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.

Home Builder Confidence Weaker; Supply Side Still an Issue

The National Association of Home Builders/Wells Fargo Housing Market Index missed consensus expectations by two points, slipping to 59 against the Bloomberg projection of 61.  The index had held steady at 58 for several months before leaping to 60 in June.  While an index above 50 shows that builders are optimistic about single-family housing, there are still some underlying issues in the industry that are keeping that optimism in check.

The ratio of new homes to resold homes has dropped to 1.2:1 from a high of 2:1 in the 1970s.  There are numerous factors involved, however as more and more homeowners exit an inverted status that resulted from the real estate crash, that ratio will likely drop even further.  Home sales and housing prices have increased dramatically in recent months due to the continued low interest rates.  This will increase pressure on the industry when rates finally start to normalize, although at this point we're likely looking at mid-2017 before there's any change of significance to the 30-year.

According to Ed Brady, chairman of the housing market trade group, “We are still hearing reports from our members of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor.”

Supply side problems have been a consistent theme throughout 2016.  Fannie Mae Chief Economist Doug Duncan lamented in February, "The supply from the builder perspective is just not back to normal. It's up from last year, but it's still below what long-term demographics would suggest, particularly in the lower price points of housing."

Not all regions have fully recovered from the housing crisis, and underwater mortgages coupled with long foreclosure timelines continue to add pressure to the overall supply side of the equation.  With demand continuing to rise, housing prices will also continue to experience a steady increase.  That will aid homeowners still struggling from upside down mortgages, but it certainly will not assist new home builders.  Add the prospect of interest rate hikes in 2017 to the mix, and my expectation is a weakening of the overall Home Builders Index as 2016 progresses.

All of this is good news for the home improvement industry, of course.  Companies like Home Depot (NYSE:HD) and Lowes (NYSE:LOW) will continue to benefit as homeowners choose to maintain and refurbish their properties rather than trade up to new properties.

Housing Starts are released tomorrow at 8:30 AM EDT.  That report should paint a more complete picture since it deals with the actual start of construction as well as the actual number of new permits in flight.  Consensus estimates for Housing Starts is 1.170 million, up from 1.164 million, and for Housing Permits it's 1.150 million, up from 1.138 million.  It's important to note, though, that the rate of new permits has been weakening year over year, adding to the overall struggles in this industry.

Keep an eye on the performance of these three numbers (Housing Market Index, Housing Starts, Permits) over time.  They each have a direct impact on the overall performance of the stocks in the Home Improvement Retailers Industry.  While we, as short term traders, do not focus on the fundamentals, knowing the overall pressures on the stocks in a particular industry does give us that slight edge we need over the competition.

Happy Trading

NASCAR's Attendance Wanes as Baton Is Passed to New Generation

Watching a NASCAR Sprint Cup race on TV paints a very grim picture.  The stands, even in the most hardcore raceways, are typically at least half-empty.  Races at Bristol (a track that once boasted 55-consecutive sell-outs) now struggle to fill half of the 160,000 capacity stadium.  Today's race at Loudon, NH was another prime example where it appeared that two out of every three seats was empty.  Faced with the negative publicity of declining attendance, NASCAR stopped publishing attendance records in 2012, so we'll never know the official totals.

Analysts have been searching for answers since the decline started in the 2008 recession, and when it comes to TV viewership and in-person track attendance, there's a lot of credence to what they are claiming.

• Many of the familiar big-name drivers are no longer racing.  Certainly the semi-retirement of Wild Bill Elliott - a 16-time winner of the Most Popular Driver award - hurt viewership, as did last year's retirement of Jeff Gordon, another fan favorite.   Still, with the popularity of some of this year's rookies and the extremely high popularity of fan-favorite Danica Patrick, the changing of the racing guard is a minor part of the overall story.
• Cost is often cited as the primary reason attendance is down, although the price of tickets isn't the actual problem.  The cost of travel to the oftentimes very remote track locations, and lodging in and around the tracks have skyrocketed.  Even the most die-hard fans have had enough and have significantly cut back on the number of races they attend.  That's not conjecture, it's based on fan surveys that reveal a consistent downward trend.
• TV coverage has increasingly become three-hours of commercials interspersed with a few laps of racing.  In today's coverage on NBC, as a prime example, 3 of the cautions occurred while on a commercial.  The picture-in-picture NBC uses during commercials late in the race mitigates it some, however without audio you've really no idea why the caution came out or what drama is occurring on the track to cause it.  Commercial TV is rapidly becoming the bane of all sports, not just NASCAR, and the media that once vaulted professional sports to coveted positions will ultimately cause their downfall.
• The average NASCAR fan is aging, and the Millennials are not embracing the sport in a traditional fashion.  By "traditional," we mean they are not interested in attending in person, nor are they interested in watching the sport on TV.  More on that later, however, as it doesn't tell the full story.
• Ever-changing rules and equipment packages are driving away many of the hard-core fans.  Most - if not all - of the changes are coming via consultation with the drivers, but it would behoove NASCAR to remember that it's the fans, not the drivers, that pay for the sport.  If the fans don't like the changes, how thrilled the drivers may be with them is irrelevant.  A great example of that is the fiasco that was this year's All-Star race.  The format was designed primarily by Brad Keselowski, but required a degree in advanced statistical analysis to understand what was going to happen next.  The fans hated it, and the never bashful Tony Stewart vented his frustration with the format on national TV.
• The at-track experience was changed to the detriment of the fans.  A single merchandise tent has replaced entire midways of souvenir haulers, and much of the pre-race entertainment such as the popular Sprint Experience and Fox's NASCAR Raceday TV stage have likewise been eliminated.

Clearly, NASCAR has some soul-searching to do, and with the contract with Sprint expiring this year, that soul-searching had best occur quickly.  NASCAR is hoping to make a sponsorship announcement this fall, although they've started circulating the thought that there might be multiple sponsors for 2017, not just one.  Attendance and TV ratings cannot be helping the negotiations any.

This brings us back to the Millennials.  Certainly, they are the future of any sport, not just NASCAR, which means a different form of engagement as well as different measurements for success are required.  As an example, Fox Sports 1 reported a 2.27 rating for adults over 50, beating even "Game of Thrones" for that demographic.  On the flip side, however, they only experienced a 0.71 rating for adults 18 to 49, which turns out to be a fourth place tie with "Keeping up with the Kardashians." 

That doesn't mean, however, that Millennials are not following the sport.  Thus far this year, they've had over 92 million fan engagements on sites like Twitter and Facebook.  They've also had over 2 billion social impressions, a measure of how many times specific content has been viewed.  NASCAR is also expanding the amount of streaming content live during a race, including options to dynamically switch to various in-car cameras throughout the race.  Options to stream content on mobile devices are now available and becoming widely accepted.

NASCAR is also trying to increase fan participation.  At a couple of events, for instance, they held a red carpet introduction for the drivers with fans - including a lot of kids - packed along the runway.  Drivers shook hands with the fans and tossed out souvenirs (typically hats or t-shirts) as they walked the carpet.  It's a great idea, and does wonders for promoting the sport with the younger generation.

The question remains, will it be enough?  Those empty seats are depressing for even the most ardent fan, and at the end of the day, sponsors want to know how much exposure they are getting for their rather expensive advertising dollars.  As the sport transitions from live attendance and TV viewership to a dynamic streaming experience, they also need to figure out how to do so in a manner that satisfies the sponsors.  Let's face it, without fans or sponsors, there is no sport.  NASCAR's day of reckoning may well be approaching.

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.

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:

• Sales at retailers and restaurants rose 0.6%.
• Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
• Sales of building materials and gardening supplies were up 3.9%.

With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally. 

MOS Breaks Upward Out of Descending Triangle But Warning Signs Abound

We started tracking Mosaic Co. (NYSE:MOS) for a potential breakout on June 19th.  The stock finally pierced the pattern with an upward breakout yesterday (7/13) that continued with strength today.  You'll note from the chart that there were two other false starts (also upward) on June 7th and again on June 23rd.  Neither of them were a valid signal, however, since both immediately fell back into the pattern the following day.  Yesterday was the third penetration of the trend-line and, since there was strong follow-through today, this appears to be the valid break-out.

MOS Breaks Upward From Descending Triangle

Despite having followed this pattern for close to a month, I'm going to sit this one out.  There are some warning signs on the chart that suggest that there's possibly very little room to the upside.  Here's why:

• The standard "measure rule" in a descending triangle offers a profit target of the height of the triangle measured from the breakout point.  That would give us a target of $33.38 with a stop at $24.39 (just below the bottom of the pattern.)  Our entry would be $28.68, just above today's high.  Now, an aggressive trader could place a stop around $26.99, which lowers the risk, but when I count 6 unique touches of that bottom trend-line, I'd be concerned that a pullback would easily take out that aggressive stop. 
• That brings us to the reward vs risk ratio.  The conservative stop only gives us a ratio of 1.08:1. The aggressive stop is much better with a ratio of 2.76:1, however as I said, I'm very concerned about the probability of that stop being taken out prematurely.  The 1.08:1 ratio is a non-starter.  The number of winning trades needed at that level are much higher than even a professional trader can consistently achieve.
• The profit target assumes we hit 100% of the estimate.  That only occurs about 60% of the time, however, for a descending triangle breakout.  A more realistic target would be $31.17 which is the 61.8% Fibonacci extension of the height of the triangle.  That brings our ratio down to 0.57:1.  There's also a weak resistance line at that level based on the high of the triangle.  That increases the probability that we'd never hit the 100% estimate.
• Today's candle forms a double-top with an almost identical candle that formed June 23rd.  In both cases, the price stalled at the 23.6% Fibonacci extension.  A double top is a bearish pattern that, in this case, has a price target of $20.53.  That, coincidentally enough, meets the 61.8% Fibonacci extension of a downward breakout from the triangle.
• The real killer for this trade, however, is an extremely strong resistance line at $26.91.  That coincides with the 38.2% extension, and it's formed by a low on October 2, 2015, passes through the highs of the triangle pattern, and halted an advance on April 21, 2016 as well as June 7, 2016.  It's a very strong area of resistance and, in all likelihood, the current breakout will stall at that level.

We'll keep MOS on our watch list, despite the fact that we're not taking the trade that setup yesterday.  The reason is that, if it does reverse and fall back into the pattern, there's a much higher probability that it will penetrate the support line at the base of the triangle and then resume the down-trend that has plagued this stock in stages since early 2011.

The other potential short that we will watch for is a break back into the pattern.  At that point, if the market is similarly retracing, we can enter short and ride it at least to the bottom of the pattern, if not beyond.  The way the overall stock market is surging this week, however, we'd only enter that play if the market itself pulls back and begins a downward retrace.

Remember, always stalk your trade.  We're under no pressure to enter a position ahead of its time, and when we do commit capital we always want to do so when the odds are stacked in our favor.  The moment those odds turn against us, the smart play is to revert to cash.  When it comes to MOS, that's precisely what we will do.  Cash is a position, and in this case, we believe it's the right one.

Bank of England Holds Rates Steady; Signals August Stimulus

Despite market estimates of an 80% chance for a rate cut today, the Bank of England held rates steady at 0.5%.  With new Prime Minister Theresa May signaling a slow and cautious path towards Brexit and also signaling an invocation of Article 50 no earlier than 2017, the central bank's delay in lowering interest rates makes sense. 

Only 2 1/2 weeks have passed since the Brexit vote, and that is an insufficient amount of time to gather enough data to make an informed projection on the economic climate for the next six to twelve months.  The MPC (Monetary Policy Committee) next meets on August 4th, giving them additional time to gauge the reaction and potential impact.

Additionally, despite the immediate reaction worldwide on June 24 and 27, markets in the UK and around the world have since stabilized and, in fact, rebounded significantly.  In the Forex market, the British Pound did indeed take a significant hit against both the Euro and the US Dollar, however the currencies have since stabilized albeit at the lower levels experienced immediately following the vote.

Given the slight trade imbalance the UK currently experiences, that overall drop in the Pound is actually very good for their exports.  It provides an immediate boost to UK-based corporations and, in that context, is a nice stimulus without the Central Bank taking any actions at all.  Coupled with that, initial fears that companies would seek to relocate out of the UK have since abated.  To that point, JP Morgan Chase CEO Jamie Dimon specified in today's earnings call that he had no intention of leaving the UK despite rumors to that effect on June 24th.  Following the initial shock of the vote, we now see other companies taking a step away from the ledge, realizing that the new dynamic offers tremendous opportunity, not peril.

What the Bank of England has done by standing pat is afforded themselves some options later in the year should the British economy weaken to the point where a stimulus in the form of a rate cut becomes necessary.  Lowering that key rate today would have left the Central Bank with no room left to move as the UK approaches what will certainly be a period of uncertainty after they invoke Article 50.  Remember, the BoE already provided a significant stimulus on July 5th when they eased capital requirements for commercial banks, effectively providing a £150 Billion short-term stimulus.

The change in capital requirements on 5 July was seen as a direct attempt to prevent a repeat of the 2008 crisis in which banks ceased lending.  Whether or not that move is sufficient only time will tell, however as of today the signal is that the MPC is thus far satisfied with the short-term results.

Today's decision underscores a strengthening in the overall financial stability of the UK and stands in stark contrast to some dire warnings issued by Governor of the Bank of England Mark Carney just a week ago: “The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. In particular there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity.  The UK has entered a period of uncertainty and significant economic adjustment."  The wording is particularly harsh coming from such a prominent member.

There's no word as to what measures the Committee are considering in August, however according to officials there was significant discussion of it in today's meeting: “Most members of the committee expect monetary policy to be loosened in August.  The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”

The August 4th meeting comes only a week after the US Federal Opens Markets Committee (FOMC) meets.  Fed Chair Janet Yellen typically addresses the economic environment in Europe and the UK in her post-meeting announcement, so it will be worth listening to that release for clues as to any action the Bank of England may feel necessary.  Given the interrelationships between the various central banks and the global impact each of their decisions have, it would be a mistake to focus only on the MPC for guidance as to what the future economic environment may entail.

Also of interest is the next European Central Bank (ECB) meeting, scheduled for 21 July.  Again, listening to Mario Draghi's perspective will add further insight.  It's likely that, between the ECB and FOMC, we should have a fair idea of the direction the Bank of England may take on August 4th.

Happy Trading.

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.

Fed Continues to Signal Patience on Interest Rates

Two of the Federal Reserve presidents that sit on the Federal Open Markets Committee (FOMC) had appearances scheduled this morning.  These one-off speeches are followed by traders, however it's important to bear in mind that they represent the views of the individual voting (or non-voting, in some cases) member and do not represent the FOMC as a whole.  What's more important is following any change in tone respective to the individual.

Dallas Fed President Robert Kaplan confirmed what was reported a couple of days ago related to growth, and said he expects the GDP to continue in the 2% range for the year.  He expressed the view that this growth rate is very slow, and considers boosting growth to be the most important economic issue we are currently facing.  Without going into details, he said that doing so would require some structural changes that are outside of the mandate afforded the Federal Reserve.  That would appear to be a not-so-veiled nudge to Congress related to trade and growth stimuli.

Providing a brief glimpse into the thinking of FOMC as a whole, Kaplan also stated that the Federal Reserve is "very sensitive" to the strength of the US Dollar.  Indeed, this one statement is the best signal we have that interest rates will remain low for the foreseeable future since any rise in rates would further strengthen the dollar to the detriment of US exports and to the earnings of US companies with heavy overseas exposure.  Until the entire Brexit issue is resolved and we start to understand the new dynamic in Europe, it's unlikely that the US dollar will weaken.

Meanwhile, Minneapolis Fed President Neel Kashkari spoke at a Town Hall meeting in Marquette, Michigan.  He directly addressed interest rates, saying, "We feel like we can be patient to let the economy continue to heal before we start moving aggressively to raise rates. We should take our time when we go ahead and start raising rates again. There's not a huge urgency to raise rates because inflation is coming up low."

His wording suggests that he's expressing the views of FOMC, not just his own, and it's consistent with what we've been hearing from the other Fed Presidents over the last couple of weeks.  It's interesting to note Kashkari's focus on inflation, compared to Kaplan's focus on the strength of the dollar.  By definition, a monetary "Hawk" is primarily interested in maintaining inflation at the Fed's mandated 2% target.  A "Dove" by contrast, is focused primarily on unemployment (and other non-inflationary factors) with an interest in maintaining unemployment under 5%.

Kashkari is a newcomer to FOMC, replacing the extremely dovish Narayana Kocherlakota in November, 2015. It's important to note that Minneapolis (and thus, Kashkari) will not be a FOMC voting member until 2017.  Still, hearing Kashkari take a hawkish position focused on inflation gives us some insight into where he will fall in the economic spectrum next year.  (The categorizations of hawks favoring interest rate hikes and doves favoring holding rates low are not accurate categorizations of the terms.)

While Kashkari is currently siding with the doves regarding keeping interest rates low, he also stated that he sees moderate growth ahead.  Whether that's above the 2% cited by Kaplan is unknown, but few would consider that level to be "moderate growth."  He made it a point of saying that he does not foresee a recession and does not believe the Fed will have to ease monetary policy.  (Following the dismal job numbers from May and a decline in the GDP in that period, there was some discussion of lowering interest rates or even introducing a new round of Qualitative Easing, although the June numbers have pushed those thoughts to the background again.  Kashkari clearly rejects the notion of either.)

FOMC holds their next meeting the 26th and 27th of July, with their next announcement scheduled for 2:00 PM on the 27th.  The futures market shows a 0% chance of an interest rate hike in either July or August, and only a 12% chance of a rate hike in either September, October, or November.  The odds of a rate hike jump to 30% in December, however that's more of an indication that anything can happen over the next five months.  We now have some analysts projecting the next rate hike as late as June, 2017.

For short-term traders, it does mean that we will not have artificial volatility over the next couple of months based on interest rate speculation.  It also means that dividend players will have very limited exposure going into 2017.  (Remember, higher interest rates put selling pressure on lower-yield stocks.)  We'll be interested in the FOMC release more as a gauge of what pressures the Fed sees over the next quarter both here and abroad, however at least in the July meeting we don't anticipate any signal that interest rate talk will heat up any time soon.

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.

ALK Signaling Short Near Resistance and 30-day EMA

When a stock is clearly trending, I am primarily a pull-back trader.  There are several pull-backs for which I set my scans:

• Pull-back to a 10-day Simple Moving Average.  This type allows you to capture a brief pause in stocks that are quite often in an extended Wave 3.  While slightly higher in risk, they also let you catch some excellent moves that other pull-back strategies miss.
• Pull-back to a 20-day Exponential Moving Average.  The 20-day EMA is an extremely popular line watched by enough technical traders to make this a very consistent entry point.  
• Pull-back to a 30-day Exponential Moving Average.  This is quite often a decision point for a stock.  If it bounces off the 30-day EMA, you often have a nice move back in the original direction.  If it breaks through and holds, you often have either a consolidation develop or a trend reversal.
• Pull-back to a resistance line.  While I'm not a fan of breakout strategies (the percentage that form either a bull trap or a bear trap are too high for my taste,) I do like playing bounces off support and resistance.  That's especially true if it's the first touch of that line after the completion of a different pattern or trend.

While running some intra-day scans today, several airline stocks popped up as potential shorts with pull-backs nearing the 30-day EMA and also nearing a major line of resistance.  Alaska Airlines (NYSE: ALK) is one such airline stock giving a "short" signal as it nears both the 30-day EMA and a very strong line of resistance.

ALK signaling short near EMA(30) and strong resistance

There are a number of confirming signals appearing on this chart:

• There is a double top (not labeled) that formed between December and May.  The neckline was finally broken in June, and we've had a pullback to that neckline.  The price target for that pattern is around $48.  
• Since late April, the stock has been in a downtrend, and has completed 3 of the 5 impulse waves.
• Wave 2 was a flat correction, and Wave 4 is a zig-zag with a steep retrace of the prior wave.  In fact, it's at about the 50% retrace level as of today.
• Waves 2 and 4 show alternation as required by Elliott Wave Theory.
• The candles over the last two days show a failure to drive the stock higher.  On both days, the stock finished flat with a very long wick above the candle body.  That's a very bearish indicator.
• There is overhead resistance right above the current level that was a very strong support level for well over a year.  (Remember, support becomes resistance, and vice versa.)
• The price has stalled between the 20-day EMA and the 30-day EMA.
• Wave 4 has traced a well-defined A-B-C correction.
• Price has stalled just after penetrating a bearish trend-line connecting the start of the move with the top of Wave 2.  (Remember, I'm not a breakout trader.)

Because the market has been strong recently, we'll want to see confirmation of the down move before going short.  What I'll be looking for at this point is a clear bearish candle with a close below the open in the bottom 25% of the daily range, coupled with a close back below that bearish trend-line referenced earlier.

There are some cautionary notes to factor into the trade:

• Wave 3 is shorter than Wave 1.  This forces Wave 5 to be the shortest of the three waves. 
• ALK releases earnings before the open on Thursday, 7/21.  We'll want to be out of any trades no later than the close on 7/20.
• While not yet announced, we expect ALK to go ex-dividend around 8/13, paying $0.275 per share.

Since we need confirmation, we don't yet know our entry price.  We do, however, know the target range.  Because of the Wave 3 constraint, we can only target a range of $50.38 (76.4% of Wave 3) to $47.21 (100% of wave 3.)  The greater challenge with this trade, however, will be time.  The rate of movement for this stock at the moment puts us around $54 when we need to exit before earnings.  That will need to be factored into our risk vs reward calculation, and it's why I prefer not to enter a trade within ten days of earnings.  Still, if ALK provides a strong signal tomorrow, I may well take the trade for some very short term action.  It will all depend on tomorrow's candle.  

Theresa May Poised to Take the Helm in the UK

The topics of Brexit and UK's next Prime Minister are back in the news front-and-center with the overnight announcement that Andrea Leadsom, the most conservative of the remaining candidates, had withdrawn from consideration.  That leaves Theresa May as the presumptive new head of the Conservative Party, settling the issue two months ahead of the original September 9th deadline.  The exact date of the transition has not yet been set - at least, not as of this writing - but could be within the next few days.

The UK and US markets have greeted the news positively, with US futures pointing to a continuation of Friday's rally.  Settling the Prime Minister question early removes a measure of uncertainty, which is always positive for the market.  Some caution is warranted now, however, since it does bring the Brexit discussion back to the forefront several months earlier than anticipated.  We can expect a bit of volatility as that plays out.

Despite being described as a Euroskeptic, May stated after the vote that "Brexit means Brexit."  She has said that there will not be a second resolution, and there will also be a clean break, not some Schrödinger's Cat variant of maybe in, maybe out, maybe both.  This implies that a move to invoke Article 50 may come sometime before the end of this year, setting a 2-year negotiations deadline in motion with a potential exit sometime in late 2018 or 2019.

While the monetary cost of executing the exit logistics is an unknown - but likely very high - it will bear careful scrutiny since it will have an impact on companies with UK exposure.  The financial impact will likely be lower in the EU, but again, it bears watching.

Of immediate interest will be the policies that May sets forth as the new Prime Minister, and some of those policies could have direct financial impact on companies operating in the UK.  Despite being the new leader of the Conservatives, some of her views are as left or even further left than what has been proposed by Labour, at least when it comes to management and oversight of corporations.

May has said,  “I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long term and defend the interests of shareholders. In practice, they are drawn from the same narrow social and professional circles as the executive team and – as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m prime minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but workers as well.”

 She has also pledged to reign in executive pay - which, keep in mind, is already significantly lower in the UK than it is here in the US - and intends to change the shareholder proxy structure to make shareholder votes on pay binding as opposed to recommendations.  Neither of the changes she is proposing will entice companies with global reach to remain in the UK following a Brexit that will certainly complicate their cross-border trading both in Europe and through other parts of the world.

Many of her other policy statements are synonymous with the Democratic platform in the US:

• “Right now, if you’re born poor, you will die on average nine years earlier than others. If you’re black, you’re treated more harshly by the criminal justice system than if you’re white. If you’re a white, working-class boy, you’re less likely than anybody else to go to university,”
• “If you’re at a state school, you’re less likely to reach the top professions than if you’re educated privately. If you’re a woman, you still earn less than a man. If you suffer from mental health problems, there’s too often not enough help to hand. If you’re young, you’ll find it harder than ever before to own your own home.”
• She has pledged to refocus the Conservative Party to be “at the service of working people" who, she believes, voted for Brexit because they did not feel in control of their lives either in the workplace or in government.

If any of this sounds familiar, it's only because we're hearing the exact same platform in the Presidential elections here in the US.

What it means to us as traders is that we will need to adapt to a less conservative leadership in the UK, a climate that is less business friendly, unknown impacts on foreign exchange for companies operating in both the UK and the EU, and unforeseen strains on cross-border trade.  Those of us that only trade US and Canadian stocks still need to be aware of the impact on S&P 500 companies with heavy exposure to Europe.  What is certain for now is that these considerations will add to what Janet Yellen consistently calls "headwinds" and it's likely those headwinds will be in our face for the next couple of years.

Iron Mountain Potential Long Play

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]

Iron Mountain (NYSE: IRM) appears to have completed a rather brief A-B-C correction, and is showing new Impulse tendencies in a potential Wave 1. 

Iron Mountain in a potential Wave 1 impulse

Headquartered in Boston, Massachusetts, this document and media storage provider operates across North America, Latin America, Asia Pacific, and Europe.  While new data replication technologies and the elimination of physical tape and optical media storage throughout the technical industries have diminished the need for many of the services that drove this market for decades, legal requirements to maintain physical records for extended periods, data destruction services offered across the industry, and the media services IRM offers to smaller institutions continue to provide growth potential for the storage media giant.  The growing adaptation of cloud computing in numerous industries is also adding to IRM's growth potential at a time when analysts thought the demand for the company's services would rapidly decline.

What the daily chart shows is a company that has been in an uptrend for virtually all of 2016.  A well-defined 5-wave impulse completed in March, however the resulting running flat correction retraced only a fraction of Wave 5.  With no overlap in sight for the current wave, it appears we may have resumed the uptrend and may well be in either the early stages of a new Wave 1 or (pessimistically) just starting a Wave 3 after a short 1 and short 2.  Either way, the chart is suggesting that the direction from here is up, and this is a potential long play. 

For intermediate to longer term players, Iron Mountain offers a very attractive 5.1% dividend yield.  They have yet to announce their next dividend release, however we expect IRM to go ex-dividend around September 9th, paying $0.485 per share.  With that high a yield, they have extremely limited exposure to any interest rate hikes the Fed may contemplate in either September or December, although the strength of the dollar may have some impact on their services outside of North America.

There are a couple of clouds on the horizon, at least for the short term trader.  First, there is some overhead resistance that shows on the weekly chart around $41.15.  That resistance may slow upward progress a bit, but it's likely far enough in the past that it won't completely halt the trajectory.  Second, earnings will be announced before the open on Thursday, July 28th.  We may not have reached the end of this impulse by then, so a decision will need to be made as to whether or not to exit the trade on the 27th or buy protective puts and ride it out.  (One word of caution on that latter strategy.  Remember that implied volatility on those puts will start to skyrocket about ten trading days before earnings, so if you want puts, you may be wise to buy them before this Thursday.  By the close on the 28th, implied volatility should be back below historical volatility, and that will cut a lot of the value from the puts.)  Personally, I prefer to exit the trade on the 27th.  If earnings go well and there's an opportunity to jump back in after about 10:30 AM on the 28th, fine.  If not, well, there are another 9000 stocks out there from which to choose.

The play we're looking at is as follows.  Remember, this is not a trade recommendation!  Do your own research, and tailor it to your own risk tolerance. 

• Place a BUY Stop Day order at 40.11 with a Limit at 40.16.  (We won't allow more that .05 in slippage.)  Start time for the trade is 10:01 AM and we'll submit it only if DOW Futures are positive before the open and the market is in positive territory at 10:00 AM.
• Initial protective stop is 39.13.
• Once the daily low is greater than 41.11 we will raise our protective stop to break-even.
• We will exit 50% of the position at 42.76. 
• At that point, we'll begin to trail our stop at .05 below the daily low until we are stopped out.
• We will exit any remaining positions at the close on 7/27. 

We only want to open this trade if the market heads up tomorrow.  With overhead resistance only a point above our entry,  we want the market to provide a strong tailwind, otherwise we'll sit it out.  Also, if we trade below 39.13, it invalidates the current wave count and again, we want out.

Reward to risk on this trade is 2.66:1 which is a bit less than our 3:1 preference.  That means we'll be looking to reduce our risk as quickly as possible, so we'll manage this trade rather tightly.  The time horizon we are looking at to hit the initial target is between 7/14 and 7/20. 

Remember the mantra:
1.  Identify Risk.
2.  Reduce Risk.
3.  Eliminate Risk.
4.  Protect Profits.

Happy Trading!

DEI Showing 5th Wave Extension During Uptrend

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]
 
Douglas Emmett Inc. (NYSE: DEI) has been in a strong uptrend since early February. This REIT holds 48 office properties and 9 multi-family properties in California and Hawaii. It currently returns a 2.47% yield in quarterly dividends, and has been raising dividends consistently year over year.

A quick analysis of the chart shows that the stock is likely in the 5th wave of the current uptrend.  Initial analysis showed a potential Wave 5 top last week, however yesterday's strong action suggests that Wave 5 may actually be extending.

DEI Showing 5th Wave Extension

If so, we have a potential price target for DEI around $37.50.  That's the height of Wave 1, which - when Wave 3 exceeds Wave 1 - is a probable target for Wave 5.  There's an alternate wave count (not shown) for this impulse, however.  It is indeed possible that Wave 5 completed on 7/5/16.  If so, then 7/7/16 would have marked the end of sub-wave (a), and Friday may have marked sub-wave (b).  If that's the case, then our next direction is down, briefly, with a target of about $35.00.  That would actually be a very good entry point, if it plays out, since this stock is showing a lot of potential in an environment in which REITs are currently thriving.

We are not interested in playing the possible Wave 5 extension, despite an attractive target.  If Wave 5 is extending, then we'll wait for it to conclude and play Wave A to the downside.  That has the potential to move a few points in a retrace of Wave 5 and will offer a better reward to risk ratio.

If, however, we do get a move to the downside early this week that takes us back to the $35 range, then we'll definitely play the bounce off Wave (c).  There's a high probability is this environment that the subsequent impulse wave will be upward, at least until there are signs that the Fed is ready to consider interest rate hikes again, and the next Wave 1 has some excellent upward potential.

If you're adding this one to your watch list, here are a few points to consider:

• DEI reports earnings before the open on August 2nd.  As always, use caution in that period since the trading session immediately following earnings is typically extremely volatile.
• While not yet announced, we expect DEI to go ex-dividend around September 27th, and we expect it to pay $0.22 per share.
• DEI has been consistently raising dividends every year, so look for a potential increase to either $0.23 or $0.24 per share in 1Q17.
• With a dividend yield of 2.47% currently, and given a projection of share price growth, that yield will decline over the remainder of the year.  This means DEI will be very sensitive to interest rates.  If the prospects for a rate hike in 2016 increase, expect that to have negative drag on DEI's share price.

For the moment, I like the pattern developing here, especially with no overhead resistance.  Just be aware that the first area of significant support is down at $31.95, so once the specter of interest rate hikes again rears its head, there is a fair amount of room for the stock to fall before hit hits major support.

Happy trading.

Alcoa Kicks Off Earnings Season After the Bell on Monday

The Brexit vote is behind us, the UK's selection of a new Prime Minister is still two months away, the US election is still four months away, the Italian banking crisis is simmering, but not boiling over (yet,) and yesterday's jobs report has put both the specter of recession and of interest rate hikes on the back burner, at least for now.  So what's next?  Why, earnings season, of course, and right on queue, Alcoa (NYSE: AA) is poised to kick it off after the close on Monday, July 11th.

Alcoa is one of the companies we closely follow, not just to understand the commodity landscape, but because their earnings calls typically provide an outstanding view of most industries in the industrial sector.  They are heavily dependent, not just on commodity prices, but on the performance of major players in Aerospace, Transportation, Mining, Automotive, and a score of other industries that all contribute to orders of aluminum or aluminum based products.  Getting a bead on Alcoa's outlook on the first day of earnings season provides a tremendous amount of insight into how the remainder of the season will go for most other industries. 

This quarter's earnings call will be even more interesting, however, due to the impending split of Alcoa into two companies.  We expect to hear more regarding the timing of the split and additional details as to the quarterly and annual outlook for the new company, named Arconic and trading under the symbol ARNC. 

Since Arconic will be focused on the Aerospace and Automotive industries, ARNC will be added to our short list of quarterly earnings calls to study.  Remember, there are a handful of key earnings calls that you should follow to give a broad overview of each sector and the market as a whole, and AA (as well as ARNC when they go public) are in that category.

So, what can we expect on Monday?  Well, AA is traditionally pessimistic in their outlook, however this quarter they appear to have good reason to be.  In the first quarter of 2016, AA experienced a significant drop in after tax operating income both in alumina (40% y/y drop) and primary metals (26% y/y drop.)  Revenue year over year was down 15%, and you can expect those struggles to continue.

What's worse for AA, however, is that China - the world's leading supplier of aluminum - is gearing up to increase year-over-year production by 4%, and that increase is expected to begin in the second half of this year.  According to Goldman Sachs, that will drive the overall commodity price of aluminum down from $1692 per metric ton as of yesterday's settlement price to as low as $1350 over the next twelve months.

The value-added business, however, is expected to see a boost, and it's that area in which we'll focus our attention since it will tell us the health of other industries. Sales to aerospace and automotives have been growing at a healthy pace and that is expected to continue with some reports looking at 5% to 8% growth in that division.

Overseas, expect the strength of the US Dollar - especially following the post-Brexit surge against the Euro and the British Pound - to produce negative headwinds for the remainder of the year.  The strong dollar hurts exports and also hurts earnings exchanges as goods and services flow globally.  Expect the impact of the strong dollar to be referenced in the reports of most companies in the S&P 500, as most have significant exposure overseas.

Towards the end of the week, we'll gain insight into the Financial sector when J.P. Morgan Chase (NYSE: JPM) reports before the bell on Thursday, however that's a topic for another post.  Stay tuned.

Turbine Layoffs Signal Another Blow to MMORPG Genre

Reports surfaced overnight that Turbine, Inc, the producer of the MMORPG (Massively Multi-player Online Role Playing Games) "Lord of the Rings Online" and "Dungeons and Dragons Online" notified their staff of layoffs.  Some of the more popular fan-facing developers were impacted, which is how the news leaked to the general public.

Turbine, Inc. is owned by Warner Brothers, which in turn is owned by Times Warner Cable (NYSE: TWX.)  The following statement was issued by Warner Brothers Public Relations regarding the layoffs:

“Turbine is transitioning into a free-to-play, mobile development studio, and as a result we are eliminating some positions. The Lord of the Rings Online and Dungeons and Dragons online games will continue to operate as they do now. Re-focusing and reducing the studio size was a difficult decision for the company, and we are grateful to all of the Turbine staff for their considerable contributions.”

Dungeons and Dragons online has struggled almost since launch, and subscriber retention has plagued the title for several years.  Lord of the Rings Online was a much more successful launch, however even being buoyed by the popularity of the films as well as a resurgence in popularity following the Hobbit trilogy, subscriber base in LoTRO has also waned in recent years.  At the end of 2016, LoTRO conducted a "server merge", reducing the total number of playable world instances by at least half.  We've seen this occur in numerous other online games over the years, and it is always the result of a dwindling player base.  Clearly, the future of the game is about as a clear as a foggy day on the Barrow Downs, but I'm not betting my Turbine Points on LoTRO surviving the end of the current Tolkien license which is set to expire in 2017.  I find it highly unlikely Warner Brothers will seek to renew it.

The statement in their press release that they are transitioning to a "free-to-play, mobile development studio" is most telling.  It sends a clear signal that, to Turbine, at least, the PC based online gaming platform is nearing end-of-life.  Daybreak, the successor to Sony Online Entertainment, also canceled development of a much-awaited title - Everquest Next - earlier this year.  Asheron's Call, once the only competitor to the mighty Everquest franchise, ended its run as well.  About the only major titles remaining are World of Warcraft, Everquest, and Everquest 2.  They are the only titles that are still growing subscribers, and they are the only titles consistently pushing out new expansions.  Interestingly, they are also the only titles that operate solely on a monthly subscription basis.

A quick read through Time Warner's 1Q16 Earnings Transcript, released May 4th, is equally telling.  Almost half of the earnings call focused on Warner Brothers and the major TV and Movie releases that are at the heart of their revenue.  Despite the heavy focus on Warner Brothers, there was not a single mention of Turbine anywhere in the call.  That's about as clear a signal as we can get that Turbine is simply not a strategic asset for TWX or for Warner Brothers.

Turbine's layoffs coupled with Warner Brother's PR release signal, to me, not just the impending death of a couple more MMO titles.  Rather, they signal the potential demise of the MMORPG genre as we know it today.  The remaining giants in that industry are all based on 15-year old technology, so without some major innovation in the field, it's unlikely a successor will emerge that can dethrone WoW as the leader.  Perhaps Turbine is on the right track and the future of the online gaming industry is mobile.  Certainly, that's where the non-cost-prohibitive VR headsets reside, at least.  For now, though, we'll need to watch what develops, but for those waiting for the next great PC based MMO, it looks like it will be a very long wait indeed.

Market Focus is on Tomorrow's Jobs Report

The Bureau of Labor Statistics will release the June 2016 Employment Situation report (popularly called the "Jobs Report") at 8:30 AM EDT tomorrow.  It's one of the most closely watched releases each month, and its trends have a significant impact on the Fed's monetary policy.  As you may recall, the May report issued last month stunned the financial world, showing a dismal increase of just 38,000 jobs in the Non-farm Payroll category.  When teamed with Brexit, the Italian banking crisis, and increased fears of recession in Europe - all factors Fed Chair Janet Yellen termed "headwinds" - the May report pushed any prospects of another Fed rates hike out into the distant future.  The futures market is currently projecting a near 0% chance of a rate hike in September, although it starts to climb ever-so-slightly in the fourth quarter.

Analysts do not expect such a dismal jobs report tomorrow, although the projections of 175,000 on the optimistic side to as low as 140,000 on the pessimistic side are still well under the levels needed to sustain economic growth.  The street is also expecting a slight rise in unemployment from 4.7% to 4.8%, and the expectation for hourly average earnings is an increase of 0.2%.

The June report, however, is being closely watched more as a harbinger of the economic outlook for the next twelve months.  Some analysts are now placing the risk of recession at 30% for the next year.  Given the turmoil in Europe and the impact that contagion can have in the States, I would categorize that 30% as very optimistic.  Even Janet Yellen, in the cryptic fashion typical of a Fed Chair, expressed concern last month: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015?”  If, indeed, we see another month of anemic growth, prospects for recession will spike dramatically.

There's one important factor that will not manifest in this report, and that is the effect of Brexit on the US jobs market.  The data for the Employment Situations report closed on June 12, well before the UK vote to leave the European Union.  That vote sent shock waves through the world markets, including here in the States, and most companies are adjusting their capital plans to account for it.  Financial firms in particular are adjusting to the reality of prolonged low interest rates heading into 2017, and most companies with heavy European exposure are still trying to assess what the vote means for them and what adjustments they'll need to make in their 2017 capital plans.  Whenever there's uncertainty of that nature, companies become reluctant to add to their workforce.  None of this, however, will be reflected in this month's release.

The final data points that will be most interesting concern the Labor Force Participation Rate.  You've seen me write time and again that, in my view, this is the most accurate measure of the true employment picture, and the numbers released on June 3 were horrendous.  The rate dropped to 62.6%, setting an all-time record of 94,708,000 Americans out of work.  Analysts are expecting the rate to drop even lower in tomorrow's release.

What the report will mean for trading tomorrow is anybody's guess.  I've long since stopped trying to predict how the market will react to pre-open releases, especially when you have to factor in the contradictory effects of bad news being good for interest rate projections, but bad for future growth projections.  I've learned over the years to sit back on release days and let the market sort itself out over the first 30-60 minutes of trading.  Tomorrow will be no exception.

Awaiting a Pullback on VTR

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]

When you consider the Italian Banking Crisis, Brexit, slow growth in the US economy, and the potential for recession looming in Europe, prospects for another Fed rate hike in 2016 are growing slimmer by the day.  As a result, the REIT (Real Estate Investment Trust) stocks are starting to soar.  One such stock that caught our attention recently is Ventras, Inc (NYSE: VTR.)   Headquartered in Chicago, this firm focuses primarily on properties in the healthcare industry, both in the US and Canada.



Looking at the chart, we can see that VTR started an uptrend on February 12, 2016.  Wave 1 sub-divided very nicely into 5 sub-waves, and Wave 2 was a classic A-B-C pattern that ended on April 21.  We are now into Wave 3, and this wave appears to be extending.  The 5th sub-wave (in green) appears to be sub-dividing into another 5-wave impulse, although today's candle with an opening gap down may have signaled the end of that wave.  We'll need to watch that for the rest of the week, because if that's the end of Wave 3.v.(v) it would mean that Wave 3 was shorter than Wave 1.  That seriously limits the upward potential of Wave 5 since Wave 3 cannot be the shortest wave in a 5 wave Impulse.  A bit of caution is warranted here, although Wave 3 has still run up 17 points, so even with a truncated Wave 5 there's good profit potential.

What makes this stock even more attractive on the long side is the very handsome 4.34% forward dividend yield it's currently sporting.  VTR has yet to announce it's next dividend, but history shows it will go ex-dividend around September 9th and should be in the $0.73 range.  One major caution, though, is that they announce earnings on July 22nd before the open.  My personal trading rules don't allow opening a position within 10-days of an earnings announcement, and if open, I close the position the day before any announcement. I don't like the unpredictability of the first 30-minutes of trading following an earnings announcement, so there's no reason to carry that risk forward.  Remember, too, that the next FOMC meeting is July 27th.  I don't close positions around FOMC meetings, but neither do I open them that day.

How we'll play this is as follows:

• If the uptrend resumes this week, we'll take a long position with a stop below 72.57 assuming the reward:risk ratio remains greater than 3:1.
• We'll exit 50% of our position at 76.41.  That marks the height of Wave 1.
• We'll set a 1-day trailing stop .10 below the low, and ride it until the remaining position is stopped out. 
• We'll close any positions still open on 7/21 at the close.
• If the uptrend does not resume and we enter Wave 4, we'll continue to monitor the pattern for a Wave C.  We expect Wave 4 to bottom around 70.21 - the start of sub-wave iv - and if so, we'll enter at that point.
• As in the last case, we'll exit 50% of our position at 76.41.  A truncated Wave 5 often just touches the top of Wave 3.
• Wave 5 should be a 5-wave impulse, so at that point we'll trail the remaining 50% just below the low of each sub-wave.  
• Once we hit sub-wave 5 of Wave 5, we'll set a 1-day trailing stop .10 below the low and ride it until the remaining position is stopped out.
• In both cases, if we are close to the ex-dividend date, we'll take the .73 adjustment into account when setting our stops.  (We don't want to be artificially stopped out because of the dividend adjustment.)

Happy Trading!

Daybreak Cancels Everquest/Next Development

Daybreak, the online game developer that purchased the popular Everquest franchise from Sony Online Entertainment, today announced the cancellation of their much anticipated Everquest/Next MMORPG.  Fans of Everquest, the fantasy online game launched in 1999, were anticipating a return to the world of Norrath after SOE announced the development of what was promised to be a revolutionary change to online gaming with their third title in the series.

Russ Shanks, president of Daybreak, summed up the decision in one sentence.  "Unfortunately, as we put together the pieces, we found that it wasn’t fun."  While that is certainly a good reason to abandon a game, I'm not convinced it was the only reason.

The world of online gaming is highly competitive, and only a fraction of the games that enter development actually survive.  The time and cost involved in creating an MMO is extremely prohibitive, and very few creators are able to withstand the economic pressure.  38 Studios, the bankrupt startup owned by Red Sox star Curt Schilling, is just one highly publicized example of the casualties inflicted by the genre.

For a game to survive, it must truly be a game changer.  Look at the history of the genre for proof.  Ultima Online was the great-granddaddy of the online games, and what UO did was bring graphics and real-time interaction to the world of the MUDs.  Folks that loved the text-based "Multi-User Dungeons" flocked to UO.  The game launched in 1997 and it is still alive and well today. 

Next in line was Everquest, launched March 16, 1999.  EQ brought total immersion and first-person view into the genre.  The guild system was so well developed, many guilds are still together today even though the players have long since moved on.  It's by far the most addictive online game I've ever encountered.  Like UO, Everquest is still alive and well today.

World of Warcraft entered the scene on November 23, 2004.  The overall game play and concept was very similar to Everquest, but in true game-changing fashion, WoW introduced a fully functional quest system that incorporated a storyline that was central to the game itself.  It brought PvP (Player vs Player) into a genre that had become primarily PvE (Player vs Environment), and through much simplified game mechanics and significantly lower time commitments, it brought online gaming into reach for the Tween age-group.  Of all of them, WoW is the strongest of the players today.

Since 2004, however, there has been little to no innovation in the genre.  The game engines are virtually unchanged, the game concepts are similar, and about the only major improvements we've seen are in graphics.  That is where we've sat for the last 12 years, and that is why I believe Everquest/Next was canceled.  The "game changing" features they sought to introduce six years ago when the game was announced are insufficient for the title to survive given today's technological advances.

The next major innovation that will enter the MMORPG world will be Virtual Reality.  That's not speculation, that's fact based on the VR technologies already on the market.  Any soon-to-be released  MMO that does not exploit VR is doomed to failure.  That is why EQ/Next was canceled.  Any soon-to-be released MMO that does not support multiple diverse platforms is similarly doomed to failure, and that, too, is why EQ/Next was canceled.

So what's the recipe for the next successful MMO, the MMO that will be capable of dethroning World of Warcraft?  It will be a game that uses a VR interface but can be launched from a PC, a Mac, a tablet, or a phone.  Let the game servers do the heavy lifting, let the VR interface provide all the interaction, and let the "platform" merely serve as the data conduit between the two.  When you see the game company that offers that type of gaming concept, jump on it.  Anything less, given the technology available today, is doomed to failure.  Remember, if you release a concept today, you're going live in 2022 or 2023.  That's how long it takes to produce a game.  The technology for which you are developing is 6 or 7 years away.  If a gaming company does not have the vision to incorporate that technology in their design, then there is no way for them to survive against the competition that does have that vision.