High Volatility

After the very choppy morning session, Mr. Market finally got it together to deliver some sweet relief.  I wanted to believe the big swings were over but I stuck to my rules choosing to wait for proof of support.   The Dow Futures moved from 250 points down to nearly flat in just one hour this morning.   Such high volatility can produce false signals and violent reversals.  I’m glad I have developed some discipline in my old age and decided now to chase yesterday.  Remember. just like the Grinch, Mr. Market can be a Mean One.

The VIX pulled back yesterday due to the late afternoon rally, but it still closed above a 30 handle.  That would suggest that there is still considerable fear and violent gaps and price reversals are very likely.  For the last couple years, the market was very forgiving, but for now, that has changed.  If your chaise or try to predict a bottom, a punishing lesson in discipline is now a possible result.

On the Calendar

The Economic Calendar has a parade of Fed Speakers to pontificate on interest rates.  Kaplan spoke at 6:00 AM, Dudley at 8:30 AM, Evans at 11:15 AM and Willams will finish the day at 5:30 PM.  The important report of the day is the 10:30 AM EIA Petroleum Status report.

On the Earnings Calendar, we have nearly 200 companies reporting today.  Combine a bunch of earnings with an emotional market, and anything is possible so stay on your toes.

Action Plan

At 6:00 AM Eastern the Dow Futures pointed about a 250 point gap down.  By 6:00 AM Futures had recovered to an almost even open which suggest there is still a lot of risk due to huge emotional volatility.  The relief rally was, of course, wonderful yesterday afternoon but keep in mind the VIX closed above a 30 handle.

I expect volatility to continue to produce fast price action and whipsaws.  False signals and head-fakes are very common.  Even the best of signals can quickly evaporate in this environment.  I continue to recommend extreme caution and remember the lows could see another test.  New and inexperienced traders should consider remaining on the sidelines until the price action slows back down.  If you do decide to trade, I suggest trading smaller than normal positions.  Don’t get caught up in the drama.  Stick to your rules and matain your discipline.

Trade Wisely,

Doug

The Good, The Bad and The Ugly

Can we go back to 2017?  So far 2018 has tossed at us The Good, The Bad and The Ugly in the time span of just over one month.  The Good, record highs and tremendous bullishness for the first 25 days of the year.  The Bad, last Friday’s nasty selloff of nearly 700 Dow points.   The Ugly, yesterdays record-breaking one-day selloff that wiped out all the progress for the year and then some.  So what happened?

Fear got a little out of control yesterday as the market watched Bond Yields rising rapidly and topping 2.8% by the close.  The market has also suddenly become hyper-aware of inflation and what that might mean for interest rates going forward.  As traders, we always try to compartmentalize the cause of such events to and make some sense of it all.  But the truth is when markets are euphoric or panic-stricken, it rarely makes sense.  Unfortunately this emotional roller coaster and last much longer than one would expect.  The only way to protect yourself and your capital is to stand aside and let it pass.

On the Calendar

The Tuesday Economic Calendar kicks off with International Trade at 8:30 AM.  Sadly the trade deficit is expected to widen sharply to $51.9 billion.  At 10:00 AM the JOLTS report is looking for a slight gain to 5.900 million today according to consensus estimates.   The is a Fed Speaker at 8:50 AM and some bound auctions to complete today’s calendar.

Today is a pretty big day on the Earnings Calendar with about 150 companies scheduled to fess up.  Today, we will hear from GM, DNKN, DIS, GILD and CMG just to name a few.

Action Plan

Futures have been moving very quickly and all over the map during the overnight session.  Around 11 PM last night Dow Futures were down nearly 900 points.  By 4:00 AM they were up more than 150 points but as I write this at 7:12 AM they are nearly 400.  All the blood in the water has attracted the really big sharks.  Whipped into a feeding frenzy, they will bite at anything, and we can expect this to last for a while.  Little fish like retail traders are just chum in the water and stand very little chance of escaping if we’re in the water.  Day’s, maybe even weeks of very challenging price action lie ahead.  Get out and stay out of the water if you can.

Trade Wisely,

Doug

Extreme Moves

We all know that that the bulls were over exuberant and pretty much everyone and their dog expected a pullback.  However, Friday’s extreme moves appeared to be excessive, right?  Honestly, not so much.  If you put it into the context of a 16500 point rally in the first 25-days fo January, you realize it’s only a reversion to the mean.  Nevertheless, the violent nature of the move is shocking an I doubt anyone expected a 700 point move in one day!  Volatility is very likely to continue making swing trading very challenging.  Don’t make a mistake and assume that the market is suddenly oversold and predict the will rally.  It can simply consolidate before resuming a downtrend!

On the Calendar

The is only one report of consequence on the Economic Calendar today.  At 10:00 AM Eastern is the ISM Non-MFG Index which has cooled recently but remains mostly in the mid-50’s indicating growth.  Forecasters are calling for an increase to 56.2 today.  After that with have some bond announcements and auctions to round out the day.

On the Earnings Calendar, we have 70 companies reporting.  Stay on your toes this week there are a lot of reports on the calendar.  Prepare, plan and always check reporting dates of companies you own and those you are thinking of buying.

Action Plan

Without question, Friday produced shocking bearishness breaking supports as traders ran for the exits ahead of the weekend.  Swing traders are mostly positive people, and the vast majority only want trade long.  As a result, when they see a huge move lower like we did Friday they naturally want to believe the selloff is over.  They try to predict when the bounce will occur only to find out that the sellers have more to say.  Much like this morning with the Dow Futures suggesting more than a 200 point gap down!  Even when the selling does stop, keep in mind that it could just consolidate before moving lower.  Consider the fact that Dow 25,000 needs a test as support.

Remember every day does not have to be traded to be successful.  Wait for good quality signals and remember the market is now very emotional.  Big morning gaps and intra-day reversals could be the new normal in the short-term.

Trade Wisely,

Doug

No Edge

Increased volatility, big overnight gaps, and violent reversals are great for very fast intra-day traders.  However, for the average retail swing trader, it means we have No Edge.  Everything that seemed to be working so well just one week ago is not working now.  That is the nature of the market.  It’s always changing and often that change is violent.  As a result, we as traders must recognize the change and quickly adapt or better yet just stand aside and protect our capital.  This week should be proof of the fact that not every day is a good day to trade and that setting in cash is a good position.  Eventually, all this wild emotional price action will come to an end, and cooler heads will prevail.  The question is will you be ready to trade or chopped to pieces trying to trade with no edge?

On the Calendar

We get things going on the Economic Calendar today with the very important Employment Situation report at 8:30 AM Eastern.  Consensus suggests nonfarm payrolls of 175,000 and an unemployment rate holding at a 17-year low of 4.1%.  Average hourly wages are expected to increase 0.3% with the average workweek unchanged at 34.5 hours.  Private payrolls are expected to increase 172,000 with manufacturing increasing by 18,000.  At 10:00 AM both Consumer Sentiment and Factory Orders numbers release.  Consensus suggests January Consumer Sentiment will come with a 95.0 reading.  The Factory Orders index is expecting an increase of 1.5% according to consensus.  We finish the week with two Fed Speakers at 1:30 PM and 3:30 PM.

We get a little break on the Earnings Calendar with only 46 companies reporting today.  Oil will take center stage with CVX, XOM, and PSX reporting before the bell.

Action Plan

Everything was looking okay until we had an unfavorable economic report yesterday morning creating a sudden gap down.  The bulls stepped filling the morning gap but failed to have enough strength to hold on to those gains by the end of the day.  As I write this, the Dow Futures are pointing to a nasty gap lower of more than 200 points.  I have been suggesting for some time now to prepare for increased volatility, but it’s still shocking to see the violence of these moves.  The big overnight gaps in both directions can chop an account to pieces.  I mentioned earlier this week to expect challenging price action and suggested new and inexperienced traders might want to watch from the sidelines.  Sadly that was a correct call.

The Employment Situation numbers this morning have the potential to improve or make worse today’s open.  Anything is possible.  I think the wild price action, quick reversals, and overnight gaps could become the new normal at least for the short-term.  Be very careful.  Have a wonderful weekend everyone.

Trade Wisely,

Doug

Rough but not unexpected.

Rough but not unexpected, is how I would describe yesterdays price action.  The 2018 bull run has been like a 5-year old hopped up on sugar and caffeine.  It’s a blast while it lasts, but the crash after it wears off can be brutal.  On the positive side, the economic markers continue to be very strong, and thus far earnings have supported this lofty level.  On the negative side, inflation seems to be heating up, and that may force the FOMC to raise interests rates beyond whats already expected.  Elevated volatility could be here to stay at least for the short term.  Price action over the next several days could be very challenging especially for inexperienced traders.  Now is the time to maybe do a little less trading, a little more trade preparation, and become very picky about the trades you take.

On the Calendar

We have a busy Economic Calendar on this last day of January.  We get going with the ADP Employment report which is looking for a private payroll number of 195.000 at 8:15 AM Eastern.  At 8:30 AM we get a reading on the Employment Cost Index where forecasters are calling for a 0.6% rise.  9:45 AM brings the Chicago PMI which forecasters are calling for a slight easing but still a very strong reading of 64.0.  The Chicago economy is at historic highs in data that goes back more than 50 years!  We get a reading on Pending Home Sales at 10:00 AM where the consensus expects a solid gain of 0.5%.  The EIA Petroleum Status comes in at 10:30 AM, and although there is no forecast, the trend suggests oil supplies will continue to decline.  The biggest report of the day will, of course, be the FOMC Announcement on interest rate policy at 2:00 PM Eastern.

Earnings reports continue to ramp up with over 150 companies reporting today.  Stay on your toes and have plans prepared for the companies you hold or are considering for purchase.

Action Plan

An ugly day for the markets yesterday with a big gap down and saw continued selling as the day progressed.  This morning futures are suggesting a bounce with the Dow currently showing about a 200 point gap up.  I have been suggesting for some time now to prepare for higher volatility, and I suspect it will make for challenging trading for several weeks to come.

As a result, expect bigger daily swings and overall point travel during the day.  Overnight reversals are common in this environment as well as intra-day whips that can be pretty dramatic.  We have several weeks so of earnings reports yet to chew through that will add to the uncertainty.  Today after the morning rush we could see the market become very choppy as we wait for the FOMC Announcement at 2:00 PM.  With overall market trends broken and so much whipped up emotion, it may be wise just to sit back and watch the show unless you are a very fast day trader.

Trade Wisely,

Doug

The bears woke up!

The bears woke up.  We all knew the day would come when the bears would launch a full-scale assault.  Unfortunately, they used the cover of night to attack making it difficult for the retail trader.  As bad as it may initially seem let’s keep in mind good earnings are continuing to come in, and the bulls are unlikely to give up easily.

Those who chased stocks that were well within their run will suffer the most this morning.  Those that took profits along the way and reduced the number of positions held will likely experience some losses today but it should not too punishing.  It would not be at all out of the question to the Bulls mount a strong defense after the open.  Keep in mind the buy the dip crowd could rush in creating a short squeeze.  Although the this is the very first bearish follow-through day of 2018, remember it’s not the open that matters it’s how we close the day that does!

On the Calendar

Tuesday’s Economic Calendar starts off with the beginning of the 2-day FOMC meeting.  It’s the final meeting with Yellen at the helm.   At 9:00 AM Eastern the Case-Shiller report is expected to show a solid 0.6% gain.  The consensus is for the unadjusted year-on-year rate to come in at 6.4%.  Consumer Confidence is out at 10:00 AM is exp[ected to come in at 123.4 up slightly from the December reading of 122.1.  We have an another 10:00 AM report on Investor Confidence which is unlikely to move the market, a couple of bond auctions and Farm Prices report at 3:00 PM.

On the Earnings Calendar, there are just over 110 companies reporting today.  Before the bell, we will hear from PFE and MCD after the bell JNPR steps up to report.

Action Plan

The Bears decided to make an appearance yesterday closing all four of the major indexes lower on the day.  Technically the DIA got the worst of it closing below the Monday’s strong candle.  SPY and the QQQ faired much better only producing inside candles while IWM closed near the low of its consolidation pattern.  Unfortunately, the Bears waited to mount their full-on attack in the overnight session pushing the Dow futures down more than 200 points.  As I write this, the bulls managed to recover some of the overnight losses, but currently, the Dow Futures point to a gap down of 150 points.

It would appear that at the open we will see the very first follow through by the Bears this year.  Keep in mind this is earnings season, and the bulls are not likely to give up easily.  Although this may be a painful morning, try not to panic and keep in mind a strong whipsaw rally is possible assuming earnings continue to come in strong.  Remember the first move lower from a top is not where the real selling is likely to occur.  Expect some fast price action this morning as volatility spikes at the open.  We all knew this day was likely to come and that is why we plan.  Avoid making emotional decisions follow your plan.

Trade Wisely,

Doug

Runway Bullishness?

I have only seen runaway bullishness like this during the Tech Bubble of the late 1990’s.  I am not suggesting the current rally is a bubble, in fact, I don’t think we should compare to 2-events at all.  I only point this out that bullish exuberance has proven it can last for years.  I like many others believe the market is very extended and could benefit from a good pullback.  However, just because we might think it should happen does not mean that it will.

The Tech run up lasted years and had far less backing than the current rally.  This time companies are actually making money!  If earnings continue to support these high prices then perhaps we go higher still.  Don’t fight the trend but be prepared with a plan when the reversal does occur.  It could happen today or years from now, but if you’re complacent and unprepared the consequences could be painful.

On the Calendar

The last week of January 2018 Economic Calendar begins with Personal Income and Outlays at 8:30 AM Eastern.  Personal Income is seen rising 0.3% while the consumer is expected to decline this month 0.5%, but overall remains very strong.  The PCE index expects to improve just 0.1% with a  year-on-year reading of 1.7%.  Excluding food and energy, the core number is seen up 0.2% for a yearly rate of 1.6%.  At 10:30 AM is the Dallas Fed Mfg. Survey which is expected to remain very strong but this report is very unlikely to move the market.    After that, we have 3-bond related announcements and auctions.

Earnings season ramps up this week with lots of potentially market-moving reports.  Stay on your toes as a volatility increase is likely.  There are 75 companies reporting today with LMT and STX before the bell and RMBS and PFG after the bell.

Action Plan

Last Friday the bulls were out in force producing yet another gap up run day.  The DIA, SPY, and QQQ all closed at record highs.  The Dow closed above 26,500, that a 1500 point rally in just 16 trading days.  Truly remarkable bullishness with seemingly no fear of a pullback.  IWM was unable to set a new record on Friday choosing instead to rest in a consolidation pattern.  The VIX had slight decline but held onto the 11 handle at the close.

There can be no doubt that the bulls are in control and the overall market-trend continues higher.  With so many stocks well within their run higher, it makes it increasingly difficult to find low-risk entry trades.  Guard yourself against being caught up in the emotion and chasing into trades.  As I write this, the Futures are suggesting a lower open, but there are still a lot of earnings report and economic news ahead of the open that could change that.  As we wind down January earnings will be front and center as the bulk of reports will come in over the next few weeks.  Expect higher volatility with whipsaw price action as companies prove whether or not these market prices can be justified.

Trade Wisely,

Doug

Focus on price action.

The last couple days of trading the bears have reminded us that they are still lurking about looking for weaknesses.  Even though their testing has not yet yielded much in the way of results, it’s been a good reminder to focus on price action for clues of their attacks.  It’s noteworthy that as the market continues to march higher, the VIX has slowly crept up as well.  As of now the bulls are in control, but there is a good reason to have a heightened awareness if the bears continue to test the battle-line.  Friday’s have lately been very strong, and I suspect the bulls will fight hard to do the same today.  As this bull run gets very long in the tooth don’t forget to take some profits to the bank.

On the Calendar

We have three important reports on the Economic Calendar this Friday all coming in at 8:30 AM Eastern.  The Durable Goods consensus expects a 0.6% gain with ex-transportation also seen up a solid 0.6%.  The Core Durable Goods orders are expected to come in at 0.5% which is also very strong.  Next, we have the first GDP estimate for the fourth quarter that is expected to decline just slightly to 2.9%  Consumer spending is expected to have a strong showing rising to 3.6%.  Then comes the International Trade in Goods deficit is seen narrowing slightly to 69.0 billion vs. the 70.0 billion in November.  After that, we have three additional reports that are not expected to move the market.

We get a little Friday break on the Earnings Calendar only showing 44 companies reporting results today.  Next week will be a very busy week with over 500 companies scheduled to fess-up on earnings.

Action Plan

Yesterday it was the DIA doing all the heavy lifting setting a new record high as a result of the great earnings out of CAT and MMM.  The SPY, QQQ, and IWM all decided to take a little rest yesterday that at one point threatened to slip south.  However, the bulls stepped in just before it became critical buying lifing them back into a safe zone.  Overall uptrends continue to hold, and the bulls remain in control.

The new normal seems to be that every day the bulls pump up the Futures markets and today is no different.  Currently, the Dow Futures are pointing to more than a 50 point gap up that could print above 26,500.  Both the QQQ’s and the SPY are also indicating the possibility of new record high prints at the open. What an amazing bull run!  Stay with the trend because it has without question been our best friend since the beginning of the year.  Remember Friday is a very good day to bank some profits ahead of the weekend.

Trade Wisely,

Doug

Filling the gap.

The market has gone up so long, and so strongly it’s shocking when we see a quick reversal filling the gap.  It was likely a painful wake-up call for some traders, which complacently chased the morning gap.  As bad as it may have seemed the market up-trend did not break.  The bulls are still in control, but we must always remember that the bears can attack at any time.  We must always be focused and prepared.  As earnings continue to roll out increased volatility is possible.

On the Calendar

The Thursday Economic Calendar gets going at 8:30 AM with the weekly Jobless Claims.  Consensus has the number coming in around 240K and continuing to be considered full employment.  At 10:00 AM is New Home Sales is forecast to come in with a  very solid 680,000 annualized rate.  Other than that we have several lessor reports that are very unlikely to move the market as well as several bond related actions.

The Earnings Calendar hits its high point for the week with over 160 companies stepping up to report.  Make sure you are checking reporting dates and have a plan that protects your capital.

Action Plan

New record high prints across all 4-major indexes with the futures gapped the markets higher at the open.  Chasing the gap bulls seem to rush in pushing the Dow up nearly 170 points in the early session.  But then the market seemed to run out of gas selling off and filling the gap which is something we have not seen for a long time.   The last two months alone have left many unfilled gaps behind due to the strength of this bull run.  It serves as good reminder that the market can quickly change character.  Traders have to always be on their toes and ready to quickly adapt to the changing condition.  A focus on price action is the first best place to see conditions shift.  Price is always the best leading indicator.

After filling the morning gap, the buy the dip traders rushed back keeping the uptrend intact.  Futures are once again pushing for a gap up open.  The bull will not give up this fight easily especially with the expectation of very good earnings reports.  However, yesterdays price action is a clue that increased volatility, and quick reversals are possible during earnings.  If you’re in the market, always stay focused and never let your guard down.  Complacency is an account killer!

Trade Wisely,

Doug

Overbought?

I seem to hear the term overbought a lot these days.  Personally, I believe it’s an overused word that is misleading and dangerous.  When I was coming up as a trader, I would hear that term, and it would damage my ability to evaluate a chart objectively.  It would bias my view of a stock or the overall market creating a couple of nasty problems.  1. I would be fearful of a fall not entering good trade setups and then have to watch from the sidelines as they rallied.  Or  2.  I would convince myself I needed to get short and fight the market.  Both cost me a lot of money!

The solution?  Ignore all the noise and form your own opinion with a focus on price action.  Talking heads, analysts or stock gurus don’t care about your money.  They rarely are called on the carpet for being wrong and even if they are the damage to your account is already done.  You’re the boss.  Make decisions based on what you see not what others might think.  After all, no one cares about your money more than you do!

On the Calendar

There are three important and potentially market-moving reports on the Economic Calendar today.  The first is the PMI Composite Flash at 9:45 AM Eastern.  Forecasters expect another strong showing of 54.4 composite, 54.0 services, and 55.0 manufacturing.  At 10:00 AM is the Existing Home Sales numbers is expecting a very solid 5.750 million annualized rate for December.  The strong sales have driven down housing supplies to only 3.4 months of standing inventory.  Then at 10:30 is the EIA Petroleum Status report which has shown a steady downtrend in supplies with the winter demand increases.  There is no forward forecast of oil supply numbers.  However, looking at strong gains in oil stock prices, investors seem confident that supplies will continue to decline.

The Earnings Calendar ramps up today with just over 100 companies expected to report today.  To protect your capital, it’s imperative that all traders have a plan for earnings on anything they own or are thinking of buying.  Failure to do so can result in painful lessons.  Make it a habit of your daily preparation!

Action Plan

Another day of new record highs closes in the SPY, QQQ, and IWM.  The DIA saw choppy 2-sided price action eventually closing down a whopping 11-cents.  There seems to nothing that can stop this raging bull run.  This morning the Futures are pointing to a bullish open and currently showing a possible gap up of nearly Dow 60 points at the open.  Of course, that could change substantially with all the earnings reports before the open.

Although the market seems very extended, there are currently no clues in price action suggesting that is about to change.  Stay with the trend but don’t chase.  Only enter stocks with good risk/reward ratios at or near price support levels.  Also, keep in mind as earnings reports ramp up intraday volatility can also quickly rise.  Whipsaws and swift reveals are common.

Trade Wisely,

Doug