The Bears re-emerged onto the field of battle.

Over the last 2-weeks, the Bulls have dominated the market battle to such an extent it was easy to forget the Bears were even there.  Yesterday the Bears re-emerged demonstrating they still have teeth.  I hope you were watching and prepared.  As of now, this is nothing more than a healthy pullback and the overall uptrend is still in tact however it’s time to raise your caution levels, modify or even restrict your market activity depending on your experience level.  Expect additional volatility in the days ahead.

On the Calendar

The hump day Economic Calendar begins with Productivity and Costs at 8:30 AM Eastern.  Forecasters see nonfarm productivity rising 0.8% and unit labor costs dipping to 1.3% vs. the first quarter’s point of 2.2%.  At 10:00 AM we get the most important number of the day, the EIA Petroleum Status Report.  Oil companies continue having trouble finding their footing even though supplies are declining.  If we were to get a surprise build in supplies, we could see the market to react negatively.  At 1:00 PM we will hear from a Fed Speaker.

We have just short of 350 companies on the Earnings Calendar reporting today.   The bell weather DIS reported after the close yesterday beating consensus but disappointing investors after the announcement of pulling their content from NFLX.  The company has decided to begin their own streaming service.  The stock dropped more than 3% on the news.  Their ESPN unit continues to decline muting the companies overall all performance.

Action Plan

After a sharp rally early in the day yesterday day the DIA reached an exhaustion point profit takers gained the upper hand.  As the DIA began to tumble, all the indexes started giving back gains as I had feared.  The DIA, SPY and QQQ’s left behind shooting star candle patterns.  This pattern is considered bearish and carries much more weight when found at price highs.  However, like most candle patterns the shooting star requires a price to follow-through to the downside to be truly valid.  Currently, the futures are pointing a gap open giving us that follow-through initially but the Bulls may have something to say about that before the day is over.

Saber rattling with North Korea continues to intensify.  The market hates uncertainty, and the situation with North Korea certainly raises that bar.  Another battle in Congress over the debt ceiling is another matter that easily could add to uncertainty levels depending on the games they play this time around.  After such a strong rally these uncertain items could make it challenging for the Bulls to maintain the rally.  At a minimum, I would expect a bit more volatility in the days ahead.  Fast intraday moves could be possible as we try to sort out the details.  Yesterday I reduced my risk and added in some index puts to hedge the possible risk.  Please keep in mind that the sky is not falling.  A pullback is natural, needed to confirm support levels, and what a healthy market does!  At this point, there is no need to panic.

Trade Wisely,

Doug