Last week the broader markets and majority of sectors declined, but that decline was of little significance. The week before last, the markets moved higher, but that was relatively insignificant compared to the drop from the beginning of the year’s high.
Overall, the broader markets and the majority of sectors have been “running in place” for the last five weeks.
We don’t expect that the S&P 500, the Dow or the Transports will exceed the yearly high or low anytime soon. However, the thrashes higher and lower between those reference points are likely to continue.
In this market, it’s difficult to say what might be the catalyst for the move in either direction. And whatever it might be, the apparent reasons for the recent moves don’t have a lasting effect.
Market environments that are consolidating within its wide range have a high tendency for whipsaws, and we have experienced a few of our own. I mentioned in a prior letter that when your primary timeframe becomes whippy and erratic, moving to the next higher time frame will often reveal clarity.
For us, that would mean moving from the daily to the weekly timeframe if we were trading the Dow or S&P 500. In the current market environment, that does little to provide clarity as to tradable price patterns. With recent weekly ranges flipping back and forth over themselves, the clear message is to stand aside.
What I am pointing out to you is to recognize erratic behavior and what to do with whatever your tradable instrument is. And when changing time frames does not help, we have the choice to find other tradable instruments that are not erratic and which offer higher odds investing or trading opportunities.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. Last week it started just above the high of the prior week, and immediately the Dow began to fall back toward the prior week’s low. The pullback did not reach the low, which resulted in a higher low last week.
The first pivotal reference points of resistance and support are getting closer to each other in this daily timeframe. We refer to this as “the spring getting tighter.”
We mark these pivotal points with horizontal lines that note support below and resistance above. A break below or above should result in prices moving to the next pivotal reference point. When these reference points are relatively close to each other, the expectation is for continued erratic price behavior.
This arrangement of prices that are forming on this chart is a perfect example of why drawing diagonal trend lines are misleading and useless as reference points of a violation of a trend or support or resistance.
Visualize a line connecting the two most recent swing highs pointing lower. If prices break just above that diagonal trend line — but do not violate the red horizontal line above — it is completely meaningless. The same is true if you draw a diagonal line connecting the two most recent swing lows pointing upward.
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Based on the current arrangement of prices in the Dow, there isn’t a high probability of determining the direction of prices, not a large one anyway.
A break below the first green line suggests a move to the next green line. And a break above the first red line suggests a move to the next red line.
If we were going to consider either of these breaks as a tradable event, we are not at this time. A move below the first green line would be more desirable because it is much closer to current prices.
In other words, prices would not have to move very far before violating that support; whereas, prices would have to make a relatively larger move to violate the overhead resistance.
We are going to set alerts at these reference points to be aware of a violation of either.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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NEW STOCK TRADE IDEAS
Below is a daily chart of Quad/Graphics, Inc. (QUAD).
Trade: Over $27.11, consider buying stock.
Technical Setup: Bullish Higher Low consolidation at r20-MA and middle of Bullish Wide Range Bar Breakout daily.
Stop Loss: $25.84. Earnings 4/30.
iShares Russell 2000 ETF (IWM): We have on our watch list but want to watch other sectors first on Monday.
NEW STOCK TRADE IDEAS
Below is a daily chart of HollyFrontier Corporation (HFC).
Trade: Over $46.60, consider shorting Apr (4/20) $44/40 bull put credit spread (33 DTE) for around closing mid-point of $.55/share.
Technical Setup: Bottoming Tail and Bullish Engulfing on +Vol. and 20-MA after failed breakdown and bullish retracement.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: $44.68.
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MasterTrader and You Building Your Financial Future Together
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Trading the Pristine Method — Origin and End
Dan Gibby
Chief Options Strategist
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