Trade News, PMI, and Beige Book Today

Tuesday gave us a modest gap lower at the open (down 0.10% in the SPY, up 0.01% in the DIA, and down 0.23% in the QQQ).  At that point, we saw a little follow-through by the Bears that bottomed out at about 10:40 a.m.  Then the Bull stepped in to rally us until shortly after 11 a.m.  From there, the Bears led a long, slow, wavy decline right into the close on the SPY and DIA.  Meanwhile, the QQQ ran back and forth between the late morning high and the Friday closing level.  This action gave us black-bodied candles with very little wick in the SPY and DIA (with the DIA crossing back just below its T-line and 50sma).  Meanwhile, the QQQ printed a white-bodied Spinning Top candle.

On the day, nine of the 10 sectors were in the red with only Energy (+0.10%) hanging onto green territory while Basic Materials (-0.1.93%) and Industrials (-1.74%) led the way lower.  At the same time, the SPY lost 0.43%, DIA lost 0.55%, and QQQ gained 0.13%.  VXX gained two-thirds of a percent to close at 21.35 and T2122 plummeted back down to the other side of the mid-range to just outside the edge of oversold territory at 21.48.  10-year bond yields shot up to close at 4.266% while Oil (WTI) gained another 1.39% to close at $86.74 per barrel. This all happened on extremely low volume (not much more than half of the 50-day average) in all three of the major index ETFs.  So, the Bears had control on the day, but it sure felt like just a tepid pullback after last week’s pre-holiday rally. 

The major economic news reported Tuesday was limited to July Factory Orders, which came in down but better than expected at -2.1% (compared to a forecast of -2.5% but much worse than the June reading of +2.3%).

In Fed news, Fed Governor Waller said Tuesday that the latest economic data was giving the FOMC space to wait and see whether it needs to raise rates again.  He went on to note that he currently sees nothing that would force the Fed to raise the cost of short-term borrowing again.  Waller said, “we have to wait and see if this inflation trend is continuing … I want see a couple of months continuing along this trajectory before I say we’re done doing anything.”  (For what it’s worth, the market is pricing in only an 8% chance of a rate hike in just over two weeks at the September meeting and just over a 40% chance of a hike at any of the three remaining scheduled 2023 meetings.)  Later in the day, the NY Fed said that it believes the neutral rate (neither restrictive or stimulative), known as R-star had fallen in Q2.  The Fed analysis pegged 0.57% as the R-star for Q2, down from 0.68% in Q1.  It is worth noting that analysts add the Fed target of 2% inflation to that R-star.  In this case, it would mean a 2.57% rate would be neutral for the economy.  Since the Fed currently has rates at 5.25% to 5.50%, that means the Fed is being very restrictive.

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In stock news, on Tuesday, WBD announced that the Hollywood writer’s strike will hit the company’s 2023 profits.  The company expects the impact to be $300 million – $500 million for 2023 reducing earnings to $10.5-$11 billion.  Elsewhere, STLA said that its testing shows that 24 of the company’s existing internal combustion engines work, without modification, on new e-fuels.  (E-fuels are synthetic fuels that blend existing standard fuels with carbon that has been captured and hydrogen created from sustainable electric sources like wind, solar, and nuclear.)  At the same time, UAL announced that it had resumed flight departures after a computer issue had forced them to have the FAA ground all non-departed flights earlier in the day.  By midday, MA denied reports that the company is planning to increase the fees charged merchants when a credit card is processed.  This came after the Wall Street Journal reported it had obtained documents and sources claiming that both MA and V have plans to raise those fees in October and April respectively.  After the close, Reuters reported that the head of GM manufacturing said that current UAW demands “have significant costs attached that would threaten our ability to maintain our manufacturing momentum.”  Also after the close, ENB announced they had agreed to acquire 3 utilities from D for a total purchase price of $14 billion ($9.4 billion in cash and $4.6 billion in assumed debt).  In the early evening, AAPL announced it had extended its deal with soon-to-IPO ARM in a deal that extends until 2040.  (AAPL uses ARM chips in all of its phones, tablets, and computers.  During the evening, COIN announced it would be launching a new lending platform aimed at large institutional investors.  (A regulatory filing shows that COIN has raised $57 million to fund the development and launch of this new platform.)

In stock legal and regulatory news, TSLA filed suit in China against Chinese chip designer Bingling, claiming the company violated its intellectual property rights.  (Bingling specializes in chip design related to battery efficiency optimization.) Later, the NHTSA announced a decision that 52 million airbag inflators should be recalled.  (The agency had first called for the recall in May, but the maker, Arc Automotive, refused.)  This would impact 12 automakers, including GM, F, STLA, TSLA, TM, HYMTF, MBGAF, BMWYY, VLKAF, and models from 2000 through early 2018.  The next step will be a public hearing in October to compel the recall.  After the close, the Wall Street Journal reported that the FTC is planning to file an antitrust suit against AMZN later this month after the e-commerce giant refused to offer concessions related to its pricing and rules requiring third-party sellers to use “Fulfillment by Amazon” to avoid fees.

On Monday evening, ZS posted beats on both the revenue and earnings lines.  The company also raised its forward guidance.  So far this morning, CNM reported in-line revenue but missed on the earnings line by a penny.  At the same time, EXPR missed on both the top and bottom lines.

US mortgage demand fell last week to a 27-year low, even as interest rates fell slightly.  Total applications for new home purchase loans fell two percent for the week (and were 28% lower than one year prior).  Meanwhile, refinancing applications were down five percent week-on-week (and were 30% lower than the same week in 2022).  This all took place while the average rate for a 30-year, fixed-rate, conforming loan dropped from 7.31% to 7.21% (with closing points also decreasing from 0.73 to 0.69).

Overnight, Asian markets were mixed but leaned toward the downside.  Japan (+0.62%) was, by far, the biggest gainer.  Meanwhile, Australia (-0.78%) and South Korea (-0.73%) were by far the biggest losers on the session.  In Europe, things are more dicey at midday with only Belgium (+0.09%) hanging onto green territory.  On the other side, the CAC (-0.71%), DAX (-0.40%), and FTSE (-0.66%) lead the rest of the region lower in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing to a modestly red start to the day.  The DIA implies a -0.19% open, the SPY is implying a -0.22% open, and the QQQ implies a -0.27% open at this hour.  At the same time, 10-year bond yields are back down to 4.244% while Oil (WTI) is off a third of a percent to $86.38 per barrel in early trading.

The major economic news scheduled for Wednesday includes July Imports, July Exports, and July Trade Balance (all at 8:30 a.m.), August S&P Global Composite PMI and August S&P Global Services PMI (both at 9:45 a.m.), August ISM Non-Mfg. Employment, August ISM Non-Mfg. PMI, and August ISM Non-Mfg. Price Index (all at 10 a.m.), Fed Beige Book (2 p.m.), and API Weekly Crude Oil Stock Report (4:30 p.m.).  The major earnings reports scheduled for before the open are limited to CNM.  However, after the close, AEO, PLAY, and GME report.   

In economic news later this week, on 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 Thursday, we hear from ABM, DOOO, DBI, KFY, SAIC, TTC, DOCU, and RH.  On Friday, KR reports.

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In China news, last week, while US Commerce Sec. Raimondo was visiting, China unveiled the latest Huawei smartphone.  A Canadian analyst firm acquired and tore one down. What they found was that China has made a massive leap in capability.  The Huawei phone uses a Chinese-made 7nm chip that was created using UEV (extreme ultraviolet lithography).  Prior to this, the most advanced chip China was known to create was 14nm and even the top Western companies only began using UEV lithography in 2019.  7nm still only yields 50% (half the chips made are bad), but this all means China is only one generation behind the West (TSM and INTC for example) rather than previous expectations that China was 3-4 generations behind.  It also means that the sanctions dating back to 2020, and greatly expanded by President Biden, have either been circumvented or made irrelevant by Chinese internal development. Elsewhere, overnight China announced it will increase its support of the property sector. This caused Chinese property developer stocks to spike higher with Evergrande up 83% and Sunac China Holdings up 68%.

In miscellaneous news, Oil settled at a 10-month high on Tuesday after both Russia and Saudi Arabia announced they are extending their voluntary supply cuts through the end of the year.  (Markets had expected another 1-month extension…not the 3-month extension announced.)  The continued strength of the US Dollar also helped oil, as bond rates rose again Tuesday (on a post-holiday flood of investment-grade corporate bonds that took away Treasury buyers and thus drove up bond yields).  Elsewhere, Turkey’s President Erdogan ended his talks with Russia’s Putin with any public progress on resuming the “Grain deal.”  Still, Erdogan said it would soon be possible to revive the deal and get Ukrainian grain to market. 

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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