Market Recap for Wednesday, August 22, 2018
Stock market action was bifurcated here in the U.S. on Wednesday as NASDAQ stocks led to the upside. The small cap rally continued with the Russell 2000 closing at a second consecutive all-time high. But both the Dow Jones and S&P 500 closed lower with the latter failing for a second straight day to clear all-time high closing resistance:
An ascending triangle typically comes in an A-B-C-D-E pattern with A being the end of and advance, B the initial reaction low, C the move higher to test price resistance created by A, D the final low (but higher than B) and E the breakout above A and C. These are powerfully bullish continuation (or basing) patterns that should be respected. The S&P 500 could simply power through 2873. There are no rules that make continuation patterns mandatory, but it certainly makes sense to respect that 2873 price resistance until it's cleared. Just realize that if we fail to clear 2873 now and pull back, the longer-term picture remains extremely bullish, especially since we've already seen breakouts in the NASDAQ and Russell 2000.
In terms of sector performance on Wednesday, energy (XLE, +1.20%) was the clear winner, while industrials (XLI, -0.97%) and utilities (XLU, -0.74%) were at the bottom of the heap. Transports ($TRAN) fell 1% and that helped to drag the XLI lower. The short-term outlook on the TRAN is rather ominous after printing a reversal at key price resistance:
Clearing its Tuesday high would be very bullish, but barring that, I'd expect to see the TRAN trade down to at least test its rising 20 day EMA. It looks like there could be a very slight negative divergence in play (higher price high between the two August peaks with slightly lower PPO. Also, it's noteworthy that volume on the latest price surge was not really up to par. Slowing momentum certainly appears to be an issue worth considering. If transports do, in fact, begin to push lower, that will be a drag on the S&P 500, which is facing key price resistance of its own.
Pre-Market Action
Gold ($GOLD) has fallen back beneath $1200 per ounce after bouncing to test its declining 20 day EMA. The U.S. Dollar Index ($USD) is attempting to reverse its recent downtrend and that's put a lid on GOLD - at least temporarily.
Overnight, we saw mixed action in Asian markets. European markets are mostly higher, but barely so this morning. Dow Jones futures are up 9 points as our major U.S. indices look to open relatively flat today, barring a sudden shift in the next 30 minutes.
Current Outlook
The Russell 2000 ($RUT) has broken out to all-time highs and I believe provides the best opportunity for short-term gains among our major indices. Initial price support should be found at 1707, which was the top of the ascending triangle pattern. If that fails, the rising 20 day EMA would be my "line in the sand" and that's currently at 1690. If you're considering a short-term trade in the IWM (ETF that tracks the Russell 2000 index) and do not currently own it, entry at the 20 hour EMA makes sense (see below). If you want to reduce the risk of the trade, you could enter a partial position there and a second position when the RUT tests price support at 1707. Then a definitive close beneath 1690 on the RUT could be a stop. The target? Measurement of the ascending triangle breakout....or 1785-1790. Here's the hourly chart to identify initial entry:
Russell 2000 outperformance will be somewhat dependent on the U.S. Dollar Index ($USD) resuming its uptrend and bouncing off support at 95. So if you're not a bull of the USD, then the above trade might not make sense.
Sector/Industry Watch
The Dow Jones U.S. Recreational Services Index ($DJUSRQ) appears to have broken out of its recent down channel, increasing the potential for outperformance during the balance of 2018. Historically, September through December outperformance is the norm as well (see Historical Tendencies below). Here's the current technical outlook for the group:
Bullish momentum is accelerating. If there's one negative, I'd say it's been the lack of volume to confirm the recent upside channel breakout. The 148-150 zone could prove difficult as well given that the two most recent rallies failed there. Still, the reversal is compelling especially given the upcoming seasonal strength in this industry.
Historical Tendencies
The DJUSRQ has averaged gaining 6.1% per year over the past 15 years. Interestingly, the group has posted average gains from September through December of 6.7% so we're clearly entering their historical "sweet spot".
Madison Square Garden (MSG) is a company within this area that has been struggling the past couple months, but is rapidly approaching the top of major gap support where I'd expect to see buyers return:
MSG touched 330 in early July and as it gets closer and closer to 290, the reward to risk increases significantly in my view. MSG has not been a strong September performer, but there's very little history to assess as MSG has been public for only 3 years.
Key Earnings Reports
(actual vs. estimate):
BABA: 1.22 vs 1.29
CM: 2.38 vs 2.22
HRL: .39 vs .38
(reports after close, estimate provided):
ADSK: .17
GPS: .72
HPQ: .50
INTU: .23
ROST: 1.01
SPLK: .05
VEEV: .34
VMW: 1.49
Key Economic Reports
Initial jobless claims released at 8:30am EST: 210,000 (actual) vs. 215,000 (estimate)
June FHFA house price index to be released at 9:00am EST: +0.4% (estimate)
August PMI composite to be released at 9:45am EST: 55.6 (estimate)
July new home sales to be released at 10:00am EST: 649,000 (estimate)
Happy trading!
Tom
