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Wednesday, January 10, 2018

Market Alert - The Close

Bloomberg reported at 5:00 AM ET that 'officials' from China stated that the country may slow or even halt its purchase of US treasuries. As a big creditor of the US and holding anywhere from $2T to $3T in treasuries, this is an important development, and markets reacted.

US bonds tanked, pushing the 10 year yield to 2.59% from 2.551%. Stocks dropped in one of their sharpest moves downside in quite some time. Yet, by the close bonds were back to flat (2.559% 10 year) while stocks, though still negative, were mostly unscathed. On the first test, buyers did return.

SP500 -3.06, -0.11%
NASDAQ -10.01, -0.14%
DJ30 -16.67, -0.07%
SP400 -0.48%
RUTX -0.02%
SOX -1.24%

VOLUME: NYSE +1.5%, NASDAQ -1.5%. NYSE trade remains below average, and if you have selling that works. It was never that strong on the upside either, so good to have it remain weak on the downside. NASDAQ trade remained above average for a sixth session and slightly lower. That shows no dumping of shares on the selling.

That does not mean the indices do not use the China news as a reason to test a bit more. The large cap indices all reached lower but held ground easily above the 10 day EMA before recovering most of the day's losses. A 10 day MA test, particularly after such nice upside moves, is really nothing in market terms.

SP400, RUTX both tapped the 10 day EMA on the low and recovered lost ground to varying degrees. RUTX made out the best, recovering to a tight doji while SP400 held the 10 day but bounced just modestly. SOX held the 10 day EMA on the close, but it had to recover to do so, closing with a tight doji with tail just above that support.

Stocks for the most part recovered a la the indices. For the most part. There were some continuing breaks lower from Tuesday and I will discuss those ramifications if any.

The stock action shows at least two things to us. First, several big names look as if they can test back from their recent nice upside moves. For example, AMZN, FB, GOOG all recovered, but they still dipped off their week or longer last legs on the close. A 10 day EMA test would be very normal after such runs. As discussed this week, leaders that pushed the last leg higher were in position to test and that is one reason we took gain Monday and Tuesday on GOOG, NFLX, AMZN and others that surged for us over the past two weeks. Even so, while the action Wednesday may lead to test, it does not look to be anything severe.

Second, and this follows on the last comment, we saw some stocks rally even as most of the market faded. Retailers that tested recently started to bounce again, e.g. TLRD, DDS. Not all retailers, but then again, retailers are moving in different waives inside the group. Software performed well, e.g. DATA breaking higher and FFIV continuing its move for us. XNET surged higher again and hit the target so we banked some gain. VCEL, LEDS surged as well. The point: as some the recent leaders test, others break higher.

Third (okay, there are 3 things), there were not a lot of breakdowns, those reversals from breakouts or good moves. There were breakdowns, but when you look at the names, they are few in number and in many cases there is a specific story tied to them. INTC continued lower sharply for a second session, unable to overcome the drop on the news of the flaws in its chips. More bad news was piled on with the performance degradation for those using Windows 7 and 8, so much so that those PC's will be useless in the eyes of many; certainly those using them did not get what they paid for. Or KSU, reversing sharply after a nice rise in its ABCD pattern on reports that the White House is close to notifying Canada and Mexico it is going to pull out of NAFTA. GRUB doesn't have a real story behind it as it sold aggressively for a second day. AMBA is off hard for a second session; it supplies GPRO its chips and GPRO is in trouble. RES bombed but it has a lot of interests in . . . Canada and Mexico. Another NAFTA-related bloodletting.

Further, don't get distracted by stocks that tank but are not leaders or were not near highs or recovery highs; they have problems different from leaders that are rallying then reverse hard.

In sum, you have leaders coming off highs on grudging tests, bouncing off early lows. You have other stocks rising even as the leaders in the last rally take a breather. Finally, while there were stocks heading lower in sharp selloffs, they were not that great in number, many were not leaders, and many that did sell had specific stories related to them versus just reversing off the highs.

Given that background and the recoveries, we did not do a lot. We took some gain on XNET and LEDS, but let others keep running where we had taken some gain earlier according to our play plan. We bought DATA as it was a new mover coming back around upside with a strong move. Sold a couple of chips, AVGO and MXL, though MXL was problematic. In short, we let most work as they held up rather well and played around the edges, picking up good positions and banking gain as stocks make what could be a logical test of the recent last leg surge that started the new year.

The pullback would likely give some new entries on those stocks that are still not extended despite the market move, read FAANG and some others that based and broke out more recently than industrials, etc.

Even before they test, however, there are stocks right now that look good to move, and that makes sense if the market remains bullish: as leaders test and rest, other stocks get money and break higher from good patterns.

Thus, we have some plays to add that look to be ready to make upside breaks to those put on the report this week. An upside run feeds on leaders, and as stocks set up in good patterns, those are the logical choices to help lead as the leaders of the last leg pullback. So we look at those.

Now, the cautionary word. Solid patterns in the wings and ready to go are necessary for a run to continue, but they are not alone sufficient. Rallies can die even with stocks ready to make their moves. THUS, you must watch the pullback in the leaders and monitor if they remain healthy in terms of upside. You also watch the market in general and see if other areas start to struggle and start giving back upside on high volume. Basic stuff, but in the glamor of the rally and the gushing of the professionals and television personalities it can get lost. As always, remain calm, remain as dispassionate as possible, watch and listen to what the market is showing and saying, and use those to take what the market gives.

Have a great evening!
Jon Johnson, Chief Market Strategist
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