A wildly bullish Dow gives me pause.

As many of you know, I am always cautious when I see a market gap up to new highs.  With the wildly bullish Dow Index gaping to another record high raises caution flags.  The muted price action of the QQQ, SPY, and IWM means that only 30 companies are trying to lift the entire load.  It is possible, but such a strong gap after major rally could also produce an exhaustion pattern.  Make no mistake, the trend is up, and I will stick with the trend, but I will not chase this gap.  Chasing a gap after a major rally is a kin to playing Russian roulette with a loaded gun.  Avoid emotion with a well thought out plan and have the discipline to follow that plan to protect you from you!

On the Calendar

The Economic Calendar starts August with Personal Income and Outlays at 8:30 AM Eastern.  Incomes are expected to increase 0.4%. However, spending has remained muted only rising 0.1%.  Consensus for the core PCE is 1.4% yearly which is only a 0.1% increase.  PMI Manufacturing Index is at 9:45 AM is expected to come in at a positive but moderate 53.2 reading.  A far more important number, ISM MFG index comes out at 10:00 AM.  It has been very strong this year, and that will continue if the consensus is correct with the expectation of 56.2 print.  Construction Spending is also at 10:00 and is expected to post an increase of 0.5, however, continues to be soft overall this year.

On the Earnings Calendar, there are nearly 280 companies reporting today.  The big news of the day comes after the close when AAPL reports earnings.  With the recent slide in tech, there are those saying the AAPL report is so important it may overshadow the Employment Situation number on Friday!  I’m sure about that but how AAPL reports will likely be critical to market direction.

Action Plan

The Bulls in the DIA managed to hold onto the morning gap but was unable to lift the other indexes.  The QQQ closed below support with a dark cloud cover pattern while the SPY held support but just barely.  IWM tested resistance early in the day yesterday but bears pushed back down confirming resistance but just holding on to the current trend.  So all and all we have 30 companies trying to lift the entire market and making very confusing signals overall.

The Dow futures are wildly bullish this morning suggesting a gap up more than 100 points.  The other index futures are also pointing higher but at this time are not reversing the negative candles left yesterday.  It’s my inclination to jump to the decision that the DIA this morning is an exhaustion gap which could signal the end of this rally.  However, it is always unwise to predict or bet against a strong trend.  My plan for today will be closely watching price action for clues of reversal.  I will stay with the trend until I have evidence of something different.  Watch the potential pop and drop or whipsaw price action this morning and prepare to act if necessary to protect profits and trading capital should a reversal occur.

Trade Wisely,

Doug

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