Last week the markets continued their counter-trend advance towards what historically has been a Sell Zone within a downtrend.
Our sentiment market internal gauge has not confirmed that the wrong-way option traders have committed to this advance yet. The fact that they aren’t could suggest a higher market still.
Markets could pull back without them being fully committed, but we would like to see them becoming more bullish to an extreme to give us a more reliable reversal signal.
Ideally, breath and sentiment are in alignment at a turning point.
The best performance last week was turned in by sectors that were beaten down the most from the September-October high to the December low.
Those sectors measured by their respective ETF’s were marijuana, biotech, and energy. While up in the area of 8 to 10% last week, all were down in the area of 40 to 50% during the decline.
So far, the first two weeks of 2019 has put in a good counter-trend bounce.
Earnings season begins this week. There are a relatively large amount of big-name financial stocks that are going to report to be aware of.
You can check names at the Yahoo finance website.
Netflix (NFLX) will report on Thursday and has been leading the market higher, so worth taking note of. IBM also reports on the same day.
Where Are the Markets Headed This Week?
In last week’s letter, I said, “This short-term bullish pattern suggests that the markets can — and should — move higher early in the week.”
The markets made the majority of their gains at the beginning of last week. A relatively large part of that was on the gap higher that occurred on Tuesday.
On Wednesday, Thursday and Friday, the broader markets chopped sideways for the most part under their respective Sell Zone areas.
The broader market indices that we will cover in the video below are nearing multiple reference points of resistance used by different methods of analysis.
The fact that these methods of analysis are converging in the same area means that you will have — or should have — a meeting of the minds as to the same bias that risk is rising on the long side of this market in stocks.
The methods that are being used are:
- The price resistance to the left
- The 50-day moving average just overhead
- The 50% level measured from the October high to the December low
- A downtrend line connecting certain high points (least useful information)
We have the typical economic reports coming out this week, including the Beige Book at 2 o’clock ET on Wednesday, giving guidance as to the economic conditions and what the Federal Reserve may be inclined to do next.
Earnings will be reported as previously mentioned so be aware of those stocks.
And there is the never-ending jawboning from the Washington kids.
This market has proven that it can turn fast in either direction, so have your plan.
Dow Jones Industrials
Above is the chart of the Dow Jones Industrial Average that we review each week.
In last week’s letter, I said that price patterns such as this one historically will stop and reverse approximately in that red area.
The Dow got there early in the week and stayed there until the end of the week.
However, the attempt to reverse lower on Thursday failed to follow through. The gap down and initial move lower was bought, and prices rallied up toward the high of the day and stayed there. That signaled that buyers were still aggressive.
Friday, the Dow gapped lower and, after sellers gave it their best try, the Dow and the other broader markets turned up at the 10:30 ET reversal period and pushed higher.
Buyers did not run away as the closing bell neared for the weekend. This shows continued confidence and buyers that they believe this market is going higher.
Because our sentiment gauge is not giving us a warning, higher prices may be coming regardless of the downtrend in multiple time frames and overbought breadth.
Those facts being noted, the pink dashed line is the approximate 50% level between the October high and the December low.
That line is aligned with the area of 24,400; whole numbers can have an effect.
The 50-period moving average (green line) is converging in the same area.
The 50-day moving average is widely followed by institutions and individuals as a reference point of resistance in a downtrend, and support in an uptrend.
While less significant, but worth mention it is that there is and the unfilled gap just to the left of that area. That is where the waterfall decline began from.
Should prices get up into that area — and, based on last week’s price action that does seem like a real possibility — we would like to see the wrong way option traders loading up on calls (bullish bets) if prices could move higher.
As long-time subscribers know, we always have another scenario.
If for reasons unknown, the markets should gap down significantly, and significantly would be at a minimum under Friday’s low — and ideally under Thursday’s low, the very short-term bullish bias would be negated.
Stay Tuned!
VIDEO REVIEW OF MARKETS AND INTERNALS
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NEW STOCK TRADING WATCH IDEAS
NOTE: THESE ARE WATCH ITEMS ONLY BECAUSE OF OVERBOUGHT MARKETS, WE WILL MONITOR AND ADVISE.
Below is a daily chart of GrubHub Inc. (GRUB).
Trade: Over $81.95, consider buying stock.
Technical Setup: Breakout of bullish reverse head and shoulders daily, breakdown failure reversal on weekly, price void weekly/monthly.
Stop Loss $70.98 for now.
Below is a daily chart of Lowe’s Companies, Inc. (LOW).
Trade: Over $97.61, consider buying stock.
Technical Setup: Bullish higher low after breakout of multi-week trading range daily/weekly.
Stop Loss $94.48.
NEW OPTION TRADING IDEAS
VIDEO ON OPEN TRADES AND ADJUSTMENTS
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If You’re in a Rush to Start
A quick simplified approach to calculating contract size is to simply base your contract size based on the number of shares permitted in your Trading Plan as if you were trading the stock or ETF.
Simple Share Sizing = $ Risk / Stop Loss
The amount of money that you are willing to risk – divided by – the stop loss amount. For example, $100 / .20 = 500 shares.
Credit Spread example, if your Trading Plan allowed you to trade 543 shares of AAPL based on the stop loss, then simply round down to the nearest hundred and short an equivalent number of contracts of the option.
Since 1 contract represents 100 shares of the underlying, this would be five (5) contracts.
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Trading the Pristine Method — Origin and End
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