Friday, May 24, 2019

Market Pulse through some of its Main Indicators



SP500 Index SPX, 2826.06


May, is always a difficult month for the stock market, and as I said in the previous post 'Sell in May and Go Away', the explanation of its recent fall is in the swings of the TradeWar, there is no more. It seems Wall Street discounted from January to May a "great" agreement between the US and China with the impressive rise of the SP500 (also thanks to stock buybacks, of course!) and now notice it will not be like that. Today, in moments of maximum tension, with the recent case of Huawei, the market seems to have opened its eyes not only to the complexity of this trade agreement but to assess the already many contradictory results in the US economy (for example, the recent very low ISM). Therefore, it's logical to presume that this correction should continue in next days or weeks. Current Trump's desperate last statements or tweets to bring the market up are notorious. He has done it before, let's see if he does it these days. That is the stupidity of today's market ...

Technically, the SPX made it difficult to overcome the strong resistance at 2,950 at the beginning of the month and its recoil is reaching the 23.6% of its Fibonacci, where it is forming a clear head and shoulder pattern with the last candle touching the neckline support. Its resolution will be key this week: if rebound it could enter to a clear ranging mode, with the possibility of overcoming the Kijun and the Ichimoku cloud in 2,874. If falls, its next support would be the powerful SMA200 in 2,777, and further down the 2,718 the 38.2% of its Fibonacci.


US 10-year Treasury Rate TNX, 2.32%


The TradeWar tensions and the indecisiveness of the market move investors taking refuge in the solid US Treasury Bonds, instead of other classic safe-haven instruments such as gold or Japanese yen. Today the benchmark US 10-year notes yield TNX has reached 2.3% the lowest since 2017, even below the 3-month Bill, which again revives the fears of a yield curve inversion.

Technically this indicator is moving in a bearish downtrend channel since January, being now in the lower line, prior to a resolution: could rebound to the channel or break this line and fall to levels of 2.2%. In the short-term, I see here a necessary correction upwards. To follow this week through the US T-Bond ETF TLT or triple speed 3X TLF (bullish) or TMV (bearish).





iShares Russell 2000 Index 
 IWM, $150.79 


The small caps, followed by the Russell 2000 IWM, generally suffer the swings of the market in a more marked degree, due to its greater volatility. Today, it's not exactly the best sector to invest in the middle of a Trade War but you can take advantage of its current ranging price for a swing trade. 

Since January it's moving orderly in a narrow horizontal channel between two clear support and resistance, $150 and $160 respectively, in which its main indicators are converged: SMA averages 50-100-200, and Ichimoku lines and cloud. Its ADX=18.6 (less than 20) confirms the range zone, and for these cases, the Stochastic is the best indicator. It's in 13.27, that is to say, very strong oversold, the reason why an upward rebound in the short-term can be expected. Mindful that its movement this week can correlate and influence other main indices such as the SP500 and Nasdaq.



SPDR Financial XLF ($26.86) and Technology XLK ($73.30) Funds


Some brief notes from the two most important industrial sectors of Wall Street: Financial XLF and Technology XLK, both unfavored in the current Sector Rotation, leading by the bearish Utilities sector XLU.

The Finance Sector can suffer more than any if the yield curve inverts. In addition to this, the crisis of certain major banks in the sector such as the Deutsche Bank DB (in historical lows) and a certain weakness of the Big Four, at the expense of Buffett and Berkshire, justify their bearish bias since April. Technically its weekly chart shows its price bordering his SMA50 and 100 averages, in neutral mode (yellow point in the last candle) according to the Elder Impulse System indicator. Take note that Friday rebounds in its SMA200 in its daily chart (not shown). FAS and FAZ, triple velocity ETFs of this sector, seems interesting to follow this week.

As for Technology, after its price forms an inverted V, since one month it's correcting very strongly due to the high tension in the Trade War, which has taken a decisive focus on technology. Trump and Xi know the importance of this sector, they know that who dominates the technology will become the number-one commercial world country. That is why the Huawei case is seen as only the beginning of a "Tech Cold War" that will not end even if both countries reach an agreement. Chinese reprisals against Apple AAPL are feared soon, which can deepen the XLV fall.

Both sectors find their price between the EMA exponential averages of 13 and 26 of their weekly chart, the "Value Zone" defined by Alexander Euler as the ideal moment to invest in a stock. Let's wait for some next news to predict a movement here. Now fundamentals are key here, more than technical analysis.


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Tuesday, May 14, 2019

Trader Notes: InterMarkets Analysis. Part 1


Basics.


Surely it is known, but I think is a good topic to develop in two or three posts, briefly and colloquially, how I always try to do, the 'InterMarkets Analysis'. How it works, its importance, and the relationship among its instruments (stocks-bonds-currency-commodities), and how to take advantage of it for our trades, now that we are near another decision of the US Federal Reserve (FED) in November.

The Central Bank of each country (the FED in USA) control the interest rate, which has a direct impact on the value of the local currency. If they raise the interest rate, their currency tends to strengthen as investors look for high returns in their country for their short-term investments. If a government lowers the rate, it weakens its currency, since very few investors will be willing to lend their money to a country or its banks with a weak currency. Simple.

- A strong currency has a direct positive impact on stocks and bonds, since they pay more, but in turn generate inflation.
- The opposite occurs when the currency is weak: investors seek profitability in other regions and markets, and in commodities such as gold or oil, which rise in prices due to the increase in demand. In this environment, the yield of the bonds, which always accompanies the interest rate, falls and the price of bonds rises, due to the inverse relationship between the two. All these basic relations occur in an inflationary environment, in deflation some intermarket relations become inverse.

Include in one chart the four instruments (commodities, stocks, bonds, 
and currency) is the best way to understand the InterMarket Analysis.

How Central Banks work


I think the best way to explain it is with a real example: the Real Estate crisis of 2007 in the US. That time, during the crisis, the FED initiated a policy of economic stimulus, gradually lowering the interest rate to zero levels in order to 'warm the economy', and at the same time issuing currency to buy assets from banks (bonds issued by them) and generate liquidity in the market for low rate loans (this is called Quantitative Easing or QE). This generated the slow recovery of the economy and markets, and a progressive increase in the prices of commodities and services (i.e inflation), which today must be controlled, because in the short term it generates unemployment. That was the discussion (it's eternal) in the FED, which is the 'least bad' decision that must be taken: either keep invariable the i-rate for a while to take care jobs at the cost of a little inflation (dovish point of view), or on the contrary, prevent the rise in inflation, raising the interest rate above it, at the cost of some unemployment and stable prices (the hawkish).

As an important document for later analysis, here is the FED Funds Rate History since 1970, and its relationship with the Gross Domestic Product (GDP or PBI in spanish, publish quaterly) and Unemployment Data, issue the first day of every month.


The objective of Central Banks is always ensure that the i-rate exceeds the inflation data. During the Real Estate crisis was impossible to do, lowering it to zero levels, so as to heat a shattered economy.

                                                                                      

To be continue...

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Saturday, May 4, 2019

Sell in May and Go Away? Depends on Trade War.


Market Pulse.


"Sell in May and Go Away" says the popular phrase, which is also a well-known adage in Wall Street. Last week the stock market closes in a moment of grace: the SP500 SPX in all-time highs and great numbers in economic events, especially the recent Employment data with great jobs numbers, with a 50-year record unemployment rate and flat average hourly earnings. That's the perfect combination for bull investors: the U.S. economy is strong and with growth without inflation. Also Wall Street is closing an amazing Q1 Earning SeasonThe only divergences are some market overbought signals (not critical yet) and the recent Powell speech, that Wall Street disliked, especially when he told that only a "persistently" low inflation would make the FED consider a rate cut. 

Finally, the Trade War is a separate chapter in this story: could finish (or not) with an agreement in the next weeks, nobody knows, probably neither Trump. As I always said, its resolution is key for the future rise (or drop) of the markets in the short-term.


Update: Today, May 5th. 

Trump in a tweet: Trump vows higher tariffs on Chinese goods.
Answer from Chinese: China considers skip trade talks.
Consequence: now, 22:40 EST, sell-off in world futures markets  SP500 /ES -2%,  Oil /CL -2.5%, DAX -2%, HangSeng -4%, VIX /VX +16%.







"Main15" Stock Watchlist for May


Some brief technical notes and forecasts of the stocks that make up my watchlist "Main15" for May. As usual, remember, they are NOT buying suggestions, only my personal ideas.

1. Cree CREE: after a successful earnings report, continue strong its bull rally, more than 10% in April. As it's trending, I'm only checking weakness signs in its MACD (and its financial news, of course) for taking profits and entry in the pullback. Great stock for all 2019.
2. Cognizant CTSH: its recent Q1 earnings report disappointed Wall Street traders, closing down 11% the session. It seems an entry short is the best play for the short-term.
3. Facebook FB: great performance in April, far overcoming all resistances, now going towards the $200, despite the usual uncertain news about its privacy and data management of its applications. His next resistance at $198, the 78.6% Fibonacci retracement of its fall since August.
4. Fiserv FISV: last weeks returns to its ranging channel between $82.5-87.5, due to its earnings report that beat EPS, flat guidance, but miss sales. I prefer to stay neutral in this stock, but checking carefully the level $87.50 for a possible breakout.
5. General Electric GE: trading now at $10.50, is again its an interesting stock for the short-term, as recently beats earnings and overcomes many resistances in April: the three daily SMA (50, 100 and 200), and the Ichimoku cloud. I'm long here.
6. Illumina ILMN: this health-sector stock came here from my Radar watchlist, after a good earnings report, beating EPS and sales, with flat guidance. Technically is now above all its daily SMA, touching the upper line of an important downtrend channel that could send this stock to $350 levels. Waiting for a more clear breakout: it's my entry signal.
7. Lennar LEN: Housing sector is recovering this year from a disappointing 2018, and Lennar is a key stock in this sector with its 35% YTD gain. Stock mainly for long-term investing, its next important resistance is in $54.68, the 50% Fibonacci retracement of its 2018 drop.
8. Netflix NFLX: the popular FAANG stock is now in my Main15 list due to its recent good earnings and nice world subscriptions numbers. Disney DIS new streaming service was a tough jab that I'm sure Netflix could assimilate well in the future, due to Hastings abilities. Now the stock is in a ranging channel $340-380 all the year, that yesterday overcomes. Probably a breakout is near here.
9. Paypal PYPL: same as in April, technically is unstoppable. One of the few stocks that did not suffer the market correction at the end of last year. Permanent member of my watchlist, I continue long here, with a tight stop loss now.
10. Roku ROKU: as an stock in a ranging phase (ADX<20) rebounding in a channel, it moves well according to the Stochastic indicator. I twitted that two weeks ago, for a nice rebound and next profit-taking. Today is near the upper line of its downtrend channel. I'm neutral, due to its huge volatility, waiting for signals and next Earnings Report.
11. Snapchat SNAP: as I remark always, it is a stock only for short-term speculation, never for a long investing. It's approaching its real valuation, I presume near $12-13. Probably recover to that levels in May due to upgrades because it slightly beats its recent earnings.
12. Atlassian TEAM: another stock winner, in my watchlist since January. I'm long here since it broke the psychological $100 level. Sank after its recent earnings but now is filling that gap, breaking its SMA50. Good pullback for an entry long.
13. Tesla TSLA: continue being the most hated (and the most loved) stock in Wall Street, due Elon Musk personality. Its fundamentals, news (as recent capital raise), and Musk tweets are key in its performance. Technically, the same as ROKU, is rebounding fine in a downtrend channel all 2019. Technical signs in MACD and Stochastic indicate some days in bullish bias.
14. Twitter TWTR: the bird breaks its 9-month resistance at $35, due to its good earnings report, and now the sky seems is the limit. Many bank upgrades confirm that. Long.
15. US Steel X: in April sank near 30% from $20 to lowest 2-year levels ($14.39) due to a Credit Suisse downgrade to $13 that make this a good stock for shorting it that month. Now, after an amazing earning report, it seems the gap could be filled in the next weeks. News of its new billion-dollar plant, a +17% day-recover and also an indirect Trump tweet are very good signals. Interesting stock if it increases volume because it usually takes off strongly.


Images were taken on May 4th, 14:25 EST 



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