Cup and Handle Breakout in KFRC with Flag Forming

All systems appear go-for-launch with KForce, Inc. (NASDAQ: KFRC,) the Tampa, FL based temporary and permanent placement agency that released very strong earnings and revenue numbers on Tuesday, 6 February.  While it took a couple of days for the good news to sink in, a vertical move over the last four trading days pushed the stock to a 2-year high and resulted in a breakout of a year-long cup and handle formation on confirming high volume.

Today's analysis will focus on the daily chart.

KFRC Daily Chart

The cup formation in the pattern started on 2 March 2017 with a failed test of a longer term high set on 8 February, just a month earlier.  The round-bottom cup formed over the remainder of 2017, tapering off into a consolidation pattern to end the year.  The handle represented a nice 12% decline off the right lip of the cup.  Of significance, however, is that volume throughout the entire development of the handle was well below the 50-period volume-EMA.  That's a major sign that the decline into correction territory was without conviction and wouldn't be sustainable.

Following the strong earnings release, we can see the 4-day vertical rise that may well be the development of a flagpole.  We'll watch this for the next couple of days to see if the flag or pennant actually does form.  The spinning top candle on Friday, appearing below the 50% mark for the day, suggests that it will.

A closer look at the handle itself shows that we attempted a breakout on 14 Feb, however we retreated to close precisely at the top of the right rim. The actual close occurred the next day, with a very strong bullish candle.  The spinning top on Friday, however, suggests a pause or pullback to, or slightly below, the breakout line.  Given the choice, a second thrust above the breakout level is the one we'd prefer to play.  Just remember that we're not always given that opportunity.

A closer look at the technical indicators shows a lot of confirmation around that handle breakout.  The RSI(9) broke a down-trending resistance line on that same day.  The MACD(5,34,5) confirmed with a bullish crossover.  The JDK RS Ratio continued an upturn above the 100 level, and JDK RS Momentum followed suit. (It's always a good sign when both the RS Ratio and the RS Momentum indicators are showing improvement above 100.)  Finally, the Relative Strength vs the S&P broke a down-trending resistance line as well.

Volume, as we mentioned, was extremely depressed through the handle formation but began its rise heading into the earnings release.  Breakout day and the day following the breakout experienced the highest volume of the entire formation, and the On Balance Volume indicator turned sharply upward to intersect a horizontal resistance level.

For a short-to-intermediate term trade, this is a long stock only.  There's nothing that we are tracking to suggest a potential short play, here. Our strategy now is to watch the next couple of days for either a flag or pennant to develop or, if that doesn't happen, to play a break above Friday's candle if there's a continued move upward on volume above the 50-day volume EMA.  We do expect a pullback before entry, but we also need to be prepared to go long if the pullback doesn't manifest.

The price target for the Cup and Handle will be $34.23.  If a flag develops, then the price target for that flag play will be $3.34 above the level of the breakout.  Either way, the play at the moment is long.

Happy Trading.

SHLX At Long-Term Support in Inverse Cup and Handle

Four consecutive quarters of missed earnings and missed revenue estimates took a major toll on Shell Midstream Partners, LP (NYSE: SHLX).  It looked like a positive report on 3 November 2017 would turn it around, and share price did, indeed, rise at a promising rate.  That, however, was undone by news on 2 February 2018 that the company would issue 25,000,000 common units in a series of public auctions, while also providing the underwriter an option for an additional 3,500,000 common units as part of the overall deal.  Shareholders were decidedly displeased, and the share price plunged 16% in just 3 weeks.

In today's analysis, we're going to examine the weekly chart since that offers an excellent overview of what has happened to this stock and also provides a glimpse into what trading opportunities we may see in the near term.

SHLX Weekly Chart

What attracted my attention to the chart in the first place was a large gap down into support on the daily chart.  That manifested as the long red candle you see here on the weekly, the last week of January 2018.  The pattern itself appears to be forming an inverted cup and handle.  If that's accurate, we're now two weeks into the handle portion.  We would expect this handle to run about 4 or 5 weeks, although that could change depending on the health of the overall market in that same period. 

In marking the weekly chart, though, a second confirming pattern emerged as well.  The support line on which the stock currently rests extends all the way back to September 2015, and it has been tested on five separate occasions.   The series of lower highs extend back to that same time period and the resulting pattern is a descending triangle.  Now, one word of caution is in order regarding that triangle.  There's a bit more white space in the pattern than I really like to see.  Based on that, I wouldn't trade that pattern alone, however there is sufficient other evidence on the chart to overcome that pattern issue.

Volume on the declines is rather pronounced.  That was especially true after the February announcement, but we can also see that the On Balance Volume has been trending negatively since 2015.  Money, it appears, is flowing out of this stock, and not into it.  Now, we do have a word of caution, here, because that volume pattern in conjunction with the price sitting on long-term support for three weeks is also consistent with a selling climax followed by an accumulation pattern.  Be on the lookout for signs of major buying by the larger institutions, since we really don't want to be trapped by one final shake-out before the price is pushed higher.

There is not much insider action on this stock; the last reported transaction was a 500 share sale in September 2017 reported by director Margaret Montana.  That was only 1/8th of her total share holdings, and was largely insignificant.  There are, however, a large number of institutional share holders with a significant number of shares in their portfolios.  If we see major movement towards accumulation, it will come from one of them, and will only be evident through a study of the price and volume action.

Looking at the RSI(9), there are some hints that that may, in fact, occur.  Notice the lows of the RSI(9) each time support was reached, and compare that with the RSI(9) in this current move back to support.  Notice that we don't reach those same levels.  Now, it's not quite pronounced enough for me to declare it definitively as a bullish divergence, but the cautionary message is still quite clear.  The downward thrust may, indeed, be weakening and we may be exhausting the number of sellers willing to dump this stock.

The other indicators we're watching are much more bearish.  The MACD(5,34,5) executed a bearish crossover in conjunction with the February announcement.  The relative strength vs the S&P, which has been dismal for the last couple of years, continues its steady decline and is well below a current resistance level.  The JDK RS Ratio is hooking downward (and is already in under-perform territory) and the JDK RS Momentum indicator is declining.

So, how are we going to play this stock?  Once again, we'll let volume be our guide.  A close below that support line with confirming volume would be a sign to go short.  Now, be careful.  Given the strength of that support line - it's lasted 3 years and been tested at least 5 times, remember - it's highly probable that we'll experience a pull-back to that line.  So, if we do go short, they will be very short-term trades designed to protect profits and exit very quickly.  The potential for a bear trap here is extremely high, and we don't want to be the ones gnawing off our own paws.

If, however, we take out the prior week's highs, again, on convincing volume, we're not opposed to a long position.  The top of that descending triangle will provide major resistance, of course, so we'll be looking to exit as we approach that level. 

SHLX reports earnings before the open on 27 February, and it's not our intent to hold any positions in either direction going into the close on Monday.  The next dividend date isn't until April, so that won't factor into any short term trades for the foreseeable future.

This is a stock to add to the watch list.  There are numerous potential trades setting up in the short term, and looking at the patterns, we may find some low risk opportunities to both the long and the short side over the next few weeks.  As always, watch the volume signature for confirmation when assessing the probabilities.

Happy Trading.

LYV Flirts with Breakout at 52-Week High

Live Nation Entertainment (NYSE: LYV) spent the last two trading days of the week teasing traders with the potential for a breakout above the 52-week high after spending over two months in a horizontal corrective pattern.  That pattern appears to be a Wave-4 in the longer term cycle that started at the end of 2012.  While a 5th wave has the potential to run 20 points or more, there's sufficient reason to watch for a head-fake before jumping in.

LYV Daily Chart

Friday's doji just barely topped the prior day's close.  While the high did briefly pierce the resistance line marking the top of the channel, it was short-lived and the stock settled for just a three cent gain on the day.  The 5-day run up from the bottom of the channel was impressive (from a candle-pattern perspective) but the volume signature for that entire week was extremely lackluster.  It's not a pattern we'd want to see in anticipation of a breakout.

A similar issue appears in the RSI(9).  That hook at the end of the RSI is a warning sign, and we've yet to see any sign that the RSI is signalling strength.  When we look at the JDK RS-Ratio and Momentum indicators, it's the same story.  RS-Ratio is rising but RS Momentum is weakening.  That's a major cautionary tale in itself.

Notice that the start of the week resulted in a bullish crossover on the MACD(5,34,5) and that crossover was preceded by a resistance breakout of relative strength vs the S&P.  Both of those are positive signals, but they outweigh neither the volume pattern nor the RSI(9) warning.

Longer term, we expect LYV to breakout and produce a nice Wave-5 bullish run.  The short term, however, may be more of a head-fake.  LYV is scheduled to report earnings after the close on Tuesday, 27 February - just over a week away - and the forecasts are not good at all:

LYV Earnings Forecast from NASDAQ

Volume is the key in this week before earnings.  A breakout on week volume is a nice bull trap.  It would be a potential short play, but we'll avoid any long positions one week volume.  The same is true for a downward move on week volume.  If there's no conviction to the move, we'll stay away from it.  What I'll be watching for in the run-up to 27 February is a volume confirmed move that shows which way the major players are trading.

We'll be keeping an eye on the options action as well.  Right now, there's a tremendous amount of open interest in the at-the-money March 16 47 Calls and the out-of-the-money March 16 44 Puts.  We'll be watching closely for a surge in options activity surrounding any volume-confirmed move.

Also be cognizant of the overall market direction.  Following the correction we experienced two weeks ago, we've seen a rebound back to the 61.8% Fibonacci level between the highs and lows of the corrective pattern.  It's likely that the corrective wave is not yet over, so watch for potential weakness over the next week.  I still expect this to be at least a Zig-Zag corrective wave, and if that's true, we'll again retest the bottom of that first corrective drop.  Avoid taking a long position if the market indicates it's again marching towards that corrective low.

As to LYV, add it to your watch-list and be sure volume confirms any move that prompts you to open a position.  It should be a volatile week in the run-up to their earnings announcement.

Happy Trading.

Has the Time Finally Come for TWTR?

In the midst of last week's market turmoil, Twitter, Inc. (NYSE: TWTR) posted a five-cents per share earnings beat, but also posted a $45.94 million beat on revenue.  Those numbers were enough to drive a return to year-over-year revenue growth following a long history of declines.  Even more to the market's delight, Twitter posted a 7% year-over-year increase in owned and operated advertising revenue.  In the ensuing conference call, CEO Jack Dorsey gave a rosy preview of 2018, saying, "We're investing to make 2018 a year of growth and expect our expenses to more closely align with revenue after a year of significant margin improvement."

The market was most appreciative, drawing a significant break-away gap on Thursday in spite of a 1000+ point drop in the overall market.  Twitter continued to show strength on Friday with a very strong bullish candle that didn't penetrate the lows of the previous day's move.

Now, before we go too far in the discussion, Twitter is not, for me, an investment stock.  While the chart shows a very good potential for upside growth, it does lack the number one component I require in any stock held for investments, and that is a quarterly dividend.  Therefore, I'm looking at Twitter solely as a trade vehicle for short term capital appreciation, and would not be interested in holding Twitter as a longer term investment.

With that said, let's take a look first at the Weekly Chart.  This sets the overall canvas upon which our daily analysis will be drawn.

TWTR Weekly Chart

 What we've placed on this chart are the major support and resistance areas that are likely to impact any large-scale move.  Notice that last week's price action broke across the 200-day moving average (that continues to trend downward) but also broke above a major pivot line that has held since July 2015.There's a good possibility this line will be tested several times over the coming weeks, so factor that into any entry and stop plans.

There's a second resistance line looming around $35, and that, coincidentally enough, marked the high of our gap day.  Price hit that resistance and retreated back to the $30.50 range on that day, although it did recover back to $31.51 the next day.  What we need to take from this, though, is that there are sellers looming around $35 and they will have to be shaken out of the market a bit before Twitter can further advance.  Expect some horizontal movement at that level.

The major resistance zone, though, sits between $50 and $52.50.  That level formed a double top on the weekly chart between July 2014 and April 2015, and the stock retreated from there to its all-time lows.  We have due cause to respect this resistance level.  For me, assuming I'm still long the stock if it reaches that point, I'll exit there and wait.  It may become a good short opportunity at that point.  If nothing else, we can always reenter if it shows a breakthrough across that resistance line on strong volume.

What's encouraging about the weekly chart, though, is the 28-month base formed over the 2 1/3 years prior to Thursday's breakout.  The P&F price target from the breakout of that base would put us at $52.  Not by coincidence does that coincide with the major resistance zone discussed previously.

Okay, with that foundation, let's turn to the daily chart.

TWTR Daily Chart

Most of what appears on this chart is positive, and speaks to a decent move to the upside.  Consider the following:

• Strong breakaway gap after good earnings and forward guidance.  It's even stronger considering that the overall market dropped over 1000 points that same day.
• The breakaway gap also broke out of a strong rising channel that began developing in September 2017.
• Volume from the start of this move two weeks ago shows very strong bullish tendencies, more than doubling the 50-day moving average of volume across the entire period.
• On Balance Volume has been rising steadily since July 2017, showing money gradually moving into the stock.  
• The MACD shows a bullish crossover at the start of the move, and then a nice bullish bump in conjunction with the breakaway gap.
• Relative Strength broke out of a rising resistance line.
• The JDK RS Ratio and JDK RS Momentum lines are both rising rapidly.

There aren't many negatives to speak of:

• The RSI(9) is at a level that has proven to be extremely resistant on the last four moves.
• The candle on the breakaway gap day was decidedly bearish, closing within 10% of the low.  In fairness, though, that did come on a major down day in the market, and Friday's candle was decidedly bullish.
• The breakaway candle bounced off major resistance found on the weekly chart.

So, where does this leave us?  Well, given the glowing forward guidance from Twitter on Thursday, we've got at least a quarter for this stock to run without negative news weighing on it.  If TWTR can break through the resistance at $35, then it has a very good shot at running to $52. That's precisely how we're going to play it.  I don't intend an entry until TWTR breaks the resistance line above Thursday's candle.  We'll take 1/2 profits at $48.35 (the 78.6% Fibonacci level of the entire range,) establish a trailing stop set to the prior day's low, and allow the remaining half to run until we get stopped out.  The key, though, is to be patient and let it break that $35 level with volume. Do keep in mind that we expect that line to be tested once or twice as a support line, so don't set your initial stop too high. 

Happy Trading.

BK Ends Sub-Wave (3) with Bull Flag

Bank of New York Mellon (NYSE: BK) rode the Financial Sector's post-election wave to a new high on November 15, surging to 47.96 on high volume.  In what has become a very familiar pattern in the week following the US Presidential Elections, a strong flagpole pattern emerged.  As with other stocks that we've reviewed this week, the subsequent trading sessions consolidated into a well-defined flag pattern.

BK Daily Chart

 The major uptrend for this financial sector giant started on February 11th, and it has traced a very distinctive Elliott Wave impulse pattern ever since.  Notice that Wave 1 encompassed a 5 sub-wave impulse that ended in June, 2016.  Wave 2 was a complex corrective wave, and retraced about 61.8% of Wave 1.  That corrective wave lasted for almost 4 1/2 months before Wave 3 kicked off on October 13. 

Based on our Elliott Wave analysis, Wave 3 has not yet completed.  Thus far, we've traced three complete sub-waves and are in the midst of sub-wave (iv).  There's still one more upward move coming in Wave 3, and that's the wave we hope to catch. 

Two price targets come into play to the upside.  First, we have a flag pattern that's been in play for over a week, and that target is 50.36 on an upward breakout.  (One caution to note, however, is that the time-duration of the flag is becoming troubling.  The proportion of flag to pole is very close to invalidating the pattern.  Keep an eye on this if it goes on much longer.)

The second pattern to consider is the Elliott Wave price target.  Thus far, Wave 3 has not yet reached the full length of Wave 1.  Typically, Wave 3 is the longest of the three impulse waves of the five wave set, although it doesn't have to be by rule.  The actual rule states that Wave 3 cannot be the shortest of waves 1, 3, and 5, but it doesn't have to be the longest of the three.  Based on that, we set our initial target to the actual length of Wave 1, recognizing that it's possible for Wave 3 to fall short of that without violating the rule.  For our flagpole target to be valid, in that case, we need wave 3 to rise 11.85 from the height of Wave 2.  A rise of only 10.45 is needed to satisfy that requirement.

Now, our current sub-wave is a bit of a problem since Wave (iii) falls just short of Wave (i).  That means that Wave (v) must be shorter than Wave (iii.)  Fortunately, the flagpole target is a full 2 points below that level, so a truncated Wave (v) will still be able to hit our price target.  Thus far, the pattern we're seeing appears valid on multiple counts.

Let's take a look at some other aspects of the chart to see what they're telling us.  Look, for instance, at the bullish channel that formed at through each of the waves as drawn in tan dotted lines.  The upper channel line, when extended out to the right, now intersects our flag pattern precisely where we're trading today.  That line may well form a support line if the stock breaks to the upside. 

The other interesting characteristics we see are the two spinning top candles that formed yesterday and today.  (We'll ignore the doji that formed on the day after Thanksgiving since it was a short, low volume trading day.)  The spinning tops indicate indecision in this context, meaning this stock can break in either direction. Volume has been consistent throughout the flag pattern, however.  We'll have to wait to see which direction the market decides to take this one, although the overall chart increases the probability of an upside break.

Here's how we're playing this one.

• If it breaks to the upside - meaning, it has closed above the flag pattern with confirming volume - we will go long, setting a price target of 50.36.  Our stop will initially be below the pattern low.
• We will trail our stop to reduce and then to eliminate risk.
• If the stock breaks to the downside, we will stay on the sidelines.  The pattern in general suggests high risk associated with a downside break, so we won't be looking to play a short on this one.

As always, watch the volume signature on a break to either side.  If volume does not confirm the pattern, wait for a pullback and a second break.  With all the attention the financial sector is receiving in the post election cycle, this stock has a high potential for false breakouts in either direction as the market makers attempt to shake loose the weaker hands.  Always watch for confirmation before entering the trade.

Happy Trading.

Trading Outlook for the Week of August 15-19

Markets are still showing strength as we head into mid-August.  The Nasdaq shows amazing strength, riding its 7-day moving average as a very strong support line.  The Nasdaq composite has not closed below it's 7-day since June 28th, and has only dipped below it intraday four times in that period.

Surprisingly, given the strength of the Nasdaq, the Technology sector has rotated into neutral territory.  The leaders last week were Energy, Consumer Staples, and Consumer Discretionary.  Utilities rotated up to neutral, and that coincides with a slight drop in the 10-year Treasury yield. 

The probability of an interest rate hike on September 21 has declined to just 9%.  A December 14 rate hike, however, is still at 40.6%.  With the CPI being announced Tuesday, however, those probabilities could change dramatically.  The current consensus is for CPI to be unchanged for July.  That would be the weakest result in 3-years, and it's the primary reason expectations for a September hike are near zero.  Excluding food and energy, the index is expected to rise 0.2%, which is a healthy rate, however it's likely not enough to move the Fed.

All market capitalizations are still indicating long positions, so that's the way we'll play it this week.  Earnings season is winding down, and we only have Home Depot and Deere on our watch list for this week.  We'll also be paying attention to Wednesday's release of the FOMC minutes.  That release does have a tendency to move the market, however please keep in mind that it's month old data.  Market reactions to the minutes tend to be short lived.  Still, for those of us that swing trade, it's important to be aware of the potential for movement Wednesday afternoon.

Finally, this is Options Expiration week, so watch for some volatility on high volume this Friday.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLE - Energy
XLP - Consumer Staples
XLY - Consumer Discretionary

Showing weakness
XLB - Materials
XLF - Financials
XLV - Health Care

Neutral
XLK - Technology
XLU - Utilities
XLI -  Industrials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/15/16

• 08:30 - Empire State Manufacturing Survey
• 10:00 - Housing Market Index
• 16:00 - Treasury International Capital
  

Tuesday, 8/16/16

• 08:30 - Consumer Price Index
• 08:30 - Housing Starts
• 09:15 - Industrial Production

Wednesday, 8/17/16

• 10:30 - EIA Petroleum Status Report
• 14:00 - FOMC Minutes

Thursday, 8/18/16

• 08:30 - Jobless Claims
• 08:30 - Philadelphia Fed Business Outlook

Friday, 8/19/16

• 16:00  - August Monthly Options Expiration

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/16/16

• Before Market Open - Home Depot (NYSE:HD)

Friday, 8/19/16

•  Before Market Open - Deer (NYSE:DE)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks.  I'm still wary of Energy, however if there's a promising setup with a short-term (1-3 day) projected move, I'll take it.  Given the volatility of that sector over the last 18-months, though, I'm reluctant to play anything with a longer forecast.  Watch for continued signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Trading Outlook for the Week of August 8-12

A jobs report that far exceeded expectations saved what had promised to be a down week in all indexes.  Instead, all sectors except Utilities finished higher, with technology leading an extremely robust surge.  The flight from utilities matched a similar flight from the 10-Year Treasury which saw a 5.3% increase in yield on Friday.  Both of these moves signal a renewed confidence in the health of the US economy, although it's prudent to remember that nothing is more whimsical than the confidence level of the average equities trader.

The Technologies sector - and with it, the Nasdaq - continues to shine.  A note of caution is in order there, since it is now trading well above its 20-day moving average.  Be aware that a consolidation will likely follow such a strong upward charge that is now over 6-weeks running.

We're seeing some healthy sector rotation playing out with Financials joining Technology at the head of the class while Health Care and Industrials have slid into neutral territory.  We'll keep an eye on Consumer Staples late in the week since the all-important Retail Sales number will be released on Friday.  Energy, of course, continues to show weakness in the face of continued depressed oil prices.

Thursday and Friday are the big days when it comes to economic news.  We'll be especially interested in the Import/Export numbers in light of the growing strength of the dollar against the British Pound and the Euro.  The Retail Sales and Consumer Confidence numbers will shape our strategy heading into the weekend.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLK - Technology
XLF - Financials

Showing weakness
XLE - Energy
XLP - Consumer Staples
XLU - Utilities

Neutral

XLV - Health Care
XLI -  Industrials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/8/16

• No reports of market significance
  

Tuesday, 8/9/16

• 08:30 - Productivity and Costs

Wednesday, 8/10/16

• 10:00 - JOLTS
• 10:30 - EIA Petroleum Status Report
• 14:00 - Treasury Budget

Thursday, 8/11/16

• 08:30 - Jobless Claims
• 08:30 - Import and Export Prices

Friday, 8/12/16

• 08:30 - Retail Sales
• 08:30 - PPI-FD
• 10:00 - Business Inventories 
• 10:00 - Consumer Sentiment

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/9/16

• After Market Close - Disney (NYSE:DIS)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Financial stocks.  With the sector strengthening, there may be some good dividend plays that also show short-term growth.  Watch for signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Trading Outlook for the Week of August 1-5

The last week of trading in July saw continued strength in the Technology sector, and that carried through to the Nasdaq as a whole.  There's some signs of life coming back into the mid-cap stocks, however across the board the S&P large cap, mid cap, and small cap indexes continue to be flat.  A bit of demand came into the markets on Thursday and Friday, following the dovish Fed announcement that suggests interest rates will remain at their current level well into 2017.

We are still maintaining a long bias into the week ahead, however with the extremely tight range being experienced in all market capitalizations for the last two weeks, be aware that a breakout in either direction is possible.  Only the higher volume on the last two up-days suggests that the breakout could be to the upside.  In the meantime, we'll be keeping our stops close.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long

Sectors

Showing strength
XLK - Technology
XLV - Health Care

Showing weakness
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples
XLU - Utilities

Neutral
XLF - Financials
XLY - Consumer Discretionary
XLB - Materials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/1/16

• 09:45 - PMI Manufacturing Index
• 10:00 - ISM Manufacturing Index
• 10:00 - Construction Spending

Tuesday, 8/2/16

• 08:30 - Personal Income & Outlays

Wednesday, 8/3/16

• 08:15 - ADP Employment Report
• 10:00 - ISM Non-Manufacturing Index
• 10:30 - EIA Petroleum Status Report

Thursday, 8/4/16

• 08:30 - Jobless Claims
• 10:00 - Factory Orders

Friday, 8/5/16

• 08:30 - Employment Situation
• 08:30 - International Trade

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/2/16

• Before Market Open - Proctor & Gambel (NYSE:PG)

Wednesday, 8/3/16

•  Before Market Open - Avnet (NYSE:AVT)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Health Care stocks.  We'll keep our stops very close for several reasons:

• All three market capitalizations continue to show an extremely tight trading range.  Until we see the direction of the breakout, we'll need to remain cautious for a move to the downside.
• The 10-year yield is still trending down, indicating a continued flight to safety.  Weakness in the Utilities sector suggests this flight may be ending however we'd like to see confirmation in the treasury yield before reaching that conclusion.
• This is Employment Situation week, and that adds a measure of uncertainty to Friday's behavior. 
• The Bank of England has their announcement on August 4th, and there will be uncertainty leading into Thursday based on the view they will take regarding Brexit risks.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Apple Beats on Earnings and Revenue, But Is It Enough?

Apple (Nasdaq: AAPL) posted their 3rd quarter earnings after the bell this afternoon, and on the surface, at least, the news sounded good.  They beat earnings by $0.04, and they also beat on revenue by $310 million.  In after-hours trading, shares of AAPL surged as high as 8% before settling back to $103.60.  They also held their quarterly dividend steady at $0.57 per share.

The underlying picture, though, is not quite so rosy.  Their sales were down 14.5% year over year, and their gross margin dropped to 38%.  In fact, their forward guidance for the next quarter includes a gross margin range of only 37.5% to 38%, and their forecast for revenue is up slightly from this quarter, but still well below last year.

International sales contributed to 63% of their revenue this quarter, but sales in China were down 33% from last year.  The Apple troubles in China continue, in fact, not only due to the slowing economy in Asia but also resulting from difficulties with Chinese regulators.  The iBooks and iTunes services were shut down by regulators last April, and in June the Chinese government ordered a halt to iPhone 6 sales due to a patent dispute.  (We'll skip the editorial about the hypocrisy of China arguing about a patent infringement.)  The point is, China was once seen as the major growth market for Apple, but at least for now that market has run dry.

The Services business, including iTunes and Apple Pay, were up 19% year over year, however on a quarter-to-quarter basis, it was essentially flat.  Despite Credit Suisse's forecast of the services business providing over 30% of Apple's revenue by 2020, the reality is that the current growth trends are not supporting that prediction.  With Google and Samsung both entering the payment market with comparable products, the competition faced by Apple Pay is becoming formidable. 

Demand for iPhones, iPads, and Macs appears to have peaked.  The iPhone market is already saturated, and the tablet and personal computer markets are crumbling, at least as far as the average consumer is concerned.  The iPad is still doing fairly well in certain business applications, but when it comes to the average consumer, the phablet is rapidly replacing them.  To that end, with the extremely popular Samsung Galaxy S7 and S7 edge out for 6 months, now, the iPhone 7 (with an expected larger screen offering) is a bit late to the dance.

The question that Apple must seriously entertain is whether or not a change at the top is in order.  CEO Tim Cook has yet to prove that he's capable of driving the innovation needed to keep Apple at the top of the industry.  I've seen an increasing number of analysts state that, in their view, Apple's best days are behind them, and thus far I've seen nothing to contradict that opinion.  There has certainly been no innovation coming from the company since the passing of Steve Jobs.  It may well be that the "next new thing" to come out of Apple will be a new CEO.

A Pause in the Rally Across All Capitalizations

For the entire month of July, we've been treated to extremely encouraging news in the face of the first major stock market rally we've experienced in well over a year.  For over a week, both the Dow Jones Industrials and the S&P 500 posted new all-time highs day after day.  Now that we're well into Q2 earnings season, however, the markets have turned flat and the exuberance is starting to subside.  Let's take a look at the anatomy of the rally separated by large-cap, mid-cap, and small-cap stocks.

Daily Chart of Small, Mid, Large Cap Indexes for July, 2016

These three charts show the month of July in the S&P 600 Small Cap Index ($SML), the S&P 400 Mid Cap Index ($MID), and the S&P 500 Large Cap Index ($SPX).  For those not familiar with the capitalizations, a Small Cap stock is considered one with under $2 Billion in market capitalization, a Mid Cap stock has between $2 Billion and $10 Billion in market capitalization, and a Large Cap stock has over $10 Billion in market capitalization.

At first glance, it appears that all three indexes benefited from the rally.  Each of them started their rally immediately following the Brexit sell-off in late June, and each of them have plateaued over the last two weeks.

From an Elliott Wave perspective, we have completed three very obvious waves in all three indexes.  Wave 1 lasted 4 days in each, Wave 2 lasted 2 days, and Wave 3 lasted 4 days in $SML, 5 days in $MID, and 6 days in $SPX.  From that point to the present, each index has traded flat.

Of the three indexes, though, in only $SML was Wave 3 longer than Wave 1.  Under Elliott Wave theory, we know that Wave 3 cannot be the shortest of the impulse waves.  This means that, assuming this is a true 5-wave impulse sequence, only the Small Cap stocks remain unconstrained to the upside.  Both the Mid Caps and Large Caps, however, are faced with a ceiling, which is the actual height of Wave 3 beginning at the bottom of Wave 4 when that wave completes.  As it stands now, the Large Caps have an upward limit of around 2250 and the Mid Caps around 1615.  We'll need to keep these potential limits in mind once the uptrend resumes and we plan exit strategies for long positions.

All this, of course, assumes that we are in a 5-wave impulse, and not a continuation of the correction that's been ongoing for over a year.  So far, the pattern has not violated any impulse rules.  In fact, it's conforming to them rather nicely.  Wave 2 retraced between 38.2% and 50% of Wave 1 in all 3 indexes, Wave 4 has not (yet) violated the territory of Wave 1, and we're experiencing well-defined alternation between Waves 2 and 4.  As long as Wave 5 doesn't exceed the length of Wave 3 in the Mid and Large Caps, the impulse pattern will be valid.

The caveat, of course, is that we're in the middle of earnings season, and anything can happen here.  We also have a presidential election coming up, and that should add a bit of volatility into the mix as the summer draws to a close.  What could easily invalidate the entire impulse pattern would be a price decline that creates overlap with prior waves, signalling a consolidation pattern, not an impulse pattern.  I would be very concerned if we dropped below the high set on June 8, causing overlap with the prior A-B-C corrective wave pattern, and I would consider the impulse pattern definitively invalidated if we drop below the high set on June 23, just prior to the Brexit vote.  Some purists may argue that the pattern's valid unless we dip into the Wave 1 high in the current sequence, however when analyzing Elliott Waves I find it important to consider the pattern or patterns that completed as we enter the current one.  Continuation patterns can be confusing since they can take so many different forms, and for those of us that change strategies based on whether or not a market is trending, knowing where we are in the cycle is extremely important.

As to the current situation, we have clearly been in a flat corrective pattern for the last two weeks, and the most obvious wave count structure would place this corrective pattern in Wave 4.  Take a look at it yourself, and plan your strategies accordingly.  Remember to include the weekly and hourly charts in your analysis if you're a short-term trader using the daily chart for your primary analysis.

Happy Trading.

GE Offers Promising Outlook for Aviation

General Electric (NYSE:GE) released earnings on Friday, beating EPS forecasts by $0.05 and revenue by $1.74 Billion.  That didn't prevent their stock from taking a 1.8% hit pre-market, however, due primarily to a 2% decline in orders and what they described as a "volatile and slow-growth economy."

The news, however, appears rather bright for the Aviation industries.  GE reported a strong first half of the year in that industry, and is forecasting the remainder of 2016 to remain strong as well.  There were a couple of items that bode well for the airlines, at least according to GE.  They saw commercial traffic growth of over 6% this year, down a bit from last year, but still experiencing a healthy growth pattern.  Additionally, the airplane load factor remains at 80% for the second year in a row, and GE reports over 2 million departures added in the past year.

GE reports, not surprisingly, that jet fuel continues to be deflationary, and is down over 50% over a three-year period.  When you combine the lower fuel costs, increased passenger demand, and a very strong load factor, it's reasonable to expect a healthy year for what has been an oddly depressed airline industry that has been in an Elliott Wave zig-zag and flat pair of corrective patterns for the past 18-months.  (Do keep in mind the Schlumberger warnings of an impending oil supply deficit, however.  If that manifests, it will put an end to depressed jet fuel costs.)

You can see the overall pattern for the airline index in this weekly chart:

Airline Index Weekly Chart

We can see on the chart that the index started a steep uptrend in October, 2011.  It then traced out a very distinctive 5-wave impulse pattern that completed in January, 2015.  Since then, however, it completed a classic A-B-C Zig-Zag pattern, retracing almost 50% of the prior impulse pattern, and it looks like it's starting a possible flat correction now.  This overall pattern appears to be Wave 2 of a larger overall 5-wave Impulse, so once this corrective pattern completes, we can look forward to a very healthy third wave impulse.  Long-term traders should enjoy a very nice 3 or 4 year bull trend in airlines once that wave kicks off.  The way this pattern is trending, though, that may not happen until 2017.

Returning to GE, there were some additional interesting comments related to defense spending.  They forecast it to be flat in 2017 here in the US.  Given the number of industries here dependent upon defense spending, that's a cautionary note that we'll have to carefully watch.  Now, this flat projection may well be due to the number of sizeable contracts that were awarded in 2015 and early '16, so a pause in new contracts is to be expected, but it will be important to watch other companies in the industry to see how this matches their own forecasts and revenue plans.

Interestingly, GE forecasts international defense spending to be up 4% globally (excluding the US.)  That comes at a time when Europe is teetering on recession and facing the unknown threat of Brexit, so that 4% value is likely depressed due to the state of the global economy.  Should the economy heat up, it's reasonable to expect a similar increase in global defense spending, especially at a time when the terror threat appears to be spreading to parts of Western Europe.

With US defense spending flat but international defense spending up, we'll need to watch for companies that have a strong global stake.  These would include Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), and Raytheon (NYSE:RTN).  Fire Support, a defense marketing website includes an excellent list of the top 100 global defense companies for 2015.  While the list is a year old, the major players in this space have not changed.  If you're looking for companies that will benefit from growth in international defense spending, this is an excellent place to start.

From a trading perspective, it looks like there will be some short-term potential plays in the airlines, but be aware that there should be at least one more downward wave in the correction.  Longer term players can look forward to growth of a bit over 200% in the airline index from 2017 to 2021 if the Elliott Wave pattern holds true. For defense contractors, look more for trades in companies servicing overseas orders.  Just be aware of the impact the strong US dollar will have on their exchange rate and earnings forecasts. 

Happy Trading.

Trading Outlook for the Week of July 25-29

We close out the month of July in the coming week, following four solid weeks of strong performance.  The week ahead sees the July FOMC meeting, the GDP report, and another week of key earnings reports.

We're starting to see a bit of a pause in the upward movement across all capitalizations, and from an Elliott Wave perspective, all but the Nasdaq Composite appear to be in a fourth-wave consolidation.  The strongest plays for the week appear to be in either the Nasdaq or in the Large Cap stocks.  Both Mid and Small Cap stocks remained in a horizontal consolidation pattern, so we'll avoid those until their trends resume.

The three strongest sectors closing out the week are Technology, Utilities, and Health Care, so for long trades we'll be looking primarily in those sectors.  That the Utilities sector surged on Thursday and Friday is an area of concern since that indicates a renewed flight to safety.  The 10-Year Treasury Yield declined 1.87% this week after a large spike up last week.  We'll keep an eye on this throughout the week as well, since a decline in yield will further support the concept of a flight to safety.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - No Trades
Small Caps - No Trades
Nasdaq - Long

Sectors

Showing strength
XLK - Technology

XLU - Utilities
XLV - Health Care

Showing weakness
XLB - Materials
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples

Neutral
XLF - FinancialsXLY - Consumer Discretionary

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/25/16

• 10:30 - Dallas Fed Manufacturing Survey

Tuesday, 7/26/16

• 09:00 - S&P Case-Shiller HPI
• 10:00 - New Home Sales
• 10:00 - Consumer Confidence

Wednesday, 7/27/16

• 08:30 - Durable Goods Orders
• 10:00 - Pending Home Sales Index
• 10:30 - EIA Petroleum Status Report
• 14:00 - FOMC Meeting Announcement

Thursday, 7/28/16

• 08:30 - International Trade in Goods
• 08:30 - Jobless Claims

Friday, 7/29/16

• 08:30 - GDP
• 08:30 - Employment Cost Index
• 09:45 - Chicago PMI
• 10:00 - Consumer Sentiment

Earnings Reports Watched for Sector or Market Significance

Tuesday, 7/26/16

• Before Market Open - Caterpillar (NYSE:CAT)
• Before Market Open - 3M (NYSE:MMM)
• Before Market Open - United Technologies (NYSE:UTX)

Wednesday, 7/27/16

•  Before Market Open - Boeing (NYSE:BA)

Thursday, 7/28/16

•  Before Market Open - Ford (NYSE:F)

Friday, 7/29/16

• Before Market Open - UPS (NYSE:UPS)

Summary

Our long positions this week will be limited to large caps and Nasdaq stocks, primarily in Technology, Utilities, and Health Care.  We'll keep our stops very close for several reasons:

• Both UNP and SLB provided strong evidence of potential problems in several key industries.  This may take the wind out of the strong bullish sails we've experienced for four weeks.
• Strength in the Utilities sector and a slight decline in the 10-year yield are showing signs of a renewed flight to safety.
• There are major companies reporting earnings throughout the week.  This will add a measure of unpredictability to the markets.
• FOMC reports on Wednesday.  While we don't anticipate any major announcements, just the tone and language of the announcement can generate unforeseen shifts in market behavior.
• Mid-caps and Small-caps are experiencing consolidation, and both Large-caps and Nasdaq are showing signs that they, too, will enter a similar phase.

As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

UNP Reports Negative Economic Impact Due to Low Oil Prices and Strong US Dollar

One of the companies we closely follow for their insight into the overall health of several sectors is Union Pacific Corporation (NYSE:UNP), headquartered in Omaha, Nebraska.  As one of the larger transportation companies in the US, their revenue is directly dependent up the health of other industries, and they provide extensive candid detail into each of those areas in their quarterly earnings calls. 

UNP reported earnings before the open on July 21, and their ensuing earnings call painted a less than optimistic picture of the overall health in a variety of sectors.  There are two driving factors associated with declines and pressures they are reporting: low oil prices and the strong US dollar.  Said CEO Lance Fritz, "A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year."

For UNP, the only area of growth experienced this year was in Agriculture shipments (up 2%), however that growth was primarily driven by severe harvest delays in South America and by a high demand for corn in Mexico.  Had South America not experienced agriculture problems, even grain shipments would have been down for the year.

The remaining segments were all doom and gloom.

• Total volume was down 11%.
• Carload volume declined by double digits in coal, intermodal, and industrial products.  (Intermodal refers to shipments of the large containers typically carried by rail but then transferred to ship or truck.)
• Automotive was down with finished vehicle shipments declining 10%.

The strong US dollar continued to hurt exports with chemicals, plastics, and fertilizer all down for the year.  With inflation at or near zero in Europe and with the US likely to raise interest rates either at the end of 2016 and most certainly several times in 2017 and 2018, there is little likelihood of any weakening of the dollar for the foreseeable future.

Low oil prices continue to have a significant negative impact.  Rail shipments in that industry were down 23% due to low natural gas prices coupled with high inventory levels.  Lower international coal prices (due to the strong dollar) also contributed to that decline.

The other impact low oil prices continues to have is in the chemical and metals industries.  Mineral volume declined 32% and Frac Sand declined 43%.  Metal (aluminum, steel, etc.) declined 11% due to reduced shale drilling.  Expect to see this ripple through other industries as earnings continue to report through the quarter.

The flooding in Texas had a severe impact on construction shipments, down 4%.  Intermodal shipments (also impacted by that flooding) were down 16%.  We can expect to see that ripple through the trucking and shipping industries as well. 

The forecast for the remainder of the year was not very encouraging, either.  UNP forecasts agriculture to remain strong since there are expectations for a strong US crop harvest and there is continued weakness in South America.  Automotive shipments should also see a boost as the 2017 models come out, and the industry is currently trending well below the projected 17.5 million vehicles for the year.  There are also expectations of a boost in construction and in the housing market as the year progresses. The rest of the industries, however, are still expected to experience headwinds.

• UNP still expects the pressures due to low oil prices and low natural gas prices to continue. 
•  They expect drilling to continue to decline, and with it the demand for metals and chemicals will also decline.
• Intermodal shipment is also expected to experience pressure due to the impact the strong dollar is having on US exports.
• The economy in Europe and China remains weak, adding to global pressures on prices and demand for goods.

This is the first major earnings transcript we've seen this quarter that paints such a gloomy picture of the first half of 2016, however UNP is typically right on the mark in their assessment.  Consider the impacts they are citing in related industries when reading their report, since the effects will be readily apparent as other prominent names report earnings over the next two quarters.

Happy Trading

Factor Market Action, Sector and Industry Performance, and Time of Day Into Your Trade Entries

When listening to the pundits describe what happened today in "The Market," it's easy to come away with a misconception that there is such a single entity that can be so easily categorized.  That, unfortunately, is a very dangerous trap, especially for a beginning swing trader.  There are numerous factors that influence a stock price at any given time, and for those of us that are attempting to capitalize on short-term (typically less than a week) swings in prices, understanding those forces is most beneficial to the health of our trading accounts.

The Market

Dow Jones Industrial Average

When the evening news armchair pundits refer to "The Market," quite often they are simply talking about the Dow Jones Industrial Average.  What's misleading about this, however, is that it represents only 30 large-cap stocks, the performance of which result in a price-weighted composite value tracked in just about every daily newspaper in the nation.  At its inception in 1885, it was intended to represent Industrial stocks, however in recent years the stocks that make up the average now span a wide variety of industries including fast food (McDonalds,) consumer electronics (Apple,) or retail (Wal*Mart.)  While widely tracked, it's not the best indicator of market health for the swing trader.  Rather, there are several others that I watch much more closely:

S&P 500 Composite Index

As the name implies, the S&P 500 is a market-weighted index of 500 large-cap stocks that was designed to be a much better gauge of the risk/return characteristics of the large-cap universe as a whole. The movement of this index is typically far more indicative of the health and performance of the large cap stocks than is the Dow Industrial Average.

Nasdaq Composite Index

This index is a great one to watch if the stock you are trading is listed on that exchange.  The characteristics and performance of Nasdaq listed stocks are subtly different from those listed on the NYSE, and when you're engaged in short-term trading, subtle differences are often the edge you're looking for.

S&P 1500 Composite Index

This is an often overlooked Index, but I do follow it.  It includes all of the stocks in the S&P 500, 400, and 600 indices, and it covers 90% of the market capitalization of stocks.  If your stock is not one of the S&P 500, this index will provide a better view of the pressures influencing price than will that specific index.

NYSE Composite Index

For broad market depth, this one's the grand-daddy of them all.  It includes all of the stocks listed on the New York Stock Exchange, and is perhaps the best indicator of overall broad market performance.  If the stock you're trading is listed on the NYSE and is not a large-cap stock, this index will give you a much better feel for market pressures than will any of the other indices listed above.

Sectors and Industries

Stocks are categorized into 9 broad S&P sectors.  (Well, originally 10, but when the S&P created their SPDRs, they combined two of them.)  These sectors are

• Materials (XLB)
• Energy (XLE)
• Financials (XLF)
• Industrials (XLI)
• Technology (XLK)
• Consumer Staples (XLP)
• Utilities (XLU)
• Health Care (XLV)
• Consumer Discretionary (XLY)

Each of those sectors is then sub-divided into industries.  For instance, there are 10 industries in the Materials sector, including such groups as "Paper", "Gold Mining", and "Aluminum."

Knowing which sector and industry to which your stock belongs is essential.  Alcoa, for instance, is in the Aluminum industry within the Materials sector.  This is important information since on a day-to-day basis, the performance of the industry and sector has a far greater impact on the price movement of the stock than does anything going on with the company itself, barring a major news release.  

Time of Day

Believe it or not, the time of day in which you enter a trade can have a significant influence on your prospects.  This is especially true for those of us that work full-time jobs and cannot watch the market unfold, carefully selecting our exact point of entry.  The trading day follows a rather natural rhythm, however, and you can plan for it.

9:30 to 10:00 - The half-hour following market open is extremely volatile and often chaotic.  There's no sense, yet, of the direction the market will take, and it's not uncommon for the market to reverse direction approaching that 10:00 hour before settling into where it wants to trade for the day.  I avoid opening new trades in the first half-hour of trading since it's been my experience that it increases my overall risk of a bad trade.

11:30 - The European market close occurs at 11:30 Eastern Time.  If there are major events going on in Europe, I'll keep an eye on market behavior starting around 11:15.  Quite often it can give you a feel for how the US markets will behave as we approach our own close.  I only avoid trading in this time-frame, though, if it's extremely hectic in Europe based on major news events.

12:00 to 14:00 - Many traders are taking lunch in this time-frame, and trade volumes tend to drop.  Since I'm not trading based on intraday patters, however, I tend to ignore that fact.  A day-trader needs to be aware of it, but since I'm holding positions for 1 to 5 days on average, I don't do anything special here.

15:30 to 16:00 - Volatility will start to increase again in this period as we approach the close.  I tend not to open new positions in this time-frame, both because of that volatility (although most of the volume occurs in the final five minutes) and because, if the trade didn't trigger earlier in the day, then the signal that generated that setup did not have the momentum I want to move it quickly enough and far enough to be profitable.  The longer I go without a fill, the more likely I am to cancel the trade, and my experience is that, for the strategies I trade, a fill this late in the day will likely result in a loss.

Putting it All Together

For the strategies I follow, and indeed for the strategies that comprise successful swing trading in general, we want the most factors moving in our favor as possible.  That means that, if I'm opening a new position, I want the following:

• A strong setup signal with multiple confirming signals on the chart.  (The type setups I look for will be covered in another post.)
• The broader market moving in the direction of our trade.  Which index I'll use for this when setting up the entry order will be one of the indices listed at the start of this post, based on the index in which this stock best fits.
• The sector moving in the direction of our trade.
• The industry moving in the direction of our trade.
• The time of day being between 10:01 AM and 15:29 PM Eastern Time.

The trading platform I use allows me to setup all of those conditions when creating my order ticket, which is ideal since I work a full time job and can't manage the trade in real-time.  Quite often, this combination does not come together in time for an entry at the price specified.  That's fine.  There will always be another opportunity for another trade tomorrow.  Protecting capital is paramount, so there's no reason to enter a trade unless you've lined up as much as possible in your favor.  Give yourself that edge.  You can be certain that the person or computer on the other side of your trade is doing the same.

Happy Trading.

Consumer Staples Sector Continues Slow and Steady Growth Through 2016

There are four consistent destinations whenever the economy degrades and investors seek a "flight to safety."  Bonds typically lead the charge, and you can clearly see investor sentiment by watching the fluctuations in the 10-year bond yield.  When the yield drops, you know investors are fleeing stocks and heading for safety.

Gold is another commodity that tends to benefit from a downturn in the economy, although using it as a flight to safety is a bit precarious.  Despite some very misleading TV commercials by a former presidential candidate, gold is not the safe-haven that urban legend would lead us to believe, yet there is still some correlation to gold prices and overall investor sentiment.  It's not one I watch, however, since gold is influenced by numerous other factors beyond just investor sentiment.

Within the equity market, the Utilities Sector is a traditional safe-haven as well.  Known for higher than average dividend yields coupled with consumer demand regardless of the state of the economy (after all, you still need water, gas, and electricity even in a recession,) investor sentiment clearly drives the overall performance of this sector.  When investor sentiment declines, the Utilities Sector rises, and vice versa.

The fourth safe-haven is the subject of tonight's study, and that's the Consumer Staples sector.  The stocks that comprise this sector are those that produce and sell the products we use on a daily basis. Products such as tooth-paste, toilet paper, soft drinks, snacks, etc.  They're considered the items we cannot do without, and thus are not impacted to a great extent by a downturn in the economy.  The sector includes ten industries: Tobacco, Food Products, Nondurable Household Products, Personal Products, Distillers and Vintners, Soft Drinks, Brewers, Tires, Food Retailers and Wholesalers, and Drug Retailers.  Some of the stocks include big names like Wal*Mart (WMT), Altria (MO), and Philip Morris (PM).  Even when the economy turns south, they are names that do relatively well compared to the market as a whole.

What we have seen thus far in 2016 is a slow-and steady gain in the sector as a whole.  Here's the daily annotated chart, unadjusted for dividends.

Consumer Staples Unadjusted Daily Chart

Through all of 2016, the entire progress of the sector has been a slow and steady upward climb.  Even in the brief pullbacks in April and May, XLP (the S&P Consumer Staples SPDR) continued to make higher highs and higher lows.  The Great Brexit Panic on June 24th and 27th took the sector down a bit - still to a higher low - while the rest of the market sought the highest bridge from which to leap.  It's interesting to note that the low reached on June 27th found support at the lower boundary of the Andrews Pitchfork that has defined all of 2016.

Also of note is that, on June 30th with the market as a whole rebounding, XLP soared through the overhead resistance formed by the prior quarter's triple top.  Since then, despite growing consumer and investor confidence, the sector has continued to rise at a steady pace, neatly following the center line of that same Andrews Pitchfork.

The strong retail sales numbers released last week will provide an added stimulus to many of the stocks in this sector.  Industrial Production and Manufacturing also got a boost on Friday, rising to the highest level in 2016 (although it's been in negative territory since August 2015.)  When you consider both reports, the outlook is very positive for both Consumer Staples (which we must buy no matter what) and Consumer Discretionary (which only really benefits when the economy is doing very well and consumer sentiment is high.)

With the exuberance of the last week, XLP under-performed the S&P 500, which is to be expected.  Remember, it's a safe haven, not an aggressive growth sector, so as investor confidence grows, XLP begins to lag the market as a whole.  That lag, however, still provides excellent opportunities.  The sector as a whole shows a modest 2.86% dividend yield, and the Food, Beverage, and Tobacco industries have a 3.11% yield. (Tobacco leads that charge with a 4.0% dividend yield.) With the sector showing consistent steady growth, even when it is being ignored, the steady income and steady growth is a nice combination.

Keep an eye on both Consumer Staples and Utilities.  For those that wish to remain in equities during economic downturns, they typically provide the safest havens among the S&P sectors.  For traders, they often provide good, short-term swings, while for the longer term investor, they provide steady income with modest growth. 

You will find the details of each of the industries in the sector and all companies in each of the industries on Bloomberg.com's Consumer Staples Sector page.

Trading Outlook for the Week of July 18-22

Before we get into the week ahead, let me provide a brief overview of how my preparation progresses over each weekend.

1. I start with an overview of the major indices.  These charts contain a 7-period Simple Moving Average, a 30-period Exponential Moving Average, and the 14-period Slow Stochastic %K line.  That's it.  The trading bias is based on this:
• Long Only if SMA(7) > EMA(30) AND %K > 50.
• Short Only if SMA(7) < EMA(30) AND %K < 50.
• Any other combination, I'll either stay out of the market or stick to one or two day duration trades based on the direction the SMA(7) is headed.
2. I maintain a chart in Excel that shows the weekly percentage change for the S&P 500 and each of the S&P sectors.  That chart is updated Saturday morning, and if my trading bias is long, I'll pick the 3 best performing sectors for the week.  If the trading bias is short, I'll pick the 3 worst performing sectors for the week.
3. I will then run my various trading setup scans focusing on the sectors found in #2.  My scans primarily look for pullbacks of stocks that have been trending, or they look for stocks that are range-bound and nearing one of the range extremes.
4. I then annotate the charts found in #3 and save them in my watch list.  The stocks I'll trade on Monday are selected Sunday night, although the actual orders will be placed before I leave for work on Monday after I've seen the movement of stocks in Asia and Europe and have also seen the direction US Market Futures are taking.  Since all of my trading is short-term, I want to be trading with the trend, and I want the market setting up to move in that same direction for the day. 
5. #3 and #4 is repeated nightly, searching for the stocks to trade the following day.

 So with that in mind, let's take a look at the trading outlook for the week of July 18 to July 22.

Trading Bias

Dow Jones Industrial Average - LONG.
S&P 500 - LONG.
Russell 2000 - LONG.
NYSE All Issues - LONG.

In all four cases, however, the %K is at an extreme high position and as of Friday began trending down.  While the bias is long, due to the risk being called out by the %K, we'll keep our stops very tight.  Risk of a pullback in all four indices this week is near extreme.

Strongest Sectors

The three strongest sectors beating the S&P 500 for the week were:

1. Materials Sector (XLB)
2. Financial Sector (XLF)
3. Industrial Sector (XLI)

Two other sectors beat the S&P 500 and we'd consider a trade there if the setup is strong.  Those are the Energy (XLE) and Technology (XLK) sectors.

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/18

• 10:00 - Housing Market Index
• 16:00 - Treasury International Capital

Tuesday, 7/19

• 8:30 - Housing Starts

Wednesday, 7/20

• 10:30 - EIA Petroleum Status Report

Thursday, 7/21

• 8:30 - Jobless Claims
• 8:30 - Philadelphia Fed Business Outlook Survey
• 10:00 - Existing Home Sales

Friday, 7/22

• 9:45 - PMI Manufacturing Index Flash
• 13:00 - Baker Hughes Rig Count

Earnings Reports Watched for Sector or Market Significance

Thursday, 7/21

• Before Market Open - Union Pacific (NYSE:UNP)
• After Market Close - Schlumberger (NYSE:SLB)

Friday, 7/22

• Before Market Open - General Electric (NYSE:GE)
• Before Market Open - Honeywell (NYSE:HON)
• Before Market Open - VF Corp (NYSE:VFC)

Summary

We'll start the week with a long bias, trading stocks in the Materials, Financial, and Industrial sectors primarily.  We'll keep our stops tight due to the extreme level of the Slow Stochastic indicator and will shift to a very short-term (one or two day) strategy if it drops below 50.  While there's interesting economic news at the beginning of the week, we'll be especially focused on Thursday and Friday with major market indicators being released and earnings releases from five of the key companies we follow for overall market and sector analysis.

Intuit In Strong Uptrend But Wait for Pullback

Intuit (NASDAQ:INTU), the small business financial services provider that is better known to consumers as the maker of Quicken and TurboTax has been in a protracted uptrend since August 25, 2015. The better part of 2016 has been spent in Wave 3 of the 5-wave impulse, although all signs point to the stock reaching the end of that wave in the short term.

INTU Daily Chart

When Intuit reported their Fiscal Q3 earnings on May 24th, they posted a very strong beat by $0.22 per share.  Equally important, they raised guidance for the remainder of the year.  With news that Intuit had little to no European and British exposure, however, the stock surged following the Brexit crush in late June.  Since June 27th, in fact, today's 0.36% decline is the only down day they've experienced.

Turning to the Elliott Wave analysis, the stock appears to be nearing the end of Wave 3.  There have been 5 well-defined sub-waves, and as of today Wave 3 has exceeded the height of Wave 1.  With declining volume and declining daily ranges, the stage is set for a pullback that will mark Wave 4.  Now, here it's important to remember the "alternation rule."  Wave 2 and Wave 4 must be alternates either in duration or depth.  Since Wave 2 retraced over 65% of Wave 1 in a correction that lasted 3 months, it's likely that Wave 4 will be a flat correction that is relatively short.  Wave 4 corrections tend to stall at the top of the last sub-wave iv, and in this case that would be less than the 38.2% correction line and would land around $109.  There is also a pretty strong support line at that level, which adds to the probability of a shallow reversal.

Wave 3 could have some life remaining, but it's not likely given that the stock has gone vertical in the past two weeks.  The separation between the low and the 10-day simple moving average is a major warning sign.  It's extremely likely that, as part of the next move, INTU will pull back not only to the 10-day SMA, but likely as far as the 30-day EMA (Exponential Moving Average) or even the 50-day.  A bullish reversal candle - preferably a long range day that closes near the high and leaves a lengthy shadow down to the low - near the 30 or 50-day averages would be our cue to enter a long position. 

INTU went ex-dividend on July 8, and paid $0.30 per share, so we don't expect another dividend risk until early October.  Be aware, however, that INTU releases their FQ4 earnings on August 18th after the close.  We may still be in the midst of Wave 4 at that point, so watch for the earnings release to be the potential catalyst that launches the stock into Wave 5.  The price targets for Wave 5 range from $126 to $137, assuming Wave 4 completes around $109.  With Wave 5 being a 5-wave impulse itself, there will be several opportunities to hop in and out of INTU while that wave progresses.

One note of caution is in order for those not familiar with Elliott Waves but who are reading these reviews. Wave analysis is intended to tell us where we are in either a trend or a correction.  Understanding the wave counts is a great example of 20:20 hindsight.  They are great at telling us where we have been.  In and of themselves, Elliott Waves do not give us good entry signals, however, because the waves are not necessarily predictive in nature.  They do conform rather consistently to certain Fibonacci ratios, and from there we can set price targets, however there's a huge difference between a projected target (used for analysis) and where a stock will reverse in reality.  For valid entry and exit points, we must rely on other chart analysis techniques (e.g. support and resistance lines, candle patterns, moving averages, etc.)  We use the Elliott Waves to define where the stock is in the overall accumulation and distribution life-cycle, but we use other signals to determine when to enter or exit a position. Hopefully, that concept becomes increasingly clear as we review additional trading techniques.

Happy Trading.

DOW and S&P Surge to New Highs But Hold the Champagne For Now

Two of the major indices, the Dow Jones Industrial Average and the S&P 500, surged to record highs today, closing at 18,347 and 2,152 respectively. While the overall market reaction since the swing low on 6/27/16 has been outstanding, and the chart looks very good from a technical perspective, we'd be remiss if we didn't take a step back for a moment to consider the entire landscape.

Dow Jones Industrials Daily Chart

The Chart

Let's start with the Chart. We've clearly pushed through overhead resistance with a vengeance.  Yesterday we plowed through short-term resistance that formed in April, and today we never looked back, breaking through resistance that dates back to May of last year.  From an Elliott Wave perspective, this up-thrust is showing clear impulse signs, both in the current pattern and in the longer pattern that started back in late June.  A very well-defined Wave 1 completed in April, and another well-defined A-B-C flat correction completed June 27 following the Brexit vote.  Since then, we appear to have completed sub-waves i and ii with wave iii of Wave 3 in progress.  If those patterns play out, there's a lot of good news ahead since wave iii has a projection of 18,645, and wave 3 could top out around 19,750.  That, however, requires a lot of optimism, and a lot of chips to fall into place in the world economy, and I'm not ready to suggest that those levels are in range at the moment.

The single item of concern on the chart right now has to do with volume.  It's been declining since the Brexit vote, and that could suggest a lack of commitment on the part of buyers. To push this market higher, we need demand to heat up, and so far - even today - volume is sitting well below it's 200-day average.

Brexit

I'm hearing a lot of talk that today's surge is due to Brexit fears dissipating.  That may be true, especially with news that the issue of the next Prime Minister in the UK has been settled, however it's decidedly premature to dismiss Brexit altogether.  At some point, probably this quarter, Theresa May will invoke Article 50, setting the stage for the Brexit negotiations to begin in earnest.  The uncertainty that will generate is going to impact the global markets despite our pushing the issue to the back-burner for now.

Japan

Another explanation I've heard today is that there's optimism over the announcement of another Japanese stimulus.  While that's certainly good news given the state of the Japanese economy, we've been here before multiple times over.  The Japanese economy has been at death's door for several years, now, and another stimulus without a fundamental shift in the demand for Japanese exports is not going to provide much of a boost.

US Economy

The encouraging jobs report last Friday coupled with today's news that annual growth appears to be 2.4% is greatly reducing the fear of recession looming in the next twelve months.  There's also some encouraging indications that non-residential construction is increasing, and we may even start to see a burst in housing starts.  If we continue to add jobs at the rate seen in June, we'll likely see a boost in consumer confidence.  All of this is great news for the US Economy as a whole, although I'd still like to see a boost in hourly wages, as well as a significant jump in the Labor Force Participation Rate.

Looming over the US Economy, though, is a new concern that interest rate hikes could once again be on the table.  As better data start to emerge, the potential for a rate hike in September increases, and as that starts to gain traction we'll see an impact in the overall market. 

Also looming large is the strength of the US Dollar as well as the resumption in the bear market for Oil.  The dollar will continue to impact our exports and will continue to put negative pressures on earnings for companies with exposure overseas (i.e. most of the S&P 500.)  The resumption of oil declines continues to impact drilling and exploration, which in turn impacts the suppliers of that industry.  These headwinds will continue likely through the remainder of the year.

US Elections

What's still ahead of us is all of the uncertainty surrounding the US Elections.  Neither presidential candidate is anti-business, so from that perspective it's not likely that the Presidential election (or campaign) will be a drag on the economy.  The Senatorial Race, however, is a different story.  Control of the Senate is up for grabs in this election, and with it, the balance of power in the Supreme Court.  A significant shift to the left in those two institutions will have a definite impact on the market as investors and traders seek to adjust to the new dynamic.  Expect the Senatorial Race to add a measure of uncertainty as we enter the 4th Quarter.

The Bottom Line

The bottom line is, there are excellent reasons to celebrate the records set today.  There are also excellent reasons to be very cautious in our trading as we explore this uncharted territory.  There are some significant downward pressures that have yet to be addressed.  Until they are, I recommend keeping the cork firmly sealed in that champagne bottle.  Remember, markets never move in a straight line.  Eight of the last ten trading days have been up, and over half of them have been up with very wide trading ranges.  Expect the bill for that upward movement to come due in short order.

Are the Airlines a Value Play? Alcoa Suggest They Are

Parsing through Alcoa's (NYSE:AA) earnings call, several items caught my attention as being inconsistent with what we're seeing in the charts.  For longer term investors, the clues provided by AA suggest that the airlines industry may be a hidden value gem with serious growth potential over the next 18-months.  Take a quick look at the Airlines Industry Index weekly chart (XAL) and you'll see that, after a very nice run that started in early October, 2011, the entire industry entered a correction in January 2015 and that correction has been in progress ever since. 

XAL Weekly Chart

The industry did find support at its 200-period moving average.  That's especially significant because it is a long-term level that large institutions and mutual funds track.  They not only use it to determine if a long-term investment is in an uptrend (above its 200-period) or downtrend (below the 200-period) but they will also use that level to place automated buy or sell orders.  Remember, only the large players have sufficient capital to move the price, so when you see an industry like this bouncing off its 200-period average not once but three times, you can be sure that the major investment firms are buying at that level.

In their earnings call yesterday, Alcoa told us that large commercial aircraft deliveries were down in the first half of 2016.  While that sounds like a negative, it really isn't.  There's an oversupply in the market right now, with Airbus reporting that they have 36 wide-bodies sitting idle just waiting for engines.  This is also a transitional period within several of the major providers as airlines are adjusting their fleets between narrow and wide-body aircraft.  Read some of the trade press exchanges between Airbus and Boeing for more insight into that tug-of-war.

Alcoa also referenced a "careful ramp up of new models" and lower orders for legacy technology.  This is due to a shift within the industry to new jet engine technologies that experienced some significant technical problems in the first half of the year.  Those problems at this point have been overcome, however, and the forecast through 2017 is for double digit growth.

Most telling of all is a single line in the Alcoa slide presentation that accompanied their earnings call.  They said, "Airline profitability is at an all-time high."  Now, as a major supplier of product within that industry, Alcoa would be in a great position to know the inside scoop.  The charts for the airlines are all in correction mode, oil and fuel prices remain depressed, and the International Air Transportation Association (IATA) continues to report strong passenger demand into 2016.

This divergence between the stock trends and the underlying industry data suggest that the airline industry as a whole may be undervalued.  Delta Airlines (NYSE:DAL) reports earnings before the open this Thursday (July 14) and we will be closely monitoring their earnings call for confirmation of Alcoa's assessment.

The other major players that we'll want to watch are General Electric (NYSE:GE) reporting July 22nd, and Boeing (NYSE:BA) reporting July 27th.  GE is a major jet engine supplier and Boeing, obviously, is one of the major aircraft manufacturers.  Remember, it's not their earnings that we're interested in, per se, but rather their assessments of the overall industry. 

By the end of July, we should have a very good idea as to where the airline industry is headed in 2016 and the first half of 2017.  If Alcoa's assessment is accurate, however, it would appear the industry is number one on the runway and ready for takeoff.