The S&P 500 teased the bulls and tested the top of its trading range today but was unable to finish the job. It closed near the highs of the day but couldn't quite push through the 200-day simple moving average and the top of the trading range, which are just under the 2000 level of the S&P 500.
This is an extremely obvious level and under intense scrutiny. When a level is watched so closely, it will be breached before any meaningful reversal occurs. In other words, watch for the stops to be triggered before you start looking for short-term tops.
There were a number of oddities under the surface. Underperformance by key big-cap names including Facebook (FB), Alphabet (GOOG, GOOGL), Amazon (AMZN) and Netflix (NFLX) received the most attention but we also had big swings in biotechnology and continued strength in oil and metals. There were quite a few big bounces in stocks that have been acting the worst lately.
Plenty of bulls are anxious to embrace this market. The action today gave them another reason to feel a bit more optimistic. The market is a bit extended and needs to regroup before a better assault upside, but there is no question the price action is generally better.
Regardless of what happens next, you can bet that earnings reports will likely receive the blame or credit. We have Alcoa (AA) tomorrow and then things really pick up next week. So far the few reports we've seen haven't been that great, but there isn't enough to establish any real theme.
While the price action is better, it is still an extremely tricky market to trade. We had an ugly intraday fade today but reversed back up and closed strong. It is not easy action to navigate but at least there are signs of better buying.
Have a good evening. I'll see you tomorrow.
Oct. 7, 2015 | 1:34 PM EDT
Not Enough Juice to Push Through the Top
- But the action is improving, and that is a good sign.
The bulls made a good run at the top end of the trading range but didn't have the juice to push through it. The market is a bit overbought, which makes it tough, but that can be cured with backing and filling.
Primarily, weakness in oils turned the market but there is good action in big-cap technology names, including Apple (AAPL), Tesla (TSLA), Amazon (AMZN) and Alphabet (GOOG, GOOGL). That is causing the main pressure. As I discussed earlier, the charts aren't set up particularly well, and that is one reason we aren't seeing great upside continuation.
One positive is the bottom-fishing interest in biotechnology. This group has been leading the recent corrective action and it is good to see interest in speculative names again. This group led the market for quite a while and it is unlikely that it will immediately lead again, but at least there are signs of support.
I've been complaining lately about not being able to put much money to work, and that continues to be the biggest issue I see. When I do make a buy, it tends to be small and with a shorter timeframe. For my style, it simply isn't a market that allows for substantial buying.
The market is in a trading range, which means that selling strength and buying weakness tends to work best. At the top of a range, it isn't logical to start chasing. There are folks who want to believe the V-shaped move has returned, but I'm not making that bet.
The action is improving and that is a good sign. Underlying support will help produce a higher low, which is the foundation needed to break through overhead resistance.
Oct. 7, 2015 | 10:34 AM EDT
Beyond 'Good' and 'Bad' Charts
- In a market like this, if you aren't buying 'bad' charts, you aren't buying.
Bounces in oil, China and a few biotechnology stocks are helping to push the market higher. Breadth is very good with more than 4,250 gainers to just 1,000 losers. The new-high list is still has only about 40 names, which is a function of the fact that this is mainly a rally of broken stocks rather than powerful momentum action.
In a market like this, if you aren't buying "bad" charts, you aren't buying. Characterizing a chart as "good" or "bad' is highly subjective and dependent to a great degree on timeframes, but in general it means things that have been in downtrends and have broken key areas of support. Virtually everything in the oil and biotechnology sectors fit that description. That makes it tough to trust them for sustained upside, but there are always bottom fishers trying for bounces in stocks that have acted like these two groups have.
The indices are approaching the top of the recent trading range. The big hurdle for the S&P 500 is the 2000 level, which is psychologically important but is also near the key 50-day moving average. What the bulls really need is for the S&P to close above the 2000 level and stay there for a few days. That would help to grow the conviction that the worst is over and embolden dip buyers to put idle capital to work.
While this action is improved, it is still extremely difficult to put cash to work if you are looking for strong technical setups. The oversold bounces are fine but you have to use short-term timeframes.
One chart I like is MaxLinear (MXL). It has a cup-and-handle pattern and should attract interest above the $12.75 level. LGI Homes (LGIH), which I mentioned yesterday, looks good, and Shopify (SHOP), my Stock of the Week, is also in good technical position.
The market is acting well but putting money to work is not easy.
Oct. 7, 2015 | 07:44 AM EDT
Neither a Bull, Nor a Bear Be
- The best thing is to be an opportunist.
"Be stubborn about your goals, and flexible about your methods."
After a big two-day move, the market stalled on Monday, but strength in oil and precious metals offset another drubbing of biotechnology. Given the size of the move after the lousy jobs news, the market was due for a rest, but now the question becomes whether the bulls can gain further traction as earnings season starts to heat up.
So far, there are a few worrisome signs on the earnings front. Adobe (ADBE) warned last night and Yum! Brands (YUM) missed, and is trading down hard. We still have to wait until next week for major reports to start rolling in, but there are some major concerns about the numbers.
At the moment, the indices are working hard to test the top of the recent trading range. They have not yet recovered the levels we hit following the FOMC interest rate decision on Sept. 17, but those with a bullish bias keep telling us that there was a "successful retest of the lows" and that we are in good shape now.
Maybe so, but there is some substantial overhead resistance to deal with. The better action in oil is helping, and traders have their fingers crossed that maybe the health care and biotechnology sectors are finally washed out.
One of the most striking things about the mood of the market now is how anxious so many folks are to be bullish again. They have a vested interest in proclaiming that the worst is over, and that more upside is sure to come. The inclination to be optimistic is understandable. We have had such a strong uptrend for so long, that people simply can't handle corrective action. The market simply isn't supposed to act that way when we have central bankers around the world working to keep things running to the upside.
It isn't too hard to understand the arguments of the bulls and bears right now. The bulls are happy to see the Fed remain dovish, while the bears tell us that conditions have changed and that the market is going to act the same as a result.
While both the optimists and the pessimists have strong logic, the best approach is to simply stay open-minded and let the price action be your guide. Why bother being a bull or a bear? Be an opportunist and stay focused on ways to make money in the market no matter what it may do. Right now, the bulls have an advantage but they are running into resistance. There has been some trading in oils and if you have dodged the biotechnology pain, you are ahead of the game.
This market has demanded some defense over the past six weeks. If you have played it to some degree, you shouldn't be in too bad a position. The goal now is to focus on moving accounts back to their highs. Rather than just blindly start buying things that have been beaten up, we need to look for opportunities with the best probabilities.
This isn't a market for dogmatic bullishness or bearishness. It is a trading range with a positive bias at the moment. We need to stay objective, flexible and opportunistic.
We have some early strength as a rebound in oil drives overseas markets, but it's earnings that will soon be the focus.