Having just been through one of the most powerful hurricanes to hit South Florida, I am counting the days to the end of the hurricane season that ends on November 30th. Luckily, family, friends, and home came through it relatively unscathed. Many others did not and I am counting my blessings.
Similar to the Atlantic hurricane season, the broader markets are almost near the end of their hurricane season that starts in August and runs through September for the worst of it, and then historically ends in October. The crashes are remembered in October, but the beginning — and often the most of the devastation — happens in the prior two months.
Last week, the broader markets turned up from the prior week’s consolidation. The Dow Industrials and the S&P 500 made new all-time highs and the majority of other sectors either advanced or showed stabilization. Some of the weaker sectors were the leaders in the advance last week showing relative strength: those being Energy, Retail, and Financials.
Master Trader Tip: Relative strength is only one part of the analysis. Looking at what is strong without the combination of trend analysis, support and resistance are more likely to have you entering at the worst possible time. This was the essence of the Chart of the Week that I wrote last week. If you missed it, here is the link to read it.
Assuming that the markets get through the end of September unscathed — and it seems that they will be based on last week’s price action — could they be headed for an acceleration to the upside? Considering seasonal tendencies, an October low is supposed to proceed an end-of-year rally. However, there has been no significant downward correction in the broader markets, which now suggest the August low was “the low.”
A thought that comes to mind is that these seasonal tendencies may invert. Of course, there is no way to know but my discipline of always having two scenarios — no matter how bullish or bearish — requires a backup plan.
The long-term trend and internals have maintained a bullish bias; however, the last 3 to 4 months have been a constant tug back and forth. That’s what “corrections through time” versus “downward price corrections” do. Being able to determine which of the two it would be when a correction seems imminent would be a blessing as it relates to markets analysis.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. Last Monday, prices gapped up from the prior week’s consolidation above Major Support (MS) and never looked back. The continuous move higher throughout the week made a new all-time high. That move higher left two unfilled gaps below.
It’s commonly thought that unfilled gaps get filled, but the above chart shows that they don’t have to in the short-term — and, at times, the long-term. In fact, the November 7th gap up after our buy signal on November 6, 2017, has yet to be filled.
On Friday, prices gaped higher, pulled back to Thursday’s high and then moved higher throughout the day to end near where they started the day. This left a Bottoming Tail (BT) candle.
But this BT comes after multiple days moving higher. That being the case, the gap higher and slowing momentum suggests a short-term correction.
If that is in the cards, a pullback near the area of Minor Support (mS) should be buyable with the appropriate confirming price pattern.
I do realize that the accepted candlestick book term for this candle that formed on Friday is a Hangman, but I like to keep it simple. There are so many candlestick names that are suggestive of a directional move that is meaningless.
Simply look at a candle with a small candle body as a signal of slowing momentum. All candle patterns signal one of three things: momentum is slowing, momentum is increasing, or momentum is reversing.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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Below is a daily chart of PowerShares QQQ ETF (QQQ).
Trade: Over $146.60, consider buying the stock or the Oct (10/20) $135 calls (32 DTE, which has less than $.29/share time value).
Technical Setup: If triggers, Breakout from bullish consolidation daily, bullish weekly and monthly churning uptrends.
Option Strategy: Long Stock or Calls.
Stop Loss: $144.98.
Below is a daily chart of Cummins Inc. (CMI).
Trade: Under $163.75, consider shorting Sep (9/29) $ 167.5/172.5 bear call spread (11 DTE) for mid-point of $.60 or better (closed at $.70/share but spready).
Technical Setup: Bearish Gap following rally to Major Resistance daily chart.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $167.52.
Below is a daily chart of Expedia, Inc. (EXPE).
Trade: Under $141.00, consider shorting Sep (9/29) $146/149 bear call spread (11 DTE) for mid-point of $.50 or better (closed at $.57/share but spready).
Technical Setup: Breakdown daily and weekly charts.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $146.02.
Below is a daily chart of Regions Financial Corporation (RF).
Trade: Under $13.65, consider shorting the stock.
Technical Setup: Sell Setup and Topping Tails at Declining 20-MA daily.
Option Strategy: Short Stock.
Stop Loss: $13.93.
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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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