Search This Blog

Monday, February 5, 2018

Market Alert - The Close

Now the market is showing some selling with the DJ30 off 1,597.08 on the low, the largest price drop ever, though not nearly close to the largest percentage declines. Stocks started lower and sold into the afternoon, then the trap door opened and stocks absolutely plunged. They hit low at 3:10ET and reversed with a knifepoint turn, but after just 20 minutes they rolled over again and sold with SP500, SP400, RUTX coming back to session lows, NASDAQ closing at a lower low.

SP500 -113.19, -4.10%
NASDAQ -273.42, -3.78%
DJ30 -1175.21, -4.60%
SP400 -3.56%
RUTX -3.63%
SOX -4.72%
NASDAQ 100 -3.91%


The move saw SP500, DJ30, SOX give up the 2018 gains to day while SP400 and RUTX gave up the January AND December gains. NASDAQ and NASDAQ 100 still hold onto some of the 2018 gains, but not many.

DJ30: Have to start here just for the size of the 1597.08 point loss. Wow. DJ30 gapped lower but above the 50 day MA and the December consolidation. Then it broke and sold below all December prices to just below 24,000 -- the Dow likes round numbers. A rebound closed DJ30 about 470 points off the low. It retraced 78% of the move from mid--November and bounced but did not get back to the 61% retracement. From the big move starting September 2017 (from the last touch of the 50 day EMA, an important time), DJ30 retraced almost 61% of that move and rebounded to the 50% retracement. Getting there.

Now, what happens in this pattern? It can bounce for sure, BUT typically a PATTERN off the 61% or 50% retracement is a much sounder bottom to buy. So, any bounce you treat as -- a relief bounce to make money upside and take care of any other positions. THEN you get the next move lower that tests the 61% or 50% level, forms a pattern such as a double bottom, cup, triangle, inverted head and shoulders, ABCD then breaks higher again. During that time, stocks can repair themselves and build new bases. Those patterns support a new rally, a sustainable rally.

Thus, all of that talk about is this the bottom or not is just talk. The market will let you know, but historically the market goes through this process and that is what lets you know a bottom is being set. You will see a lot of great stocks with really sweet bases at that point and will have the confidence to buy when the stocks say 'buy me' while everyone else panics that the market is rolling over again. You buy in, then as stocks move up, the crowd realizes they were wrong, they pour in and drive your positions higher and higher.

That has happened over and over again in market history, and the machines don't change that, they just accentuate the highs and lows.

More index chart analysis in tonight's report, but the DJ30 action sums it up.

It is somewhat amazing to see these selloffs. I can remember all the big ones during my career (not that many) and the scenario always plays out the same. It is exacerbated with the algorithm trading as that magnifies the losses and gains, but the action is all the same. New money comes in after an abnormal rally and it comes in late, too much leverage occurs as up is the only way to go, some selling starts, new money is worried, selling continues, fear ramps then the flood starts. I am not saying that Tuesday has to be the bottom, but I have seen this more than a few times in my career, and the setup is classic.

There were a few other items that added to the program selling that snowballed on down.

New Fed chairman. There is an old adage I heard again today and was kicking myself for not talking about it this weekend: the market always tests a new Fed chairman. Greenspan, Bernanke, and even Yellen though to a lesser extent. The fact of a new FOMC chair is just another reason for the market to correct some. The market is not expecting the new Fed head to cut rates, but it is concerned that a new sheriff may be too gung ho. Bull markets historically die because of Fed foolishness in fearing prosperity. The late 1920's into the 1930's. 2000 is a classic example in recent history as well as 1996 before that when Greenspan tried to end it but was not as committed to it.

Stronger Economy: This dovetails with the new Fed chair. ISM Services hit record highs at 59.9 with employment and new orders at all-time highs. Friday the Fed's Franklin opined about 3 rate hikes as a floor, as a minimum for 2018 rate hikes. That put the market on edge about whether new chair Powell will be more hawkish.

Bonds: Bonds have been slaughtered and yields exploding. Today, however, it could be bonds found bottom. The 10 year yield started at 2.84% and moved up to 2.862%. More of the same with yields running higher. 2.862%, however, was as far as it got. For about 20 minutes bracketing 11:00ET the 10 year traded at 2.862%. It could not move through 2.862 and faded. Bonds then surged in the last hour to 2.707 on the low, indeed closing at 2.707%.

If bonds have found near term support, it makes it easier for stocks to bounce again as they do not have at least that factor pressuring prices.

Volatility surged. VIX rallied 117.48%, +20.16 to 37.32. That puts it in rare air past the 2015 closing high, past the 2010 closing high . . . BUT that is below the intraday highs high in 2015 (53.29), 2010 (48.20), the 2011 highs (closing 42.96; intraday 48.00). It is also, of course well off the 2008 numbers (59.89 closing, 96.39 intraday). Historically you can see the 50ish level is typically a level that will trigger a market reversal back upside. As discussed over the weekend, a further selloff Tuesday morning could easily send VIX over 50 and be another piece that sets a rebound in place.


Okay so the market is moving to something of a historical script. Economy is strong for now, and if there is nothing the market sees as a major problem ahead in terms of economic growth, then it shakes it off. If not, that is another story.

That script reads as another drop Tuesday at the open, and futures continued lower after the market close (down 1+% on SPY, DJ futures), a spike in VIX to over 50, another really ugly downside session, then a vicious reversal upside.

We are looking at what stocks held up decently to play on a rebound. A lot of names will be bought regardless of patterns; people want GOOG, AMZN, FB, NFLX, etc. and they will buy regardless of patterns. NFLX looks great. NVDA not bad at the 50 day SMA. AMZN is pretty solid with a doji and a rather modest 2.79% drop. BLUE holding the 20 day EMA. CRM showed relative strength all session then faded late to the 50 day EMA. TTWO is not bad. SPLK, PANW. STLD at the 50 day. QRVO testing its breakout. MSFT at the 50 day. RHT held up really well at the 50 day.

It may be too early, but if the market plays out with another dive lower and reversal into a doji at the close, then you have to go with what the market is showing. Do you follow your guts or follow the market indicators? Of course you do the latter, make the plays regardless of how your stomach feels, stay on top of it and play the move up.

And what is that move? For now, as noted over the weekend, you treat it as a relief move. These setups are classic, but not every one results in a new bull run as many are saying. It is what it is: a big selloff that gets overdone and is going to bounce. That bounce can make you good upside money. In itself, however, the setup and rebound does not necessarily equal new bull run. It may, and if so it will prove it. We will make money on the bounce, and if it continues into a new bull move, great.

Likely, however, after a sharp move higher, it comes back and tests the low at some point. That is the time the patterns broken during the selloff rebuild into bases -- or not -- and if they do, that sets up the new bull run. If they don't then take some good upside gain, buckle up, get ready for the downside with new downside plays, and make money downside. Frankly, I believe it WILL come back for a second drop after a sharp rally because things were so complacent for so long and the market needs a good shakeup. I guess you could argue that it IS getting just that.

THAT is how you have to think of this. We still have some plays upside in various stages of holding support or disrepair, but we are in mostly cash and will let them rebound as we play new upside at the same time after a reversal.

Have a great evening! Understanding the process allows you to do that!
Jon Johnson, Chief Market Strategist
Alert Key


Customer Support:

No comments:

Post a Comment