Short Week Starts With Modest Bear Push

On Friday, markets opened higher, gapping up 0.62% in the SPY, up 0.62% in the DIA, and up 0.67% in the QQQ.  However, that was the last we saw of the Bulls with all three major index ETFs selling off until about noon.  (QQQ had faded its morning gap by 10:35 am while SPY and DIA faded their own gaps by 11:50 am.)  From that low of the day at noon, the SPY and DIA drifted slowly and slightly higher the rest of the day (closing back inside the opening gap area) as QQQ rode waves sideways and did not quite reach the Thursday close level at the end of the day.  This action gave us a gap-up, inside day, black-body Spinning Top in the DIA.  At the same time, we got a gap-up, black-bodied candle in the SPY.  Meanwhile, the QQQ printed a gap-up, Dark Cloud Cover signal.  All three remain above their T-line (8ema) and did not even retest those levels.  The same goes for the DIA not retesting its 50sma, but to be fair, DIA is not far above either average. 

On the day, seven of the 10 sectors were in the green with Energy (+1.96%) far out front leading the way higher while Communications Services (-0.88%) lagged behind the other sectors.  At the same time, the SPY gained 0.19%, DIA gained 0.34%, and QQQ lost 0.11%.  VXX dropped 1.35% to 21.21 and T2122 climbed back up to the edge of the overbought territory at 76.92. 10-year bond yields pulled back slightly to close at 4.18% while Oil (WTI) gained 2.89% to close at $86.05 per barrel. This happened on modestly below-average volume in all three of the major index ETFs.  So, the bullish trend of the week continued but it felt tepid with a strong gap in one direction and then trading the rest of the day that went back the other way. 

The major economic news reported Friday included August Average Hourly Earnings which rose a bit less than expected at +4.3% (year-on-year), compared to a forecast of +4.4% and the July reading of +4.4%.  It is worth noting that the month-on-month Avg. Hourly Earnings also came in a bit below forecast at +0.2% versus both a forecast of +0.3% and the July value of +0.3%.  At the same time, August Nonfarm Payrolls grew more than predicted at +187k (compared to a forecast of +170k and the July reading of +157k).  Meanwhile, August Private Nonfarm Payrolls were reported much stronger than anticipated at +179k (versus a forecast of +150k and a July value of +155k).  The August Participation Rate increased to 62.8% (compared to the forecast and July numbers which were both 62.6%).  This drove a jump in the August Unemployment Rate to 3.8% (from the forecast and July readings which were both 3.5%).  Later the August S&P US Mfg. PMI came in at 47.9 (better than the 47.0 forecasted but lower than the July 49.0 value).  Then the August ISM Mfg. PMI was better than expected at 47.6 (versus a forecast of 47.0 and a July reading of 46.4).  At the same time, the August ISM Mfg. Price Index was reported well above predicted at 48.4 (compared to a 43.9 forecast and a 42.6 July reading).  So, to summarize, wages grew by slightly less than expected and jobs were also up much more than expected.  However, a pop in participation led to a pop in the unemployment rate.  Bloomberg characterized this as a “controlled cooling.”  Meanwhile, manufacturing was better than anticipated but still contracting both in the US and globally.

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In stock news, on Friday, the Wall Street Journal reported that Saudi Aramco is now strongly considering issuing a $50 billion secondary before the end of the year. If done, this would essentially double the world’s largest oil company’s outstanding shares.  This seems a bit odd since the company just increased dividend payouts by $10 billion in August.  However, the $50 billion will be used to bolster the Saudi sovereign wealth fund (which is a major investor in US markets).  Later, HOOD announced it would buy a block of stock formerly owned by Sam Banman-Fried (disgraced “wunderkind” indicted on crypto fraud and conspiracy charges).  The block was seized by the US government in November and is now held by the US Marshal Service.  The sale will be for $605.7 million or $10.96/share.  Elsewhere, entertainment stocks took a hit Friday as a major contract dispute between DIS and CHTR (second-largest cable TV provider) over the television distribution fees of their deal.  Later, TSLA announced a new, restyled Model 3 in China with a higher price.  At the same time, TSLA slashed the price of its premium vehicles, which include the “Full Self-Driving” software, by 14%-21%.  After the close, the New York Times reported that META may allow Facebook and Instagram users in Europe to pay in order to avoid getting advertisements on its platform. 

In stock legal and regulatory news, on Friday, the NHTSA announced that F will recall 169k vehicles to replace rearview cameras, update software on some cameras left in place, and will take a $270 million charge as a result.  Later, the FTC approved the AMGN $27.8 billion acquisition of HZNP.  This comes after the FTC ended its lawsuit to block the deal.  To obtain the agreement, AMGN agreed not to bundle its own drugs with those from HZNP.  Elsewhere, HUM joined the list of big pharma companies who are suing the US government.  In this case, HUM does not want Medicare to claw back billions of dollars of overcharges after audits found prescriptions for medications for conditions that are not even listed in the patient’s medical records.  HUM claims the rule allowing the clawbacks is “arbitrary and capricious.”  The Biden Administration says the clawbacks will save $4.7 billion over 10 years.  At the end of the day, NVS also sued the Dept. of Health and Human Services, hoping to prevent Medicare from negotiating drug prices for its 66 million enrollees.  One of NVS’s top-selling drugs (Enestro) was on the list of 10 drugs Medicare announced it would be negotiating prices on (as opposed to just accepting whatever the drug maker wants as it is now).  After the close, the US government sued EIX for negligence that led to a 2020 fire near Los Angeles, which burned 180 square miles.

In major IPO news, ARM revised its filing and is now pricing the much-anticipated chip stock between $47 and $51 per share.  Although this IPO is expected to raise around $5 billion, with SoftBank retaining 90.6% of the stock.  (The IPO underwriters do have the option to up to an additional $735 million of the stock, which would reduce SoftBank’s stake to 89.9%.)  FWIW, ARM is the architecture AAPL chose when it replace INTC chips with so-called AAPL-designed chips and ARM is the only real competitor to the x86 chip architecture used by the industry leaders INTC and AMD.  

Overnight, Asian markets were mostly in the red.  Japan (+0.30%), India (+0.24%), and Taiwan (+0.01%) managed to hold onto green while Hong Kong (-2.06%), Shanghai (-0.71%), and Shenzhen (-0.67%) led the region lower.  In Europe, we see a similar picture taking shape with only four of the 15 bourses in the green at midday.  The CAC (-0.39%), DAX (-0.24%), and FTSE (+0.09%) are typical of the region in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing toward a red start to the day.  The DIA implies a -0.09% open, the SPY is implying a -0.22% open, and the QQQ implies a -0.42% open at this hour.  At the same time, 10-year bond yields are up briskly to 4.23% and Oil (WTI) is off by a third of a percent to $85.27 per barrel.

The only major economic news scheduled for Tuesday is July Factory Orders (10 a.m.).  There are no major earnings reports scheduled for before the open.  Then, after the close, the only earnings report that might be considered major is ZS.  

In economic news later this week, on Wednesday we get July Imports, July Exports, July Trade Balance, August S&P Global Composite PMI, August S&P Global Services PMI, August ISM Non-Mfg. Employment, August ISM Non-Mfg. PMI, August ISM Non-Mfg. Price Index, Fed Beige Book, and API Weekly Crude Oil Stock Report.  Then Thursday, Weekly Initial Jobless Claims, Q2 Nonfarm Productivity, Q2 Unit Labor Costs, EIA Crude Oil Inventories, and Fed Balance Sheet are reported.  We also have 3 Fed speakers (Harker at 10 am, Williams at 3:30 pm, and Bowman at 4:55 pm).  Finally, on Friday there are no major economic news reports.

In terms of earnings reports later this week, on Wednesday, CNM, AEO, PLAY, and GME report.  Then Thursday, we hear from ABM, DOOO, DBI, KFY, SAIC, TTC, DOCU, and RH.  On Friday, KR reports.

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In miscellaneous news, the National Federation of Retailers said that their surveys lead them to predict there will be record back-to-school spending of $135 billion this year. That is up $24 billion (a 21.8% increase over 2022).   Elsewhere, the industry group that represents large private hedge funds filed suit against the SEC on Friday, claiming the agency went too far in requiring them to disclose their expenses and preventing them from giving different investors different deals (sweetheart deals).  Oddly, the group filed suit in New Orleans, so there was probably some judge shopping going on there.  Finally, a reminder that we have 9 days until the current UAW contracts with F, GM, and STLA expire.  Given the nature of brinksmanship, expect a lot of stories on this topic and the possibility of a major strike over those 9 days.

In world economic news, Bloomberg reported Friday that US corporate profits are on the rise again for the second straight quarter. Profits rose 4.5% in Q2 according to data from the Bureau of Economic Analysis.  Their report showed US corporate profits grew from 13.8 percent to 14.3 percent of GDP in the second quarter.  So, in the US we are seeing what may be a “controlled cooling” with an extremely strong job market, and corporate profits on the rise.  (It is worth noting that GS has now lowered the probability of a US recession to 15%, down from 20% and far below the cycle-high probability of 60%.) However, in Europe, things are not as rosy. Inflation there is much worse than in the US and is remaining higher (stickier) due primarily to energy prices. At the same time, EU economic growth continues to be very weak leading many to start talking about potnetial “stagflation” in Europe.  Meanwhile, in China, the picture is grim.  The Chinese are now experiencing a banking sector that is under siege from a real estate crisis, and is also seeing widespread unemployment (especially among youth).

With that background, it looks like the Bears are looking to start the shortened week with a move lower. DIA even retested its T-line (8ema) in the premarket. However, it has the strongest early session candle bouncing up off the level while the other two major indices are giving us indecisive gap-down candles so far. The trend remains bullish with all three major index ETFs above a rising T-line, 17ema, and 50sma. As far as extension goes, none of the major index ETFs are too far extended from their T-line and the T2122 indicator is sitting right at the upper edge of the midrange (or just outside of overbought territory if you prefer). So, both sides have the room to run, if they can muster the momentum.

As always, be deliberate and disciplined…but don’t be stubborn. If you have a loss, admit you were wrong and take that loss before it gets out of hand. And when the price does move in your direction, always move your stops in your favor and take a little profit off the table. You have to keep the “Legend of the man in the green bathrobe” in mind. In a winning situation, it is NOT HOUSE MONEY you’re betting, it’s YOUR MONEY! There is absolutely no reason to keep raising your bet (risk) size just because you’ve had a win. Finally, remember that trading is not a hobby. It’s a job. The money is real and so is the risk. So, treat it that way. Do the work and follow the process. Stick to your trading rules, trade with the trend, and take those profits when you have them. Do the work!

See you in the trading room.


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