
up well in a test. A lot of other chips are problematic.
Machinery/Manufacturing: CAT testing the 50 day MA. DE looks like it goes
lower but a downside play may be kind of tight. TEX already doing so. UTX
looks ready to roll lower. HON almost at the 50 day MA already after its
breakout and reversal. MMM testing still.
Oil: Some major bombs. CVX, XOM. CRZO to the 200 day SMA. Others not bad,
e.g. APC. MRO testing the 50 day EMA. HAL cracking the 20 day toward the
50 day.
Financial: Tough session with C off 2.75% and heading to the 50 day. BAC
is not bad. GS is selling hard to the 50 day MA.
Biotech/Drugs: BIIB, AMGN, GILD down hard on the week, but they are also
already showing signs they want to possibly hold. This could be a fertile
area this week if the market hits bottom at the targets indicated earlier.
Retail: Starting to break lower in some cases (TLRD; AAP). BBY not in bad
shape. TGT breaking the 20 day EMA, but WMT holding it nicely in its
pullback.
Metals: Sold but some are in good tests. STLD at the 50 day. SCHN at the
50 day MA. FCX dropped to the 50 day EMA in one move.
MARKET STATS
DJ30
Stats: -665.75 points (-2.54%) to close at 25520.96
Nasdaq
Stats: -144.92 points (-1.96%) to close at 7240.95
Volume: 2.6B (+13.04%)
Up Volume: 550.38M (-459.62M)
Down Volume: 1.99B (+760M)
A/D and Hi/Lo: Decliners led 5.16 to 1
Previous Session: Advancers led 1.01 to 1
New Highs: 65 (-24)
New Lows: 161 (+73)
S&P
Stats: -59.85 points (-2.12%) to close at 2762.13
NYSE Volume: 1B (+12.55%)
A/D and Hi/Lo: Decliners led 8.47 to 1
Previous Session: Decliners led 1.26 to 1
New Highs: 46 (-42)
New Lows: 338 (+207)
SENTIMENT INDICATORS
VIX: 17.31; +3.84. Exploding higher 28.5%. As it should. It did not
surge during the upside so this is not indicating a major top.
VXN: 20.66; +1.51
VXO: 16.82; +3.38
Put/Call Ratio (CBOE): 0.90; -0.01
Bulls and Bears: Bulls bounced right back upside, just below the cycle high
67.0. Bears fell to cycle lows at 12.6, still hanging around 30 year lows.
Bulls: 66.00 versus 64.7
Bears: 12.6 versus 12.8
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.
Bulls: 66.00 versus 64.7
64.7 versus 66.7 versus 64.4 versus 61.9 versus 64.1 versus 64.2 versus 62.3
versus 61.5 versus 63.5 versus 64.4 versus 63.5 versus 62.3 versus 60.6
versus 60.4 versus 57.5 versus 54.3 versus 50.5 versus 47.1 versus 49.5
versus 49.5 versus 48.1 versus 50.5 versus 57.5 versus 60.0 versus 60.2
versus 57.8 versus 50.0 versus 52.5 versus 54.9 versus 51.5 versus 50.00
versus 55.8 versus 50.00 versus 51.9 versus 58.1 versus 58.7 versus 58.5
versus 54.7 versus 51.9 versus 56.3 versus 55.8 versus 49.5 versus 56.7
versus 53.4 versus 57.7 versus 63.1 versus 61.2 versus 61.8 versus 62.7
versus 61.8 versus 58.2 versus 60.6 versus 58.6 versus 60.2 versus 59.8
versus 59.8 versus 59.6 versus 58.8 versus 56.3 versus 55.6 versus 51.0
versus 42.9 versus 41.7 versus 47.1 versus 42.9
Bears: 12.6 versus 12.8
12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1
versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1
versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2
versus 19.1 versus 19.1 versus 18.3 versus 18.1 versus 17.0 versus 16.2
versus 16.5 versus 16.7 versus 18.6 versus 18.8 versus 18.6 versus 18.3
versus 19.2 versus 18.3 versus 17.1 versus 17.3 versus 17.9 versus 17.9
versus 18.3 versus 17.5 versus 18.3 versus 18.1 versus 17.3 versus 13.75
versus 17.3 versus 16.5 versus 17.5 versus 17.6 versus 16.7 versus 17.6
versus 17.5 versus 17.3 versus 18.3 versus 18.4 versus 19.6 versus 19.6
versus 19.2 versus 19.6 versus 22.3 versus 21.6 versus 23.5 versus 25.7
versus 24.3 versus 23.1 versus 23.8 versus 23.1 versus 22.8 versus 23.1
versus 24.3
OTHER MARKETS
Bonds: 2.841% versus 2.792%. Impressive dive lower by bonds and spike
higher in yields. Kaplan says 3 rate hikes are the starting point in 2018,
not a max. Higher yields are not a bad thing in a growing economy.
Historical: the last sub-2% rate was in November 2016 (1.867%). 2.792%
versus 2.713% versus 2.72% versus 2.72% versus 2.66% versus 2.66% versus
2.639% versus 2.617% versus 2.656% versus 2.661% versus 2.618% versus 2.587%
versus 2.535% versus 2.55% versus 2.559% versus 2.551% versus 2.482% versus
2.456% versus 2.463% versus 2.464% versus 2.405% versus 2.434% versus 2.412%
versus 2.474% versus 2.485% versus 2.484% versus 2.501% versus 2.459% versus
2.398% versus 2.351%
EUR/USD: 1.24573 versus 1.2502. Dollar a bit stronger Friday, but the euro
is still in a trend up the 10 day EMA.
Historical: 1.2502 versus 1.2404 versus 1.2402 versus 1.23832 versus 1.24308
versus 1.24159 versus 1.24340 versus 1.23083 versus 1.22567 versus 1.22169
versus 1.2241 versus 1.2198 versus 1.22698 versus 1.22060 versus 1.20608
versus 1.19507 versus 1.19322 versus 1.19662 versus 1.20313 versus 1.20756
versus 1.20177 versus 1.20573 versus 1.2001 versus 1.1936 versus 1.1936
versus 1.18998 versus 1.18593 versus 1.18628 versus 1.18658 versus 1.18792
versus 1.18408 versus 1.17703 versus 1.1752 versus 1.17798 versus 1.18392
versus 1.17430 versus 1.17652 versus 1.1764 versus 1.17754 versus 1.17990
versus 1.18276 versus 1.18727 versus 1.18983 versus 1.18976 versus 1.18529
versus 1.18489 versus 1.1899 versus 1.19329 versus 1.18148 versus 1.17402
versus 1.1791 versus 1.1787 versus 1.1786 versus 1.1799 versus 1.16443
versus 1.16646 versus 1.16439 versus 1.15871
USD/JPY: 110.174 versus 109.46. Continues the rally this week. Moved the
dollar off the bottom of the 10 month range.
Historical: 109.46 versus 109.50 versus 108.77 versus 108.84 versus 108.601
versus 109.411 versus 109.033 versus 110.159 versus 110.159 versus 110.70
versus 110.834 versus 111.036 versus 111.290 versus 110.357 versus 111.024
versus 111.204 versus 111.534 versus 112.706 versus 113.15 versus 113.58
versus 112.749 versus 112.677 versus 112.27 versus 112.690 versus 112.758
versus 113.216 versus 113.208 versus 113.304 versus 113.363 versus 113.334
versus 112.870 versus 112.625 versus 112.619 versus 112.298 versus 112.639
versus 113.555 versus 113.476 versus 113.48 versus 113.473 versus 112.473
versus 112.554 versus 112.442 versus 112.190 versus 112.55 versus 112.102
versus 111.583 versus 111.244
Oil: 65.45, -0.35. Oil holding the gains but not going anywhere the past
week as the dollar firmed -- just a bit.
Gold: 1337.30, -10.60. Gold dropped to the 20 day EMA after gapping
upside. Still trending higher since December, but found the going tougher
last week.
SUPPORT AND RESISTANCE
NASDAQ: Closed at 7420.95
Resistance:
The 10 day EMA in 7363
7506 is the January 2018 all-time high
7300 from a modest mid-January consolidation
Support:
The 20 day EMA at 7301
The 50 day EMA at 7108
7,000 from mid-December
6914 is the late November all-time high
6796 is the early November 2017
The 2016 trendline at 6737
6641 is the October high
The 200 day SMA at 6533
6477 is the September intraday high
6461 is the July 2017 prior all-time high
6450 is the early September high
6341.70 is the all-time high from early June.
6300 is the mid-June interim high
6205 is the late May all-time high
5996 is the recent May 2017 low
5937 is the all-time high from April
5915 is the tops of the March to April 2017 range
5910 is the lower gap point from mid-April
5800 from the February consolidation lows
S&P 500: Closed at 2762.13
Resistance:
2808 from the mid-January consolidation. Some support, not that strong.
The 20 day EMA at 2782
2850 from a January 2018 gap point
2873 is the January all-time high
Support:
2751 from early January 2018
The 50 day EMA at 2728
2694 is the mid-December peak
2597 is the November 2017 high
2569 is the upper channel line from the March 2009 uptrend channel
The 200 day SMA at 2532
2491 is the August all-time high
2480 the late August and early August highs
2453.46 is the June prior all-time closing high
2409 is the July 2017 closing low
2406 is the all-time high from May 2017
2401 is the March 2017 all-time high
2352 is the May 2017 low
Dow: Closed at 25,520.96
Resistance:
The 20 day EMA at 25,858
26,439 is a gap point from the January high
January 2018 all-time high 26,617
Support:
26,000 from mid-January consolidation
The 20 day EMA at 25,740
The 50 day EMA at 25,130
24,835 is the mid-December consolidation range
24,312
23,602 is the early November 2017 high
23,608 is the early November high
The 200 day SMA at 22,703
22,420 is the September high
22,179 is the August 2017 all-time high
22,086 is the mid-August lower high
21,681is the July prior all-time high
21,638 is the July 2017 closing high
21,529 is the June 2017 high
End part 1 of 3 |
