Weekend Profit Navigator August 11

The Weekend Profit Navigator takes a look back on the week in the markets and then looks ahead with the key charts and levels to watch in the week ahead.  Key levels  are provided along with commentary to keep you on the right side of the trade.

A plunge and a recovery; What’s next?

All the major averages took a deep plunge on Monday following China’s devaluation of the Yuan, then spent the rest of the week stabilizing and even making a slight recovery.

If you look at the charts of SPY or QQQ  the nearest comparison of this week’s price action is the early stages of the fall 2018 sell off.  Compare the charts below of SPY

In my experience, deep sell offs rarely have  V -shaped recoveries.  Like in the fall of 2018, the corrective moves more often take the form a an A-B-C type pattern.  Overlaid on the 2019 chart are the Fib retracement levels. The late week bounce fell just shy of the 61.8 Fib zone. Again, a common reversal point.

My Theory of the case

My base case is that we explore lower prices.  Here are the key levels I see.

Above $294:   If price breaks above $294, fills the overhead gap there and moves up toward $297 the bear case diminishes short -term

Below $289.67: THis is the bottom of Thursday’s candle. A move below opens the door to $288

Below $288:  This was the price level that defined the lower level of the gap. A move below opens up the door to $282

Below $282:  Below this level is a confirmed sell signal and points toward the May lows at $273.  Not so coincidentally, there is a gap there to be filled.

Those that follow my trading style know it is  “if this then that” style. I go level to level. If price points to something different then I am happy to be wrong and change my outlook.  As I mentioned above, if price moves up through $294 and on toward $297, that dents the bear case at least temporarily.

Evidence supporting the Bear case.

Keeping in mind that every trader tends to see what they want to see in the technicals, here are a few charts to support the bear case.

Bullish percent Indexes are falling

The Bullish percent indexes tell you what percentage of stocks are on a P&F buy signal. Using the P&F framework, a stock is either on a BUY signal or it isn’t, there is no in between.

As you can see, for the $NYA, the percent of stocks on a BUY signal have been falling since Jan 2018.

For the Nasdaq Composite we see a similar look.

Trashed Commodities speak to Global demand

Although I keep a chart on the commodities index, Greg Schnell from Stockcharts.com presented a much prettier one than I have. It shows the relationship between commodities and stocks.   This is his chart.

Industrial bellwethers like copper, industrial metals, and oil have seen severe beatings and it looks to continue as the $CRB index heads toward the 2016 lows.  The commodity index speaks to demand in the here and now and that picture is not a strong one. More often than not, as shown by the chart, stocks have a hard time going up when commodities are going down.

Safe Havens continue to be Bid

I will spare you the charts, but suffice it to say, we are not in a risk on market.  Safe havens like Bonds, Gold / Silver, Utilities / Staples, the YEN / $USD continue to hold bids.  Some of the buying activity in the utilities and staples are a function of the “reach for yield” in a low yield world, but not all of it.

The following chart shows several relationships that speak to risk on vs risk off.  When the trend is down, it suggests risk off. When the trends are up, risk on.   Its not 100% and you can’t trade off this day to day, but I  do think it speaks to the overall environment we find ourselves in.

The fact that offensive sectors, particularly financials, have had difficulty getting going tell me that we are risk off.

The chart below shows several additional relationships that speak to risk on vs risk off.  With all of these metrics pointed down, it points to risk off. While you can’t trade off this chart day to day, I think it does a good job speaking to the current environment.

 

McClellan Oscillators

The McClellan Oscillators have served me well over the years as a heads up on over bought or over sold levels. When the boat gets overloaded to one side the market soon goes the other way.  You can see in the charts of $NYMO for the NYSE and the $NAMO for the Nasdaq, the plunge on Monday sent both indicators into the oversold area.  The bounce burned off the overcooked reading of Monday.  With both oscillators higher, it signals that if price wants to it can go lower.  Price can also move higher as well.  For me, the oscillators shown are only provide good signals at the extremes.

Market Keys for Next Week

Does price move above the Thursday Highs?   ( SPY $294   QQQ  $188.50 ) If price closes above these levels, the bear case is diminished, not negated.

Moves below Thursday’s low are bearish.  Taking out Thursday’s big green candle would be a bearish development.  Any move below Monday’s low would be a confirmed sell signal and target lower prices.

$QQQ, XLK,  and FAAMG stocks are pivotal.    THe broad market indexes are not going anywhere unless and until QQQ breaks.  QQQ is not breaking unless the big cap names of $FB, $AAPL, $AMZN, $MSFT and $GOOGL break.  I am particularly interested in watching $AAPL and $MSFT.   Both are bellwethers of both price and market sentiment.  If they remain strong its tough to see a big market swoon. If however, these big cap names begin to crack, all bets are off.

Lastly, a group that particularly interests me are the Semiconductors. Within $XLK they are often a leading indicator.  Below is a chart of $DJUSSC with is the Dow Jones Semiconductor Group.   Note the striking similarities between the May rug pull and what we are seeing now.    Trend line breaks on both price and RSI coupled with high level PPO momentum bear crosses for both time periods. If you look in the lower panels you’ll see relative strength trendline breaks vs both SPY and the XLK.   Based on the charts,  I think Semiconductors are poised to go lower.

A big Week ahead

This is a big week inside the charts. A down move will bolster the A-B-C corrective move thesis outlined above.  A move higher and those ideas go on hold as bulls will have regained, at least in the near-term, control of the tape.

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