Right when I thought that this market might avoid taking the hit expected from the extreme in our market internals, it trapped the last holdouts with a Breakout Failure and Topping Tail (BOF/TT). Having used these market internals for many years, I’ve seen quite a few sell signals from them.
Historically, the sell signals are much more difficult to pinpoint the exact turn whereas the buy signals are relatively close to being pinpoint accurate. I want to mention so it’s clear that a breadth and sentiment alignment sell signal does not mean crash, but does suggest a short-term correction.
A market internals sell signal is like a scene in one of my favorite movies: A Bronx Tale. I was born in the Bronx, in that neighborhood of Little Italy, and in the era that the movie depicts. Another reason it is one of my favorites since it goes back to my childhood and heritage.
The scene is the one where bad bikers come to a bar in the neighborhood to cause trouble and do. In the scene, the sell signal was “that wasn’t very nice, now you have to leave.” The door was open to doing that.
The bikers did not take the warning (sell signal) and then the door was closed and locked. Then they were told, “now youse can’t leave.”
If you have not seen the movie, check it out, it’s a classic.
That is how some fund managers and investors feel right now that the markets have dropped. Most never saw it coming. Of course, now they want to leave, but they cannot without taking some pain.
In the movie, the pain was severe; however, in the markets, it doesn’t have to be if you pay attention to the warnings and manage accordingly.
So far, the correction measured by the S&P 500 (SPY) or the NASDAQ 100 (QQQ) cannot even be called a correction of any significance. However, there is a correction happening. The Russell 2000 (IWM) is down almost 6% from its high and the Transportation Index (IYT) is down just over 6% from its high.
The Biotech Sector (XBI), which we know is amongst the most volatile, is down almost 9% from its high. The Internet Sector (FDN) is down 5%, and Pharmaceuticals down just over 9%.
All of these occurred — almost to the day of the market internals sell signal that was reported in the July 24 newsletter made their high.
I’ve said it before, but it’s worth noting again for you to keep in mind in the future, the broader markets often mask the correction and, in some stocks, the devastation that occurs.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. In last week’s letter I said: “However, almost to the day of that market internals signal, the Dow began its advance. Could this be manipulated to suck in the last holdouts?
There is no way to know for sure, but it certainly does seem odd. Odd that the most widely quoted index continues to make all-time highs each day on its own.
And if it did not catch your eye looking at the chart above, notice that the closing price is the same as the high of the day. This does not happen too often.
Historically, when it happens after a multi-day run to the upside a short-term top has not been far off.”
The high day came two days after. Are you impressed? I amaze myself too sometimes (smile). All kidding aside folks, small observations like explained about the price pattern can tip you off to what will happen. The “tell” is in the price action and, like any other tell, it just needs to be pointed out to you to recognize them in the future.
While a trade recommendation can produce short-term profits, the education that we offer provides you is a long-term way that you can to it on your own and use our service as a compliment to your own work. As a member of MasterTrader, I believe that you are someone that primarily wants to be told how to do it, rather than be told what to do.
If these letters and the videos are helping you learn “how to do it”, Dan and I would greatly appreciate you sending us an email with a testimonial about MasterTrader, and of course Dan and me.
Okay, what about what happened in the Dow last week and where we going?
A Topping Tail (TT) formed in the DOW as it did in other markets and Sector ETFs. While not a BOF, the short-term climactic move higher makes that TT a high-odds bearish reversal.
All TTs are not created equal. For example, a TT after the start of a move higher, rather than a move higher that has come after multiple advances, will be less powerful as a bearish signal. And many times, it will be ignored by not following through lower that much or not at all. Another tell in that example is the strong demand by buyers that are in control.
Prices stopped almost to the penny of the unfilled gap reference point I provided last week. Since the Dow made the advance that it did – on its own, it is still in an uptrend and at a point where buyers should want to step up. So the next tell of whether sellers are in control or not will be if the Dow can move up from here or whether an attempt to do that fails.
A fail would result in a move down to the areas of Minor Support (mS) and/or Major Support (MS).
Retailers This Week
This week is loaded with retail sector stocks reporting earnings. On deck are, Tuesday – URBN, TJX, APP, COH, DKS, HD; Wednesday – LB, TGT, SPLS, AEO; and Thursday – WMT, GPS, ROST, EL, FL. The beaten up sector will be getting plenty of action.
BROADER MARKETS
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TREND MATRIX and INTERNALS
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New Trade Ideas
Below is a daily chart of IDEXX Laboratories, Inc. (IDXX), $153.02.
Trade: Under $150.35, consider shorting Aug (8/18) $155/160 bear call spread (5 DTE) at mid-point (closed at $1.02/share).
Technical Setup: Secondary Breakdown after Bearish consolidation daily and weekly.
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain on Call Spread: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $155.02.
Below is a daily chart of H&R Block, Inc. (HRB), $30.70.
Trade: Over $31.02, consider buying Sep (9/15) $26 calls (32 DTE) for a limit of $5.20/share (which gives us high delta as a directional trade and paying no more than $.20/share time value).
Technical Setup: Breakout daily with bullish consolidation daily and weekly.
Option Strategy: Long Calls (LC). Call buyer pays a premium for the right to buy the underlying asset (stock) at a specified price (strike) for a specified period of time (expiry). Long calls are used to capitalize on upside market movements with less cost (leverage) and to limit risk (to debit paid). One (1) contract represents the right to buy 100 Shares.
Potential Gain is unlimited; Max Loss is the Premium paid. Break-even point is Strike Price plus the Premium paid.
Stop Loss: $30.17.
Below is a daily chart of Baxter International Inc. (BAX), $59.84.
Trade: Under $59.40, consider shorting stock.
Technical Setup: Secondary Breakdown and Topping Tail on daily chart.
Stop Loss: $60.42.
Below is a daily chart of XL Group Ltd (XL), $44.41.
Trade: Under $44.10, consider two trades: (a) shorting Sep (9/15) $45/47 bear call spread (32 DTE) at mid-point (closed at $.48/share), or (b) shorting stock (more bearish).
Technical Setup: Breakdown after Pro Gap down, retracement and bearish consolidation daily.
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain on Call Spread: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $44.82.
Below is a daily chart of CSX Corporation (CSX), $50.27.
Trade: Under $49.75, consider shorting stock.
Technical Setup: Sell Setup at Declining 20-MA on daily chart.
Stop Loss: $50.82.
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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
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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NOTE: Master Trader will show opening and closing prices of all stock and option trades. We do not recommend proper share size for your particular trading style, risk tolerance, or account balance. We urge you to calculate your own share size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk.
NOTE: Master Trader and its representatives might have existing positions in these and other trade recommendations before or after suggested herein. Additionally, we often manage them differently for internal purposes based on different risk parameters than noted herein.
