Bears Look to Gap Lower on Inflation Fears

Markets gapped strongly higher at the open Tuesday on good sales numbers from WMT and HD.  However, they immediately began fading the gap in all 3 major indices.  The lows were reached just before 11 am only to see a long, slow rally take over. Price had climbed back to the open level about 1 pm only to print another whipsaw between 2 pm and 3 pm before running up to new highs late.  This has left us with indecisive, gap-up, Spinning Top or even Hangman candles in all 3 of those averages.  The good news for bulls is that those 3 were able to pass a retest of their T-lines (8ema).  The bad news is that the downtrend line has not yet been reached and there is still a lot of resistance above.  On the day, SPY gained 2.04%, DIA gained 1.30%, and QQQ gained 2.59%.  The VXX rose slightly to 24.79 and T2122 climbed up above the mid-point to 67.14.  10-year bond yields rose sharply to 2.984% and Oil (WTI) fell 2% to $111.86/barrel.

During the day, April Retail sales came in as expected (+0.9%) but the Core Retail Sales beat expectations (+0.6% vs +0.4% est.).  This was offset by larger than expected builds in March Retail Inventories.  However, April Industrial Production also came in above expectations at +6.4%.  Then in a Wall Street Journal interview, Fed Chair Powell said he’ll continue to back rate increases until “we see inflation coming down in a clear and convincing way,” even if that meant moving past levels broadly seen as “neutral.”  He said that this policy might come at the expense of increasing the unemployment rate past the current 3.6%.  This is the most hawkish Powell we’ve ever heard. However, overall he said he sees the most likely paths to lead to a “softish landing” for the economy.

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In stock news Tuesday, C jumped 7.59% on news of Warren Buffett taking a $3 billion position in the stock. All the semiconductor stocks climbed with AMD spiking 8.73% after catching an upgrade from Piper Sandler.  Meanwhile, MU surged 5.69% and NVDA surged 5.29%, as QCOM ran up 4.31%, and INTC climbed 3.06%.  However, despite the strong Tech gains, the top-performing sectors were Basic Materials and Consumer Cyclicals (both up 3.14% as sectors).  After the close, KEYS reported a beat on both the revenue and earnings lines.  Also, for the second day in a row, a major corporation faced shareholder rejection of its executive compensation plan.  This time, after-hours it was announced that JPM shareholders rejected CEO Jamie Dimon’s bonus ($52.6 million in stock options) by more than a 2-to-1 margin.

On the Russian invasion story, the leaders of Finland and Sweden are submitting their country’s NATO membership applications today in a meeting with NATO Sec. Gen. Stoltenberg.  The leaders of both nations with then visit the White House to meet President Biden on Thursday.  Elsewhere, Bloomberg reported last night that the US State Dept. would not extend the sanctions carve-out that allowed Russia to pay bond debt in dollars when it expires on May 25th.  This greatly raises the chance of Russian default when the next payments are due May 27th. Finally, President Biden is preparing a $500 million military aid package (money they can spend on US-made arms) for India.  This is intended to start weaning India off of buying arms from Russia.

Weekly mortgage demand for new home purchases fell 12% week-on-week and was down 15% from one year ago.  Refinancing applications also continue to nose dive, falling another 10% week-on-week.  This came as 30-year, fixed-rate interest levels fell slightly from 5.53% to 5.49%.  Clearly, people still remember the 3% rate from the start of the year and have a hard time swallowing 5.49%.

Overnight, Asian markets mixed but leaned heavily to the green side.  Taiwan (+1.50%), New Zealand (+1.08%), and Australia (+0.99%) led the gains, but increases were widespread.  Only Shanghai (-0.25%), and Shenzhen (-0.20%) had appreciable losses.  In Europe, markets are more evenly mixed at mid-day.  The FTSE (-0.11%), DAX (+0.02%), and CAC (-0.18%) lead the region as always with Russia (+2.03%) as an outlier.  As of 7:30 am, US Futures are pointing toward a down start to the day.  The DIA implies a -0.44% open, the SPY is implying a -0.60% open, and the QQQ implies a -0.83% open at this hour.  10-year bond yields are back up to 3.001% and Oil (WTI) is up 1.1% to $113.64/barrel in early trading.

The major economic news scheduled for release Wednesday are limited to April Building Permits and April Housing Starts (both at 8:30 am), and Crude Oil Inventories (10:30 am).  Major earnings reports scheduled for the day include ADI, ARCO, LOW, TGT, TJX, and ZIM before the open.  Then, after the close, BBWI, SQM, CSCO, CPRT, and SNPS report.

So far this morning ADI and ZIM have reported beats on both lines.  At the same time, TGT reported beating the estimates on revenue but missing on the bottom line.  On the other side, LOW missed on revenue while beating on earnings.  TGT shares were down 23% in premarket trading on the earnings miss, punished the same as WMT (which lost 11.38% Tuesday) for higher-than-expected costs.  LOW was down 3% in premarket on a revenue miss that the company blamed on cooler weather (despite rival HD beating sales estimate just yesterday).

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Inflation, how it will be fought, and how that will impact markets is the main topic on trader’s minds today. As Fed Chair sounded quite hawkish Tuesday and the UK printed 9% April inflation overnight, Mr. Market is scared. It could also be traders thinking it’s time to take profits on this relief rally after gaining 4% in the SPY over the last 4 days. Add geopolitical risk to the mix and there is uncertainty in the air. Either way, we need to remember the trend is still bearish and there is a lot of resistance above. We have not made a low, high, higher-low, and higher-high yet. So be very careful chasing long positions. That said, the bearish move is long in the tooth as well and near the potential support of a 20% fall to bear levels. So, remain nimble and hedged. Above all, don’t give in to FOMO -OR- feel the need to predict a reversal either way.

Trading is a job, not a lottery ticket. So, work the process. Stick with your trading rules and manage the things that you can control while trying not to worry about the things you have no control over at all. Trade with the trend, don’t chase, keep consistently taking profits when you have them, and move your stops in your favor. Also, remember that the first rule of making big money in the market is to not lose big money in the market. So, don’t be stubborn, and protect yourself from yourself. Keep in mind that nobody is right all the time. When you’re wrong, just admit it and take your loss. As they say, the best time to have taken a $500 loss is when you are now staring at a $1,500 loss.

Ed

Swing Trade Ideas for your consideration and watchlist: SLB, MOS, LLY, KO, PSA, GILD, ZC, JPM, IVR, LYFT DAL, AXP, ABNB, SHOP, MSTR, BBBY. You can find Rick’s review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

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