Thursday's Trader Daily wasn't the first time we'd discussed the waning momentum in small caps, biotech and momentum stocks. A number of folks, both readers and contributors to Realmoney.com, have been opining on the situation for a while now. In fact, LinkedIn (LNKD) appears to have become the latest victim in the exodus from social media names, dropping more than 50 handles, or 20%, following the release of its quarterly results after the bell on Thursday. Despite LinkedIn CEO Jeff Weiner's assertion that the quarter was "solid," momentum buyers are unwilling to endorse LNKD's near-term potential.
So what's behind the weakening structure of the market? Blame it on the strengthening dollar. Blame it on a confusing macro environment. Heck, blame it on the fact that we're six years into a bull market. The bottom line is we could credit the weakness to any number of factors. Assigning blame, however, won't accomplish a bloody thing. The most important thing to do at this juncture is to recognize that while the E-Mini S&P 500 futures (Es) contract is less than 2% from its life-of- contract highs, much of the market, many of its traditional leaders in fact, are coming under increased pressure.
I generally reference the S&P 500 futures in the Trader Daily. But even if your preferred market is the Russell 2000, NASDAQ 100 or Dow Jones, the end result is the same. All major indices are displaying bearish momentum divergences across higher timeframes (as seen through the Relative Strength Index). And all have struggled for months to attract buyers at new highs. As tired as you may be of hearing me say this, I continue to believe higher timeframe traders and investors should either be sitting on their hands, taking off some risk or actively looking for reasons to hedge existing positions.
Let's switch gears and return our focus to the day timeframe. As we wrap up another week of trading, we need to recognize and respect that while demand continues to evaporate on rallies, it miraculously returns as we trade into previous price support. Put another way, the past few sessions of volatility haven't changed the fact that we're trapped in a choppy market with little to no directional momentum.
I want to begin Friday's auction with a focus on both 2084 and 2065.50. Value migration above the mid-2080s begins to put bulls on more solid footing. Continued migration beyond the low-2090s would leave the bulls in a decent position to mount another assault on life-of-contract highs. But to be clear, I would approach buying strength above the low-2090s with extreme skepticism.
What I believe is most probable during Friday's auction is a continued slide toward 2065.50. Barring a sustained shift in value above the mid-2080s, I'll enter the session with a bias toward fading probes of developing day timeframe value area highs. As the contract approaches the mid-2060s I'd expect to find dip buyers re-entering the pit. Pressing shorts into that area likely carries with it significant risk.
1. The beating in biotech land continued on Thursday, with the SPDR S&P Biotech ETF (XBI) declining another 4+% during the regular session. My view here continues to be that short-term traders can sell rallies in the XBI as long as it continues to close under its short-term exponential moving averages (either the five-day or the eight-day). Beyond that, I'd be looking for the next area of support to be around 190 (both trendline support and the approximate location of the rising 200-day EMA).
2. Bonds enjoyed a respite from their recent drubbing on Thursday, with the iShares 20+ Year Treasury Bond ETF (TLT) bouncing from between its 150-day and 200-day EMAs. Keeping in mind that both higher timeframe moving averages are still drifting higher, I see no reason for traders to flip directions and adopt a bullish posture until the ETF closes back above its short term EMAs. As mentioned numerous times in the past, my ongoing bearishness on bonds stems from the bullish reversal in the monthly chart of 30-year yields from beneath 2.5%. A push in 30-year yields above 2.9% will likely bring any hibernating bond bears into the light of day.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.