Market Recap for Friday, May 18, 2018
Last week ended with plenty of bifurcation. Strength was once again seen across the small cap universe as the S&P 600 SmallCap Index and Russell 2000 both finished the week at all-time high closing levels. The larger cap Dow Jones and S&P 500, meanwhile, languished all week and closed well off of their respective all-time highs set back in January. From a sector perspective, action was mixed last week as well with four sectors higher, four sectors lower, and one unchanged.
On Friday, it was the industrials (XLI, +0.59%) that led the action as commercial vehicles & trucks ($DJUSHR) rallied more than 2% to potentially break its 3 month downtrend:
While technical developments on Friday were quite bullish, I'd like to see the DJUSHR clear 2100 price resistance to provide further confirmation that the recent downtrend has ended.
Financials (XLF, -0.82%) were weak as banks ($DJUSBK, -1.43%) stumbled. The 10 year treasury yield ($TNX) fell 4 basis points to close back at 3.07% and that led to some profit taking in banks, as that group had rallied about 8% over the prior two weeks on the back of a rising TNX.
Pre-Market Action
Asian markets kicked off the week rather bullishly overnight with most markets higher there. In Europe this morning, strength is carrying over, although the German DAX is closed for a public holiday.
Gold is down roughly 0.5% in early trade, while crude oil ($WTIC) is flat. Dow Jones futures are poised to surge significantly at the open as they're up more than 200 points with an hour to go before the opening bell. There are rumors that the U.S. and China are nearing a trade deal so look for large caps to gain a competitive advantage in early trading this week.
Current Outlook
Technically, the 60 minute negative divergences that appeared a week ago have been relieved. PPOs on the major indices have been reset to centerline support and are now free to move in either direction. The trend over the past couple weeks has clearly been higher so I'd look for continuation, but beware a move back below 2700:
Two months ago, we had a nearly identical setup - a negative divergence where price action played out to 50 hour SMA support and the PPO returned to centerline support (pink arrows). But, in March, gap support was lost and selling intensified. It would be much more bullish for the S&P 500 to hold 2700 gap support and rally through recent highs. Failure to do so could prompt more consolidation and frustration.
Sector/Industry Watch
The Dow Jones U.S. Automobiles Index ($DJUSAU) is acting like they could be preparing for an upside move. There was solid volume on their last advance and recent gaps lower have been followed by intraday buying to form red hollow candles. Here's the chart:
The combination of a close above 203 and a PPO bullish centerline crossover would likely trigger a near-term technical rally in autos.
Monday Setups
I like the current setup in Garmin Ltd (GRMN). After reporting stellar quarterly results on May 2nd, GRMN gapped higher and gained 5% on strong volume. It has since pulled back and filled its gap and I look for another push higher. Fundamentally, GRMN's revenues exceeded Wall Street's expectations by 6-7% and its EPS came in at $.68, well above the $.56 consensus estimate. But the best part is the chart:
59.00 and 57.50 represent the two best reward to risk entry points, while I'd ultimately look for a target of 64.00.
Historical Tendencies
The upcoming calendar month of June is not notable for its bullish tendencies. Over the past two decades, the benchmark S&P 500 has dropped an average of 0.7% in June, ranking it behind only September as the worst month of the year. There are pockets of strength, however. For instance, the small cap Russell 2000 ($RUT) has averaged outperforming the S&P 500 by 1.5% over the past 20 yeaars, its most significant month of outperformance throughout the year.
From an industry perspective, health care providers ($DJUSHP) rank near the top in June and the group is on the verge of a bullish inverse head & shoulders breakout. Check this out:
The measurement is roughly 160 points, suggesting an initial target of 2000. The DJUSHP would seem to be in a solid position technically to benefit from seasonal tailwinds.
Key Earnings Reports
None
Key Economic Reports
None
Happy trading!
Tom
