Market Report 4/18/16

There’s no stopping this market.

That seems like the conventional wisdom at this juncture. The current run-up from the February low to the close this past Friday stands at +14.9% or 270 SPX points. What an incredible move! But the SPX is also up just +1.8% year to date and closed last week at the same level it was back in December 2014.

Last week I wrote about the April Fools’ Day high and we closed this week five S&P points over that. As they say “only fools try to call a top” and that wasn’t really my intention. What I noticed on the charts a couple weeks ago was that the “indicators”, MACD, RSI moving averages were crossing to the downside. Naturally I turned cautious.

The market subsequently went through a period defined by sideways up and down chop in an expanding range. It turned out to be mostly a sideways range, which resolved marginally to the upside last week generally attributed to a further rally in oil prices.

Right now everything hinges on the price of oil. It almost seems silly but like it or not, everything is based on perception. At least that’s the way it seems these days. As strange as it sounds I truly believe that the “news flow and perception thereof” are what moves markets in the near-term. Not supply and demand. Not fundamentals like earnings and revenues. And not even the domestic or global macro economic picture.

Here’s an example.

The huge fluctuations in oil aren’t based on supply and demand. In February (the day the SPX bottomed) oil hit a low of 26 and closed Friday at 41.75. that’s a +60% move in a month. Neither supply or demand shifted that drastically.

Earnings on the SPX have been declining since mid-2015 and will have contracted again in Q1 once all the earnings are announced. Revenue, which is more important than non-GAAP earnings are declining too. Profit margins are shrinking. Yet the market didn’t care last week.

Last week the IMF cut it’s global growth forecast for the fourth time in a year. The Fed has been lowering it’s GDP forecast from “meager growth” to practically recessionary. The market didn’t care.

GDP_now_4162016

These things all matter on the fringes as they are woven into the current news cycle, but it’s apparent that there are only a couple things that have really mattered along the way up since the February low.

1) The price of oil
2) The timetable for the next Fed rate hike

After all, the current run seems to be based on the rebound in oil and “don’t fight the Fed” and the long list of other pesky negatives haven’t mattered since February.

I mentioned it last week but it’s important to note that both the S&P 500 and oil bottomed on the exact same day back in February, the 11th. What a coincidence!

Going into this week we have a huge catalyst – the Doha meeting. They’ve been making a big deal out of this and whether it really matters over the longer-term or whether anything substantive comes of it, the “perception” of the outcome is going to move the price of oil one way or the other – perhaps significantly.

“So goes oil – so goes the market”.

I know, it seems dysfunctional and ‘transitory’ but the correlation is undeniable. This is a little dated but illustrates the point.

oil-vs-spx

I for one would be happy to see oil stabilize and trade in a reasonable range instead of making 3-5% moves on a daily basis. Off the top of my head I’d say 35-40 seems like a reasonable range at this juncture and if it would just settle down and find a good equilibrium level I think the correlation could “decouple” and the market could get back to doing it’s own thing.

So going into the week everything seems to be hinging on what’s said in Doha (more so than what’s actually done thereafter) and the “perception” of how it turns out will drive the price of oil – and most likely the market.

Once that settles down we’ll be in the thick of earnings season. That usually turns out to be a minefield – holding the wrong stock over earnings can mean a double-digit overnight loss. That’s why I’ve always avoided holding stocks over earnings, it’s a crapshoot.

I read the funniest thing… “investors are scared to fight the Fed with a 24 PE multiple on the S&P, declining earnings, rates at zero and a moribund global economy”. That sums things up well.

But as far as the chart goes at this point it’s simply a matter of resistance overhead and support below.

Here’s a look at the daily S&P chart and I normally don’t like to zoom so far out on because it looks cluttered. But rather than posting the weekly chart there are some things I see better on the daily. There’s a lot to note here and I didn’t really have much room on the chart so I’ll mention it below.

SPX_D_4162016

The first thing to note is the “big Kahuna” downward-sloping trendline. That’s the next logical major resistance point and it’s within 1 ATR of the price.

After that, the prior highs in the 2100-2120 range, is the next resistance zone. then of course it’s a straight shot up to the all-time highs and beyond right?

I drew a green arrow that’s essentially the “trajectory” of the current move and I’m sitting way back in my chair staring at the patterns and trying to imagine it taking that path. I have to say I’d be shocked if this market takes that path without a substantial pullback first, but I never rule anything out.

Getting back to the chart, take a look at the structure of the areas I circled “huge rebound – pullback..” As of right now we are still in the “huge rebound” stage and it’s not a stretch to expect a pullback at some point – just like the past two times we had a similar run-up. The question of course is the level the inevitable pullback starts from.

I wish I could tell you but quite honestly no one knows so I just use the levels of resistance to imagine where it might finally get rejected from and reverse. Look at the the red downward-sloping trendline again and notice the two peaks where the price touched it and the one where it didn’t quite make it up there. It’s a series of lower-highs and that last little peak was 2104.

First the price has to break the downward-sloping trendline and that seems like the next obvious point where it might get turned back. After that, if the market can’t get through 2104 it would be the 4th lower-high going back to last May.

But here’s the important thing.

When the next pullback comes (trust me it will) I think that a lot of people will think “it’s the BIG ONE”. The sentiment shifts on a dime these days you know. Bu the last two times (circled on the chart) the market made a similar move as now, the first pullback was a “buy the dip” opportunity. In 2014 it went on to make a higher-high, in 2015 it went on to make a lower-high.

This time who knows?

But I see a lot of support below around 2020 and the 200-day moving average and the 50-day is rising fast. I think when the inevitable pullback comes it will seem scary but find support in the 2000-2020 range. The ATR (average range) of the SPX is 20 points right now so it can make a considerable move in a short amount of time.

As far as this week we’ll just have to see the reaction to this Doha thing and then take it from there. I do know that if for some reason oil heads significantly lower, the market is likely to finally get the pullback I’m glad I haven’t’ been holding my breath for.

Aside from the fact they could pull the rug out from under this thing at any time, stocks and certain sectors have been acting very well.

There’s a sort of rotation going on among sectors, as Jim Cramer called it “a rolling bull market”. The gold and silver miners have been doing great for some time, steel and aluminum too on a weaker dollar. Biotechs had a nice rally, then pulled back a bit – then it was energy stocks for a huge 2-3 day move, financials etc.. It seems like each sector has gotten a turn at a move but sometimes it only lasts a few days, then that sector gets hit.

It’s been tricky to time each one but on a day to day basis I see the stocks in these sectors are either the biggest gainers or losers. The other interesting thing I mentioned last week was the way that often they open one way and then move the opposite way once trading gets going.

To get an idea of how things are moving and which sector they are buying on any given day I follow the 3X ETF pairs closely and monitor them “from today’s open” price. The ones I pay closest attention to are:

LABU – LABD biotechs
ERX – ERY energy stocks
NUGT – DUST gold / silver mining
FAS- FAZ financials
UWTI – DWTI oil
and of course the VIX and leveraged index ETF’s.

I find that keeping these “pairs” on my watchlist and noting the directional movement from their open price gives a great indication of which stocks I should be looking at each day. These all tend to make big moves and the direction can change drastically from day to day but it’s a good way to get a read for which sectors are coming and going from favor.

There are still a lot of constructive charts out there and my guess is the action stays tradeable. Now Thursday and Friday were weird days and the market traded in a narrow-range but Friday was OPEX and I think the market is waiting for this Doha thing.

I wanted to be flat going into the week and just see how it goes.

So we’ll see how it opens and acts in early trading Monday and then I plan to get a bit more aggressive if conditions warrant. I had a few really good ideas last week but got a little skittish with the stops. I might need to loosen up a bit and just stick with the original plan instead of trying to micro-manage things.

I started off first thing last Monday on the show with GLNG and posted it in the Chart Feed but I wasn’t able to get an alert out on time Tuesday, it moved up too fast. CRR was a good trade but I tightened the stop up when oil started pulling back and it nicked the stop but managed to hold tough and end the week strong. LABU made a nice move right after the entry and traded above the entry almost the whole time. It was up as much as a buck and a half at one point but when things started to roll over mid-day Friday I wanted to tighten up the stop in case it snowballed to the downside. So of course they just nicked the stop and then everything rebounded into the close. I didn’t want to hold that one over the weekend because of the nature of the 3X ETF’s.

I’m starting with a clean slate this week and I’m considering ramping up the activity, but with smaller targets and quicker in and out trades. So be prepared…

All in all between the stocks we look at on the shows, the ones I post in the Chart Feed and the ones I send out alerts on, there’s a good constant flow of ideas and you are free to trade based on the level of activity you prefer. If you actually take the time to go back through the ideas posted in the Chart Feed the past couple months you’ll see some excellent setups were identified.

My biggest struggle is deciding which ones to send out alerts on. I’ll be totally honest and say that the shows throw me off a lot of times. Doing three 2 1/2 hour shows a week distracts the focus I need to put together some of the alerts, but if you are watching and actually taking some of the trades I’m pretty sure you’re doing ok. It’s not really preventing me from sending out alerts – I’ve done that during shows several times, but I feel like I’m not as focused and being impetuous when I stop everything during the show and make a snap decision. NK is another one I marked up on the show that I should have sent out.

Of course you are always free to trade any of these stocks we look at and use different targets and stops than I do. I tend to go through rough spells but overall I think we are doing well so far this year. I’m a little frustrated that the stops seem to be getting hit of some on these great ideas and then the stock does exactly what I expected it to, CENX and XON come to mind. But we know that stops are a must and if anything I tend to lean too cautious.

Stocks are volatile these days and it seems like a better idea might be to give them more wiggle room. Part of the problem recently is that there are certain points in time (like now) where the market could reverse and I don’t want to get caught holding a bunch of stocks in a pullback or down cycle. Trust me, when the pullback comes a lot of stocks are going to get hit hard, percentage-wise. Heck I see this almost every day. Today’s big winners are tomorrows biggest losers.

Energy stocks had a huge 2-day run then got crushed at the end of the week. Like I said earlier with earnings season kicking into full-gear it’s going to be a minefield out there and one bad move can be devastating. Of course the way to mitigate that risk is to trade a small size and then it really isn’t as big of a deal. I’ll occasionally roll the dice on 100 shares of a stock over earnings without worrying so much but “officially” I prefer to just avoid holding anything over the announcement because I have no control over how the stock will react. And we see these crazy earnings moves all the time where a stock trades in a huge range after-hours and then sometimes it even trades the opposite direction the next day. Crazy price action surrounding the earnings release is the norm these days.

But anyway there’s a lot of opportunities on the horizon and I’ll be in there every day looking through charts and finding good patterns and bringing them to you. We still have a couple weeks before they start talking about “sell in May” and I’m certain we can roll with whatever the market wants to do from here. With no open trades I’m raring to go as soon as I see how things are shaping up Monday morning.

Please join me at the open for the live show and we’ll take a look at some of the charts I like now.

See you there!