Wednesday's auction marked the end of the third quarter, and today's marks the beginning of the fourth. However, before we strap in for the final three months of trading for calendar year 2015, let's reflect on what we've witnessed since the end of the second quarter.
Over the past three months, we've seen a continued liquidation in most things related to energy, metals, mining and materials. The worst of the worst were in natural gas, where the First Trust ISE-Revere Natural Gas ETF (FCG) declined a whopping 37%.
Of the top 10 components that make up the FCG, Ultra Petroleum (UPL) declined the most, losing nearly 45% on the quarter. Cimarex Energy (XEC) fell only 5%. All in all, though, natural gas companies were murdered nearly day in and day out for the past three months.
As far as what performed well during the third quarter, we see the iShares 20+ Year Treasury Bond (TLT), Utilities Select Sector SPDR (XLU) and SPDR Dow Jones REIT (RWR) all finished in the black. Worth noting, however, is all three ETFs are trading beneath their 200-day simple moving averages. Put another way, it's premature to label them in higher time-frame bull trends.
The major averages, as you no doubt already know, also struggled during the third quarter. The iShares Russell 2000 ETF (IWM) was hit hardest, declining more than 12%. The PowerShares QQQ Trust (QQQ), SPDR S&P 500 (SPY) and SPDR Dow Jones Industrial Average (DIA) all declined between roughly 6% and 8%. (IShares Russell 2000 ETF is part of TheStreet's Growth Seeker portfolio.)
Given how far much of the market has risen since June 1, 2012, I'd hardly consider these quarterly declines to be horrific or nightmarish. Nonetheless, neither mom-and-pop investor nor seasoned trader wants to see their account balance shrink. The third quarter will likely go down as a frustrating time for the majority of passive (and many active) market participants.
Before we move on to Thursday's E-Mini S&P 500 future (Es) trade plan, I believe we should take a moment to measure how many participants are looking for a successful retest of the Aug. 24 swing lows, against those genuinely willing to contemplate a scenario where the Es blows through those lows.
The overwhelming majority appear convinced the current decline is nothing more than a correction, and within a couple of months we'll be probing new contract highs. Perhaps that's how the future will unfold. But what if it isn't? Few outside of our favorite perma-bears, who've never met an uptick they didn't want to club with a mallet, are willing to entertain a scenario where the Es breaks toward 1800, and perhaps continues to fall.
My point is simple. If you are trading outside the day time frame, and carrying risk over a multiday, multiweek or longer time frame, don't put the blinders on. And as we begin the fourth quarter, a traditionally bullish time to be long stocks, let's make sure we're approaching the market with an open mind. Be prepared for not only a resumption of the multiyear bull market, but for continued consolidation, or a potential bear market as well.
The fourth quarter begins with an economic bang, as the ISM manufacturing composite index and construction spending are released on Thursday, and the monthly employment situation report hits the wires during Friday's premarket Globex session. Ahead of Friday's employment data, I believe our primary area of interest should be 1921.5 to 1923.50, as that two-handle zone represents the most actively traded area since the current bear trend began on Aug. 20.
With the above in mind, let's recognize the lack of bullish excess during Wednesday's auction, and begin by looking for any price extension beyond 1912.50 to shine a light on 1921.50 to 1923.50. A secondary, and notably more aggressive, upside target would be 1938 to 1939.50.
Failure to sustain a drive beyond 1912.50 encourages two-way rotational trading toward 1901, with continued weakness putting a quick probe of 1894 on the table. For the time being, I'd expect the majority of traders to be focused on buying dips as low as 1885. A close under 1874.50 (Tuesday's volume point of control/value) would be required to sour them on buying, and refocus their sights on fresh swing lows.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my Twitter feed @ByrneRWS