Market Overview

Follow the Charts Not The Earnings?

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Last week started off with many on Wall Street still convinced that the Federal Reserve would act irrationally and raise rates quickly. After their careful steps to recover from the great recession I thought this was unlikely. The mid-week testimony by Fed Chair Janet Yellen reassured the markets but I am sure some are still not convinced.

Given the perpetual political turmoil there are plenty of reasons why the investor does not want to step up and buy stocks. In the latest survey from AAII the bullish % declined 1.3% to 28.2% with the bearish % down slightly to 29.6%. Most remain on the sidelines as 42.1% are neutral. The long term average for the bullish % is 38% and I would expect the bullish sentiment to pick up this week.

As I discussed last week “Correction Lures Bears Out Of The Woods” the decline in the technology stocks lasted long enough to again stimulate the high profile market skeptics to warn investors. That was also the case during the sideways period in the major averages from mid-December through the latter part of January.

On January 12th the Dow had a 184 intra-day sell off which further added to investor nervousness as did a Market Watch article "Investors are bracing for a massive stock-market selloff". The prevailing concern of those interviewed in the financial media was that the “Trump bump” may be over. At the time I said “I continue to favor buying on weakness” and that the increasing fear was creating a buying opportunity.

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Despite the WSJ headline that the Dow might never reach 20,000 I featured this chart of the PowerShares QQQ Trust (QQQ) and noted that “the daily Nasdaq 100 A/D has turned sharply higher which is a very bullish development. The A/D line had surged to a new high in December and there were signs in December that the tech sector was going to start leading the market higher. “

This was occurring as the 4th quarter earnings were being reported and for the first time in many quarters FactSet was looking for two consecutive quarters of “year-over year growth in earnings”. The earning’s outlook had been lowered from their August 2016 projection.

Those investors who did not buy because of the lowered forecast were left out as the market moved higher. The outlook for the current earnings season is quite positive but the investor sentiment and comments from many analysts suggests many do not believe they will be that good.

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This chart from Factset was featured in a Market Watch Article that wondered whether “earnings valuations will improve enough to support the S&P 500 index’s rapid rise this year toward record levels”.
From a technical perspective the PE ratio seems to be tracing out a classic continuation pattern, lines a and b. This means that a move in this S&P 500 PE ratio above 17.7 will project a move to the 18.5 area or higher. This would make the fundamental analysts even more nervous.

Last weekend the focus was on a similar pattern in the daily chart of the PowerShares QQQ Trust (QQQ) which correctly forecast higher prices last week. I discussed the formation in more detail in a Benzinga article “A Classic Trading Pattern In QQQ”.

This pattern was completed last week (see Market Wrap Section) and I think continuation patterns are one of the most important chart formations for both investors as well as traders to understand.

I often caution investors not to change their investment plan during panic selloffs. I also try to educate them to avoid buying when everyone else is buying and not to sell when nervous investors are selling. The continuation pattern not only allows one to identify good buying or selling opportunities but also to identify shifts in sentiment.

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Many remember 2013 as a great year for stocks but many forget the 127 point decline in the S&P 500 that occurred between May 22nd and June 24th of 2013. On the day of the lows Apple Inc. (NYSE: AAPL) “ plunged more than 12%, as investors grew skeptical about the iPhone maker's growth prospects. Despite reporting a record quarterly profit in January, Apple's forecasts showed signs of slowing consumer demand for its products, particularly its iPhones."

The chart of the S&P 500 during this period in 2013 shows a A-B-C- correction similar to what was just completed in the QQQ. The A wave decline lasted 10 days and then after aneight-day rally the S&P 500 plunged to new correction lows. The equality target where wave C equals wave A was at 1565 and the actual low on June 24th was 1560.

The chart shows that the decline in the S&P A/D line was not as severe as the decline in prices as it tested good support at line c before turning higher. Just seven days after the lows (line 1) the A/D line broke out to new highs as the resistance at line b was overcome.

This signaled that the correction was over and two days later (point 2) the S&P 500 broke through its downtrend, line a. Just over a week later the S&P 500 made new highs for the year. By the end of the year the S&P 500 had gained over 18% from the June low.

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The large following for the stock of Apple Inc. (AAPL) makes their earnings reports quite interesting. The weekly chart shows that it generated a weekly doji sell signal on September 28th 2012. From the high at $91.36 AAPL made its low in April 2013 at $50.42. At the low the OBV formed a positive divergence, line b, as it formed higher lows.

As the S&P 500 was making its June low AAPL was still declining, point 2, but did turn higher the next week. The chart shows that by the time AAPL released its earnings on July 23rd (point 3) it was in a short term uptrend. As it turned out “Profit sank 22% and sales were up less than 1%. That's a nasty development for a company that was regularly posting startup-like profit and sales growth as recently as a year ago”.

Those who were waiting to buy until the earnings turned around were likely surprised that AAPL closed up over 5% the next day and four weeks later traded above $68, up 23% from the pre-earning’s close. This is a good example of why I base my decisions on the technical outlook not the fundamentals.

If you look at the earnings trend of Tractor Supply Company (NASDAQ: TSCO) from macrotrends you see a strong uptrend since 2013. Therefore if you believe in earnings growth you may be surprised that TSCO is down over 46% from the June 2016 high of $95.60. The weekly relative performance topped out when the stock was around $90 and is still negative.

In my opinion it has become increasingly difficult to determine how the market will react to a stock’s earnings. A recent example was Micron Technology, Inc. (NASDAQ: MU) that reported stunning sales and earnings growth on June 29th but dropped over 5% the next day. The negative OBV readings a week before had been the reason that I recommended that Viper Hot Stock traders should sell their position in MU.

The technical reasons for both the buy and sell can be found in this article but it is important in my opinion that you evaluate the technical outlook for your stocks before holding them through earnings. It has become more common for a stock to drop 10% or more on an earning’s miss which can wipe out any open profits.

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Three of the big banks beat earning’s estimates on Friday but all three were lower on the day as traders found some negative details. This does not change their technical outlook and the SPDR KBW Bank (KBE) was only slightly lower.Viper ETF traders are still long KBE from the mid-June pullback and will stick with longs unless the support in the RS and OBV is broken.

In my view neither investors nor traders should buy because of earnings. If an investor has a nice profit on longs going into earnings I would suggests selling part of the position before the report in order to reduce the risk. I would rather miss out on a possible earning’s pop then give up some hard earned profits. Traders should rely even more on the daily technical studies.

Only if they are very strong and partial profits have been already been taken will I consider holding through earnings.

 

The Economy

 

The weaker than expected CPI data on Friday relieved some pressure on the bond market as the yield on the 10-year T-Note closed lower. This reinforces my view that concerns the Fed will raise rates quickly are overdone.

Retail Sales were lower for the second month in a row and lower than most economists estimated. Industrial production came in on target while the mid-month reading on Consumer Sentiment came in at 93.1 down from June’s 95.1.

This week we have the Empire State Manufacturing Survey on Monday followed by the Housing Market Index and then Housing Starts. Thursday we get the Philadelphia Fed Business Survey and the Leading Economic Indicators.

 

Commodities

 

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The September crude oil contract closed higher every day last week gaining 5.3%. The prior high is at $47.52 with the downtrend (line a) as well as monthly pivot resistance in the $48.50 area. The daily OBV has broken through major resistance at line b and its WMA is rising strongly. The Herrick Payoff Index had formed a solid uptrend and closed Friday above the downtrend, line c. The weekly OBV and HPI are still negative.

Market Wrap

It was a very good week for stocks with the Nasdaq Composite gaining 2.6% and the S&P 500 up 1.4%. The Dow Industrials made a new high along with the S&P 500 and even the Dow Utilities were higher. The NYSE A/D numbers were strong with 2174 advancing and 902 declining.

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The weekly NYSE, Dow Industrials, Russell 2000, S&P 500 and Nasdaq 100 A/D lines all made new all-time highs last week which again confirms the positive intermediate term trend. The daily chart of the Spyder Trust (SPY) has the daily starc+ band and chart resistance (line a) in the $247 area. There are price targets in the $248-$250 area with the weekly starc+ band at $249.93.

The daily S&P 500 A/D line is rising sharply as it made new highs the last three days of the week. The steepness of its rise looks similar to what happed after the mid-May drop (see highlighted section). This has a very positive bias for the next several weeks. The rising 20 day EMA is now at $242.78.

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The PowerShares QQQ Trust (QQQ) was higher every day last week gaining 3.1% and rewarding the Viper ETF traders who went long on Monday’s open. The close Friday overcame the downtrend, line a, and completed the flag formation. The 127.2%

Fibonacci target is at $145.62 with the weekly starc+ band at $146. There are measured targets in the $148-$150 area.
The Nasdaq 100 A/D line is leading prices higher as it overcame the resistance at line b and has already made significant new highs. The completion of the trading range in the A/D line does allow for further new gains. QQQ is well above its rising 20 day EMA at $139.39.

The iShares Russell 2000 (IWM) made a new high last week and had a new weekly closing high. The weekly Russell 2000 A/D line made a new high last week but the daily did not. The small caps need to outperform the S&P 500 in the next week or two to make it a market leader.

What to do? The focus for the next few weeks will be on earnings as the volatility in the bond market declined last week. The new highs last week should start to get Wall Street’s attention but it is still the most hated stock market rally in history as the majority of analysts have gotten it wrong.

It will be important to monitor the sector ETFs on the current rally to see if any of the best performing ETFs to see if there are any signs they are lagging the S&P 500. The weekly RS on the QQQ has turned back to positive which is a sign that it is again leading the market higher.

Though I expect some great trading opportunities in the weeks ahead it is not a time for investors to be complacent. If the S&P 500 reaches the weekly starc+ band I will likely have Viper ETF investors start to take some partial profits.

As I noted in a tweet last Wednesday it was a great day for Viper Hot Stock traders as $ATVI +5.2% $EA +2.2% $ +2.2 $IDTI +2.1% and $EBAY +2.3% for the day. There are several stocks where I will look to take some profits this week and there were almost 40 stocks with new buy signals on my weekend scan.

I think that over the next several months the markets are likely to become more difficult and you might benefit from a one-month investment of just $34.95 for either the Viper ETF or Viper Hot Stocks service. Both services include two in-depth reports per week and subscriptions can be cancelled online at any time.

For those who want to learn more about my trading strategies you can download a copy of my eBook. This will add you to the email list for the free Viper Reports. I send out market commentary and technical tips several time a week. Additional market comments are often posted on the Viper Report Facebook page.

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