Last week, the markets rallied vertically after Tuesday’s gap lower into support. The slow grind lower over the last 1.5 months to price support — and then the gap lower — was too much to resist for buyers. The gaps lower on Tuesday seen in some markets was, historically, a relatively large one bought on the gap lower.
Considering the fact that many sectors were beginning to trend lower on the daily time frame, it’s possible that short-covering began to feed the buying frenzy. And sentiment had reached a slightly bullish level beforehand, which I did think would become more so before a rally would happen. But that gap down was just too much and bears lost control.
With prices having rallied to the extent that they have last week, the bias of prices reaching a lower level of support has been negated.
That being said, last week’s low has now been established as a new reference point of Major Support (MS) in the broader markets and many sectors. Those markets and sectors are now in the area of price resistance, and it’s reasonable to expect a stall in that upward momentum.
Of the four broader market indices that we follow, only the NASDAQ 100 made a new high. For now, the others are at least forming trading ranges that could result in higher prices. Time will tell.
We are into the month of September, which historically is one of the most bearish for the markets. But it’s hard to imagine a meaningful move lower after last week — unless there is some type of a news related shock to the markets.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. The gap down on Tuesday tested Major Support (MS) (and the prior low where buyers stepped up) and prices rallied sharply into the end of the day. On Wednesday, prices rested at the prior resistance area and then continued higher and now is stalled at Major Resistance (MR).
The small chart at the upper left is also the Dow Jones, but on the monthly time frame. As you can see, 2017 has been an almost straight up move with only a minor stall. The small dash at the end is showing the beginning of September.
While August moved higher and lower, it ended in about the same place that it started the month. This type of candlestick that has a higher and lower wick with the body of the candle (open and close) in the middle signals slowing momentum.
Momentum can slow down within a trend and then speed up again in the direction of that trend. But after moving up all year, it seems more likely to see a continued consolidation. That would be the conservative bullish view and supportive of a market that would continue to move higher over the long-term without a larger move lower first.
A continued move higher now, rather than a sideways one, historically would lead to a bigger correction.
The short– to the intermediate-term bearish scenario is a move below the August low resulting in a test of the support level within the green box.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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New Trade Ideas
Below is a daily chart of Credit Suisse Group AG (CS), $14.68.
Trade: Under $14.60, consider shorting Sep (9/15) $15/17.01 bear call spread (12 DTE) for a limit of $.45/share (closed at $.50/share).
Technical Setup: Bearish consolidation after breakdown on the daily chart, with bearish engulfing on weekly chart.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $15.02.
Below is a daily chart of The Walt Disney Company (DIS), $101.50.
Trade: Under $100.00, consider the following trades: (a) shorting Sep (9/15) $102/107 bear call spread (5 DTE) for mid-point (closed at $.87/share); or (b) buying Sep (9/15) $107/98.5 bear put spread (12 DTE) at mid-point (closed at $5.10/share, but with at least $.40/share of time value, so the limit price should be around $5.60/share or better).
Technical Setup: Bearish 1-2-3 consolidation after Bearish Pro Gap and bearish consolidation on the daily chart, with weekly chart lower lows and lower highs, and bearish engulfing monthly chart; relative weakness to broader market indices.
Option Strategy: Bear Call Credit Spread (BCS); Bear Put Spread (BPS).
Stop Loss: $102.02.
Watch Trade Ideas
WTW – Breakdown daily and Climactic Sell Setup monthly chart, will be watching for Bear Call Credit Spread (or swing trade short for partial retracement lower):
BIDU – Breakout after bullish multi-week consolidation and failed breakdown, will watch for Bullish stock and option trades on pull back.
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Pristine’s Founder and Creator of the Pristine Method
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Chief Options Strategist
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