The 2018 trading year was full of erratic price action in the broader markets. We define erratic by wider range bars that overlap each other. They tend to have tails at the extreme of the ranges and candles that historically give a meaningful signal that have little follow-through.
There are other attributes that define an erratic trend but that’s a good overview.
The rotation into a certain sector doesn’t last very long until money rotates back out of it and that has created wide trading ranges.
We saw that rotation in Semiconductors, Biotechnology, Energy, Financials, Transportation, Metals and Mining, Home Construction and Pharmaceuticals.
The Internet and technology sectors have been good performers this year, but that may have come to an end last week.
Because of the erratic price action across most markets, I think it’s too early to tell if that’s the case. But Facebook’s near 20% collapse on Thursday — that was followed by selling in other Internet and technology stocks on Friday — cannot be ignored. It’s not a good sign when the leaders are being dumped.
In addition, there aren’t any sectors at this time that look like they’re ready to take over as a strong leader. This leads us to believe that we’re in for more erratic price action.
The news isn’t all bad, it’s just that we have no reason to believe that a strong trend either up or down is about to be seen in the near future. In other words, our expectations from an intermediate to long-term point are the same.
It was good to see the Transports and the Financials continue to recover last week. And the fact that intermediate- to long-term interest rates moved higher helped to stabilize the narrowing yield curve that was reviewed last week.
This week, part of our focus will be whether Friday’s bearish wide range bar has the follow-through to the downside or have little to no follow-through and gets negated. Historically, I wouldn’t bet on getting negated, but this market — as I mentioned before — has a personality that I’ve coined “Mr. Schizophrenic.”
Dow Jones Industrial Average
Above is the chart of the Dow Jones Industrial Average that we review each week.
Of the broader market indices, after the Transportation Index that was up 2% on the week, the Dow was the next best, up just over 1.5%.
The primary driver of that performance was the underperforming stocks that moved higher, but the performance was offset by Intel (INTC) and Home Depot (HD) down just over 8% and 2.5% on the week, respectively.
The Dow’s move higher was able to overcome the prior week’s swing high and what was the first reference point of Major Resistance (MR).
The prior week’s high is now our reference point of Minor Support (mS) and the next Major Resistance (MR) is in the 25,800 area (that prior high is not shown).
The trend is up with the next resistance area several hundred points away. Clearly, money is moving from what has been performing into what has not.
That being the case, the last of the tech heavyweights reporting earnings this week (Apple) is going to be — as it always is — a major focus. Can it save the FAANG and Technology stocks or does it put in the next nail in that coffin?
The Dow stocks reporting earnings this week are Caterpillar (CAT) on Monday, Pfizer (PFE), Procter & Gamble (PG), Apple (AAPL) will on Tuesday, and DuPont (DWDP) on Thursday.
From the bullish point of view, we do not want to see the Dow move back below the Major Support swing low from last week.
Sentiment has inched up to the initial area of a bearish extreme (too bullish) and that is a short-term concern. We will review that in the video below.
Market Overview Video
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NEW STOCK TRADING IDEAS
Below is a daily chart of Philip Morris International Inc. (PM).
Trade: Over $85.72 consider buying stock.
Technical Setup: Continuation Breakout after bullish consolidation in top half of +WRB breakout from Breakdown Failure from earnings on the daily chart, bullish weekly.
Stop Loss: $83.26.
Below is a daily chart NIKE, Inc. (NKE).
Trade: Over $78.44 consider buying stock.
Technical Setup: Breakout following Breakdown Failure daily, bullish weekly and monthly.
Stop Loss: $76.78.
Below is a daily chart of RH (RH).
Trade: Over $142.80, consider buying stock.
Technical Setup: Bullish consolidation daily and weekly following Pro Gap Breakout to new highs daily, bullish monthly.
Stop Loss: $133.85.
NEW OPTION TRADING IDEAS
Below is a monthly and weekly chart of Anthem, Inc. (ANTM).
Trade: Over $251.18, consider buying stock and shorting Aug (8/17) $260 calls (18 DTE) (calls closed at $.87/share so the premium lowers our cost basis and give us positive time decay income, and will be higher when triggers since stock higher).
Technical Setup: Breakout on the monthly chart in a strong uptrend, bullish consolidation after +WRB breakout and Bottoming Tail on the weekly chart, and Breakdown Failure on earnings on 7/25 on the daily chart.
Option Strategy: Covered Call (CC).
Stop Loss: $246.48.
Below is a monthly and weekly chart of Masco Corporation (MAS).
Trade: Provided it opens over $39.20, consider shorting the Aug (8/17) $38/33 bull put credit spread (19 DTE) for around closing mid-point of $.65/share.
Technical Setup: Breakout from bullish consolidation on the daily and weekly charts, Master Trader Buy Setup and bullish engulfing bar on the r20-MA monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $37.36. NOTE: EARNINGS 7/31 and we plan to hold into earnings because of the bullish setup on all time frames since we don’t mind owning longer term.
Below is a daily chart of iShares Russell 2000 ETF (IWM).
WATCH ITEM: With the -WRB Breakdown last Friday, we will watch for a Bear Call Credit Spread on an intra-day bounce and advise.
VIDEO REVIEW OF OPEN POSITIONS
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Greg Capra
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Trading the Pristine Method — Origin and End
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