Market Recap for Friday, March 3, 2017
We saw bifurcated action on Friday with the Dow Jones, S&P 500 and NASDAQ all posting minor gains while the Russell 2000 fell slightly. Sector action behaved similarly as about half the sectors climbed fractionally while the rest finished in negative territory. Healthcare (XLV) continued its torrid winning streak and was one of Friday's best performers. Here's the latest look at the chart:
The highs last week did manage to clear the 2015 highs, though just barely. We'll need to see follow through this week to confirm this breakout. Biotechs ($DJUSBT) have been very strong of late and they're featured in the Sector/Industry Watch section below.
Pre-Market Action
Overnight, China's Shanghai Composite ($SSEC) was the best performing index and it's setting up in a very bullish inverse head & shoulders pattern. With U.S. markets already trading at all-time highs and a key breakout recently in London's FTSE ($FTSE) index, it's noteworthy that another key global index appears to be primed for a potentially significant move higher. Here's the SSEC chart:
It appears that the SSEC has either already formed and broken out of this inverse H&S or the inverse right shoulder has just formed with the pullback to the rising 20 day EMA. Either way, I'd expect the next move to be higher with key support at 3200 (price support from mid-February) and 3216 (rising 20 day EMA).
Europe is mostly lower with losses of approximately 0.40% this morning and the U.S. futures are following suit. Dow Jones futures are down 36 points with an hour to go to the opening bell.
Current Outlook
Retail stocks (XRT) will be worth watching in the very near-term as this time of the calendar year is typically very kind to the industry and I've written recently at the very strong seasonal period that the XRT is in. So first, as a reminder, here's the seasonal performance of the XRT over the past twelve years:
Clearly, the XRT performs well during the months of February through April. Thus far in 2017, February was down slightly and we haven't seen March pick up either. On the short-term chart, the XRT appears to be at gap support, however, and on the longer-term chart, it's testing trendline support. Take a look at both:
XRT daily chart:
Now the longer-term weekly chart.....
As you can see, 42.00 is a big support level on both time frames. Will it break support on both charts during its best seasonal period of the year? I say no, but we'll soon find out....
Sector/Industry Watch
The Dow Jones U.S. Biotechnology Index ($DJUSBT) recently broke out above a key short-term price resistance level and it's now quickly ascended to test a more significant intermediate-term resistance level. Take a look at the following weekly chart:
The one year trading range was tested to the downside in the fourth quarter of 2016 near 1500 and that support held successfully. Now the DJUSBT has quickly moved higher and is challenging key price resistance near 1800. A breakout would suggest to me that we could see a continuing push higher to challenge the 2015 high near 2200. Weekly RSI is only 61 so the group is nowhere near overbought in my view.
Monday Setups
The idea behind these Monday setups is two-fold. First, it's important to do your homework to identify both fundamentally- and technically-sound companies and the second is to exercise the patience necessary to allow a trade to set up with a solid reward to risk scenario. Money rotates during bull markets and a great trader will catch the wave of those moves before they occur.
CLICK HERE to join me and EarningsBeats.com President John Hopkins for a great trading session tomorrow, Tuesday, March 7th at 4:30pm EST, one packed with education and trading ideas and strategies. Seats are limited, however, so you should register now and join the webinar early (4pm-ish on Tuesday just as the market closes) to make sure you claim a seat live. I look forward to seeing you there!
As for this week's setup, I'm going to focus on Barracuda Networks (CUDA). The stock has gapped up with its last three earnings reports and will report again in another month or so. CUDA has consolidated for the past two months and has seen its RSI drop from the overbought 70 level to a more palatable entry level of 46. We've seen a gap support test as you can see below and I wouldn't be surprised to see a pre-earnings run up in price to challenge the January high over the next few weeks. Here's the chart:
CUDA is currently consolidating in a bullish symmetrical triangle and there are a few key levels of support between 21-22 so if CUDA were to drop to that range, the reward to risk would increase dramatically. The gap from early 2017 has already been filled so we could see an uptrend begin anytime. Therefore, building a position from the current price down to that 21-22 range makes sense. Just one word of caution. CUDA is a volatile stock and is not a great trading choice for those that are risk averse. Also, I rarely hold stocks into their earnings reports so I'd be looking for a pre-earnings move higher here.
Historical Tendencies
Our major indices are overbought so keep in mind that the 7th-10th represents a frequent profit taking time of the month for U.S. equities. Protecting recent profits via the reduction of position size or covered calls is not a bad idea. As a reminder, here is the annualized returns for each calendar day of ALL calendar months since 1950 on the S&P 500:
7th (tomorrow): -11.36%
8th (Wednesday): +2.52%
9th (Thursday): -19.89%
10th (Friday): +4.80%
The S&P 500's average annual return since 1950 is roughly 9%. If all trading days were created equal, then we should see each of the above calendar days posting average annualized returns of 9% or thereabouts. Instead, we see historical performance that falls well shy of that average return. The fact that there have been more than 2200 trading days (or close to 9 years worth of trading data) that have fallen on the 7th through 10th since 1950 tells me that this sample size is representative and can be relied upon. These numbers DO NOT guarantee us lower prices the rest of the week. It simply alerts us to the fact that profit taking is normal and that paper gains have a higher likelihood of evaporating this time of the month.
Key Earnings Reports
(reports after close, estimate provided):
CASY: .90
KFY: .53
Key Economic Reports
January factory orders to be released at 10:00am EST: +1.1% (estimate)
Happy trading!
Tom
