Markets gapped down sharply Friday (with SPY opening down 0.82%, DIA opened down 0.65%, and QQQ opened down 1.12%). From that point, all three major index ETFs rode the rollercoaster sideways all day, at their peak retracing about half of the opening gap between 1 pm and 2 pm. However, all three also closed back down near the opening level. This action resulted in the SPY and QQQ gapping down through their T-line (8ema) and then failing a retest of those levels. It also gave us indecisive, white-bodied, Doji-like candles in the SPY, QQQ, and DIA. This also gave us all three looking like they were in Bull Flag patterns.
On the day, all 10 sectors were in the red with Utilities (-1.46%) and Energy (-1.32%) leading the way lower while Consumer Defensive (-0.67%) and Healthcare (-0.67%) held up better than other sectors. At the same time, SPY lost 0.76%, DIA lost 0.64%, and QQQ lost 0.99%. The VXX gained 1.26% to 26.48 and T2122 dropped back to the bottom of the mid-range at 25.65. 10-year bond yields fell to 3.735% while Oil (WTI) was down about a quarter or a percent to close at $69.35 per barrel. So, Friday was really defined by the opening gap, with volatile sideways action the rest of the day. This all happened on less-than-average volume in the SPY, QQQ, and DIA (although DIA was quite near average volume).
In major economic news on Friday, Preliminary Manufacturing PMI came in below expectations at 46.3 (compared to a forecast of 48.5 and the May reading of 48.4). At the same time, Preliminary Services PMI came in slightly above expectations at 54.1 (versus the forecast of 54.0 but down from the May value of 54.9). Meanwhile, the Preliminary S&P Global Composite PMI fell to 53.0 (from a May reading of 54.3). The biggest impact of these was the falling and underperforming Manufacturing PMI that is showing contraction. Later, BKR gave its weekly oil and gas rig count report. The data showed an eighth straight week where drillers are taking rigs offline due to low prices. The reports specifically cited CHK, SWN, and CRK as shutting down rigs on the week, which brings the total 9% lower than one year prior. Elsewhere, Atlanta Fed President Bostic told a University of Georgia conference “Getting inflation down is Job One, inflation is too high.” However, Bostic then went on to explain his dovish approach as “I am trying to minimize the dislocation as we get inflation under control. I am hopeful.” At about the same time, San Francisco Fed President Daly said two more interest rate hikes this year is a “very reasonable” projection. However, she went on to say that given how fast rates have risen already and how close they are to where they probably need to be, it’s better to move more slowly and carefully than before. As is usually the case, Daly said, “I want to make sure that we balance those risks on both sides, of under- or over-tightening” … “Adding another six weeks to our decision space, to me that seems optimal, and prudent.”
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In stock news, there were fires at NKLA company headquarters Friday. This caused several of the NKLA electric trucks to be damaged. The company said, “Foul play is suspected as a vehicle was seen in the area of the affected trucks just prior to the incident and an investigation is underway.” Elsewhere, Reuters reports that Germany is set to order 60 of the CH-47 Chinook helicopters from BA for $8.71 billion. At the same time, CGC reported a wider-than-expected loss of nearly $500 million on Friday. The company cited “systemic regulatory issues and competition from illegal marijuana” in their report, which raised real concerns about the company’s viability. CGC stock fell almost 14% on the day. That move took the entire marijuana industry sharply lower. Meanwhile, after the close, AAPL CEO Cook called India a “huge opportunity” after meeting with Indian PM Modi and President Biden at the White House on Friday. He told CNBC the company would be expanding operations in India, including opening two retail stores. At the same time, MU announced it has plans to open a facility in PM Modi’s home Indian state and LRCX said it has plans to train 60,000 Indian engineers.
In stock legal and regulatory news, the US Supreme Court ruled 5-4 in favor of COIN by blocking customer lawsuits while the company appeals lower court rulings and hopes to move the suits out of court and into private arbitration. Elsewhere, the NHTSA announced that HMC is recalling 1.2 million 2018-2023 vehicles due to a faulty coaxial cable connector that may disable the rearview camera. (HMC had received 274,000 warranty claims related to the issue prior to the recall.) Meanwhile, Reuters reported that the state of Washington is set to mandate that electric charging stations that want to be part of state programs (get US grant dollars) must include a TSLA plug. At the same time, US Sec. of Transportation Buttigieg warned of potential airline delays starting July 1. The issue is a long-standing delay in the rollout of 5G service near airports by T, VZ, and TMUS, who all had agreed to delay the launch until July 1. Yet airlines claim they still have not been able to get their entire fleets retrofitted and, as a result, up to 20% (DAL) of planes will be grounded to avoid altimeter interference. No other airline has released figures, but they are expected to be similar. This means a 20% reduction in airline capacity and presumably revenue starting July 1. Finally, after the close, GSK announced it had settled the first Zantac cancer lawsuit (which was headed for trial in July) for an undisclosed sum.
In geopolitical news, obviously, the attempted coup d’état in Russia (or the march for justice if you prefer) and its impact on their invasion of Ukraine were the main story worldwide. On Friday night, the fight between Wagner PMC boss Prigozhin and Russian Defense Minister Shoigu and Army Chief Gerasimov went “hot.” Putin sided with his minister, Shoigu et. al. This led Wagner to march on and capture the cities of Rostov-on-Don and then Voronezh (halfway from Rostov and Moscow). Rostov, a city about the same size as Dallas TX, is the main Russian command, logistics, and resupply center for the Russian forces in South Ukraine (including Crimea). Voronezh, a city about the size of Jacksonville FL, is the main through point to Rostov and the primary center of both logistics and command for Russian attacks on Eastern and Northern Ukraine (Kharkiv, Sumy, etc.). There was fighting with losses on both sides Saturday. Then Saturday night, with Wagner forces just 125 miles from Moscow, some deal was struck. Prigozhin told his forces to turn around, Putin pardoned both him and his Wagner forces, and Prigozhin apparently accepted exile to Belorussia. What Prigozhin was given or threatened with (or both) are unknown. The only things that seem universally recognized are that Putin’s grip on power took a major hit and the life insurance rates Prigozhin pays must have gone through the roof. And, the fact that Prigozhin and his men are not dead but instead are given a choice to leave to Wagner African operations or join the Russian Army makes it more likely that other coup attempts will happen in the not-too-distant future.
Overnight, Asian markets were nearly red across the board with only South Korea (+0.47%) and India (+0.14%) able to hang onto the green. Meanwhile, Shenzhen (-1.68%), Shanghai (-1.48%), and Thailand (-0.83%) paced the losses. In Europe, we see a similar picture taking shape a t midday. Only the CAC (+0.24%) and Portugal (+0.48%) are in the green. At the same time, The DAX (-0.13%) and FTSE (-0.08%) are following the smaller exchanges lower in early afternoon trade. In the US, as of 7:30 am, Futures are just on the red side of flat. The DIA implies a -0.05% open, the SPY is implying a -0.13% open, and the QQQ implies a -0.22% open at this hour. The 10-year bond yields are down sharply to 3.686% and Oil (WTI) is up a half of a percent to $69.51 per barrel in early trading.
There are no major economic news events scheduled for Monday. The only major earnings reports scheduled for Monday is CCL before the open. There are no major reports scheduled for after the close.
In economic news later this week, on Tuesday we get Building Permits, Durable Goods Orders, Conf. Board Consumer Confidence, May New Home Sales, and API Weekly Crude Oil Stocks. Then Wednesday, Preliminary May Goods Trade Balance, May Preliminary Retail Inventories, EIA Crude Oil Inventories, and Fed Bank Stress Test Results are reported while Fed Chair Powell also speaks. On Thursday, we get Q1 GDP, Q1 GDP Price Index, Weekly Initial Jobless Claims, and May Pending Home Sales along with Fed speaker Bostic. Finally, on Friday, May PCE Price Index, May Personal Spending, Chicago PMI, and Michigan Consumer Sentiment are reported.
In terms of earnings reports, on Tuesday we hear from KFY, SCHN, WBA, and JEF. Then Wednesday, GIS, UNF, CNXC, FUL, MU, and WOR report. On Thursday, we hear from AYI, GBX, MKC, MSM, PAYX, RAD, and NKE. Finally, on Friday, STZ reports.
In miscellaneous news, on Friday Refinitiv analysts reported Q1 had delivered (during Q2 reports) earnings growth of 0.1% (year-on-year) from the S&P 500 companies. This was far better than the feared forecast of a 5.1% decline. However, Refinitiv still has a gloomy outlook, expecting Q2 earnings (reported in Q3) to be down 5.6% from the same quarter in 2022. Elsewhere, a major drought in Panama has been causing the Panama Canal to dry up (lakes used for the locks). On Sunday, the operator of the canal reduced the depth of the hull (below the water line) permitted to transit the canal by another 13%. This reduction will cause shipping delays, impacting both major importers and exporters. The canal transits about 3.5% of global trade. Ships could be partially unloaded for canal transit or can be rerouted around South America. (Either option would cause weeks of delay and added expense.) Finally, Bloomberg reports this morning that GS has begun laying off 125 senior positions (managing directors) globally. This comes as investment banking deal values have fallen 40% so far this year.
With that background, it looks like markets want to start the week with a continuation of at least a Bull Flag pullback. All three of the major index ETFs are below their T-line (8ema), indicating the short-term trend is bearish while the longer-term trend remains Bullish in all three. For what it is worth, the markets are printing small and as yet undecisive candles in the premarket session. However, it is early. In terms of extension, none of the three major index ETFs is far from their T-line. T2122 is not far from the oversold territory but remains in the mid-range. So, both sides have room to run if they can muster the energy. The most notable thing about the market this morning is that there is apparently no reaction to the events in Russia. Maybe this is due to their isolation and greatly diminished economic position in the world. However, I have a sneaking suspicion that the reason it is not being noticed is that it so far has not had an impact on the Russian invasion of Ukraine.
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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