Dow is trying to lead the market higher.

When I see the market gapping up to new highs, I always have the possibility of whipsaws or pop and drop price action in mind.  When I see the smallest index (Dow) gapping to new record highs trying to lead the market higher, caution flags start waving.  It could be a perfectly innocent bullish rally, but it could also be the perfect setup for a reversal.  It is so easy to get caught up in the drama of the morning and emotionally chase into the open.  If the rally is real, then we will see real buyers stepping up supporting the morning pop.  There is no reason to rush!  The price action will reveal itself if we quietly watch and patiently wait for the lower risk entry.

On the Calendar

We begin the last trading day in July with the Chicago PMI at 9:45 PM Eastern followed by Pending Home Sales Index at 10:00 AM.  The PMI number has been on the rise the last five months reaching a 3-year high in June at 65.7.  Consensus expects a pullback to 62.0 this month but still very strong.  On the other hand, Pending home sales have fallen for three months in a row.  However, the forecasters are calling for a strong 0.9% bounce back on today’s reading.  At 10:30 AM is the Dallas Fed MFG Survey is expected to continue to report strong results, but this number is unlikely to move the market.

Today begins a huge week on the Earnings Calendar with nearly 1500 companies reporting.  The week kicks off with 135 3rd quarter reports so please check the stocks you own or are thinking of buying.

Action Plan

Thursday and Friday last week did little but make the charts very difficult to read.  The DIA remained very strong reaching out for new record highs while the rest of the market tried to recover.  Although the SPY, IWM and QQQ’s rallied, they all closed the day below price resistance.   Even with the DIA rally, the VIX closed Friday well off of the lows suggesting a little concern may be creeping into the market.  This morning the Futures are once again indicating a gap up at the open to new record prints on the DIA.

I am always wary of gap ups to new market highs.  They are the perfect setups for whipsaws or pop and drop price action.  As a result, I will plan to allow at least 20 to 30 minutes after the market open before considering new positions.  I will need to see some actual buying after the professional gap.  Of course, the first order of business will be to manage the positions that I held over the weekend.  The overall trend of the market is still up so will continue looking for long trades, but I will also prepare for a reversal that could happen at any time.  Please understand this is not pessimism or bearishness!  It’s simply wise business to prepare.

Trade Wisely,

Doug

What a difference a day makes!

The ugly whipsaw yesterday took the market over confidence to the wood shed and beat it half to death.  What a difference a day makes!  In my note yesterday I wrote the importance of having a plan for a reversal that could happen at any time.  I also mentioned the dangers of over-trading an extended rally.  Believe me; I understand how easy it is to get caught up in an extended rally.  A mistake I made over and over for years.  Being prepared for a possible reversal is not an act of bearishness.  It’s simply a responsible and disciplined act of good business practices.  We can not predict the time and date of such price action but can prepare a plan on how to deal with it and avoid poor emotional decision making in the heat of battle.

On the Calendar

The last Friday of the July begins with a very importing number on the Economic Calendar.  The final estimate of the 2^nd quarter GDP releases at 8:30 AM Eastern.  Consensus suggests it will come in with a solid 2.6% annualized rate with retail sales leading the way.  Keep in mind the GDP number can move the market.  Out at the same time is the Employment Cost Index which jumped up 0.8% in in the 1^st quarter but the forecasters see that slowing slightly with a reading today expected at 0.6%.  Consumer Sentiment is at 10:00 AM and is expected to show continued strength with a reading of 93.1.  After that, the only thing of note is a Fed speaker at 1:20 PM this afternoon.

On the Earnings Calendar, there are about 100 companies expected to report today.  Stay on your toes and continue to check earnings dates for companies you hold or are thinking of buying.

Action Plan

Yesterdays whipsaw should not have been a surprise to RWO readers.  We can never know the date and time when something like this will occur but as I have been saying, prepare, because the possibility exists.  Gap up’s to new market highs should always put us on high alert for the possibility of whipsaw price action.  The VIX at historic lows only adds to the high alert status.

The whipsaw made a mess of a lot of charts, and I suspect could be a warning of higher volatility days to come.  Choppy markets are dangerous and very difficult to trade.  It may be wise to curtail trading activity until we get better clues on direction.  There is also a mix of signals in the Index charts raising some concern.  The DIA managed a full recovery closing at a new record high.  However, the SPY and the QQQ closed with ugly bearish engulfing candles although well off the day’s low.

Futures were negative all night but have recovered slightly in the early premarket.  Toss in the Senate’s failure on the health care bill, and the AMZN earnings miss and explosive volatility could be the result.  Overall the trend continues to be up, but I will not likely seek to add new risk ahead of the weekend with such price action confusion.  I will, however, be very focused on managing current positions and taking profits where possible to reduce exposure to the market.

Trade Wisely,

Doug

Earnings fueled rally nearing 3-weeks up.

The current rally has been amazing with new records for the books almost every day on this earnings fueled rally.  Hey, who doesn’t love market rally? Right!  Profits are easier to make, and the world of the trader just seems to be filled with sunshine and rainbows.  It’s often times like this when traders get complacent.  Breaking the rules, rushing trades and/or over trading.  If we fail to plan carefully, we invite emotion into our trading which normally ends badly.  Maintain your discipline, be prepared and protect your capital from emotional decisions with a well thought out plan.

On the Calendar

The Economic Calendar begins with Durable Goods this morning at 8:30 AM Eastern time.  Durable goods is a market moving number that has been a little soft with declines in both April and May.  Consensus for this month is to see a big bounce back with an expected increase of 3.5% mostly on the back of the aircraft industry.  Also at 8:30 AM is the International Trade in Goods number as well as the Weekly Jobless Claims.  Trade goods are expected to come in with a 65.0 billion deficit which is an improvement from last month.  Labor has been very strong, but there is an expectation of an increase to 240K from the 233K last reading.  There are a few nonmarket moving reports, auctions and announcements.

Today is a huge day on the Earnings Calendar with nearly 450 companies expected to report results today.  Believe me; it’s in your best interest to check reporting dates before entering new positions.  It is equally important to check on reporting dates within your portfolio.

Action Plan

Yesterday the market pretty choppy which is normal on an FOMC announcement day but all in all the indexes held up pretty well.  Earnings have already begun to roll in this morning with the majority being positive.  Futures are currently reflecting that bullishness pointing to a slightly higher open, but it could shift quickly on the data laden day.  As of right now the QQQ’s are showing yet another gap up open and another record level for the history books.  The DIA and the SPY are not far behind.

As always my top priority is to manage current positions first and as we begin to wind down this trading week taking profits is also high on my list.  I will, however, look for new trades today but much recognize the fact that the rally is nearing the 3-week mark.  I’m not predicting a turn but if one did occur it should not be a big surprise so plan your trading accordingly and always have an exit plan.

Trade Wisely,

Doug