I hope everyone had a great week, it’s funny how one day can change people’s attitude on the market. Friday was a pretty heavy day on the downside and it has happened before with the market reversing the losses pretty quick and then ripping back up. This time i think there is a bit more downside coming, time to panic or stay calm? Stay calm of course, you’re now starting to get the market to blow a bit of steam off which will eventually feed energy into this tape for the next leg higher, in the meantime watch your favourites and wait for the deals to come to you.
Let’s go through some charts and try and figure out some of our probabilities..
Above is the June weekly /ES emini futures contract, you can clearly see where the week ended, at the low. This is usually a tell that more downside is coming so i wouldn’t rush in and start buying on any rallies Monday morning even though we may get a bounce. We are still above the mean so there is still plenty of energy to shake people out. There is nothing here right now that tells me this is a screaming buy.
Here is a clean chart of the /ES contract showing all the gaps from the rally since early Feb.
There are a bunch of these around the 1850,1840 and low 1830s. This is a high concentration of targets for the tape. My personal thinking is the tape will probably bounce and fill some of this stuff then chop until we get a failure from one of the big stocks on earnings and that’ll force the tape through this 1830 support level and target the 1790-1800 zone.
If the tape somehow gets through 1730 then something more fundamental is going on but in my eyes, that is a long way off.
If we use the typical percentages that media heads throw around, let’s look at where a 5%, 10% and a 20% correction takes us.
Assuming 1892 as the recent high
5% = ~ 95 points = 1797, right near a gap, uncanny right?
10% = ~ 189 points = 1703, if we get down here, we probably need to revisit the hypothesis..
20% = ~ 378 points = 1514, ouch, a long way down and way below many critical support levels. In my opinion, this is unlikely in 2014 but never say never right?
So, my gut is aiming for somewhere between a 5%-10% from this move, the market recharges and then we take out 1900 – 2000 in the second-half……need to see how the market reacts to earnings first 🙂
Here is another chart of the SPY showing a very clean break. The green is the 5 sma, we may revisit this first before continuing down. The blue is the 50, the 200 is way down around 175. The RSI indicator at the bottom reversed very hard, when it gets to near the bottom and holds, you will usually get some kind of bounce in the index, great for trading. Again, you can’t use it in isolation, you need to put together a complete hypothesis and back it up. When things line up well, there’s usually a good probability of things working ok.
So on Friday, the S&P although weak, is still holding on ok so where was the biggest selling? It appears to have been in the nasdaq as can be seen here..
The bottom dashed yellow line is where the market launched the previous rally. At this stage it looks like the NQ has a bit further to go, at least another 100 points which is why i am expecting more weakness. That said, it is currently a bit oversold.
Normally when he tape makes a big move in one direction there are usually a few days of consolidation first then it resumes it’s initial direction.
What is happening? Well i think people are unsure of the earnings which are coming up soon. That’s not to say everything is going to hell in a hand basket, it just means the market is just correcting overheated areas and everything will begin to line up again at some point for the next big push. I always try and look at how how the major indexes line up when we push to new highs, you need all of them to be moving hard. Any weakness normally is a tell.
So if we dive into some nasdaq stocks, the damage becomes more apparent…
Above is Tesla’s daily chart, as you can see the stock got pretty hammered, beautiful rejection from the descending trendline – look familiar? ( Aapl anyone? ) and i suspect sub-200$ is coming soon. Even Musk was quoted as saying his stock was overdone on the upside when it was ripping up through $200 a month or two ago. There will be a great entry on this at some point but not yet in my opinion, i’ll probably start looking in the 170-180$ range initially but just as high beta names can overcook it on the upside, they can also drop a lot further as psychology plays a part, you need a strong stomach with these but they do create some fantastic opportunities. Not a fan of the stock here but love the company and the long-term story.
Here is a weekly AMZN chart, some big selling all the way from $400, so it looks like finally the stock is reverting to the long term mean. I love AMZN as a service but i’ve never been a big fan of the stock for the longest time due to the fact they are all about revenue generation and not profits and somehow they were one of those rare stocks that got a ‘free pass’ from wall st. That said, their cloud services are impressive although that landscape is starting to become increasingly competitive..
Here is the daily on AMZN which shows how the stock is currently wrestling with the key 200ma, there is likely to be some chop around here in the short-term…hard to say if the stock will hold this and rip or push further down. You need to watch how the Nasdaq index behaves.
Finally our old friend AAPL on a daily chart.
So the stock got hit a little bit on friday but not that much, interesting right? Where i have put the dashed lines is a key zone for the stock around the 512 area. I think we are going to test that which may coincide with the next leg down in the nasdaq. Apple is also part of the S&P 500 but that index held up much better. Crosswinds going on for sure..
I still think Apple rips to 590-600 with the iPhone 6 and whatever else is coming down the pipe. In the short-term i am seeing a possible test of 512, maybe 500, maybe 470-480. I’ll look at the pricing of the options as we get closer to earnings, i’m not expecting a catalyst for the upside in the short-term on the stock. If we get into the upper 400’s, i’m buying some long term calls for a ride up ( subject to market conditions )…
So that just about covers stuff for me, interesting to note that stocks i have that were creamed last year haven’t really sold off at all and just hovering around….look at your portfolio, look at what got smoked, look what held the ground, it usually gives some good clues.
If in doubt, always hedge with some SPY puts, i always keep an eye on the vix when it gets down to 11-13 and buy, this offsets declines in the portfolio especially when the volatility shoots up. Sell, roll the profits back into your dividend stocks or whatever, rinse and repeat.
Beyond the Tape
I was hovering around a place called Future shop yesterday up here in Canada, looking at ideas, seeing what is hot, what they are trying to push. Televisions just keep getting bigger, everyone now pushing 4k televisions, they look great but not something i’d run out and buy. Beyond 4k then next ‘sexy’ thing is OLED which i am a huge fan of. It is too expensive right now, 10,000k$ for an OLED tv is a bit rich :)…if you haven’t seen one though, go check them out, i think this tech is going to become huge, not just with television, it will be used on fashion, clever advertising and all kinds of other whacky things. Technology is a beautiful thing. Probably worth watching the stock OLED and competitors as this tech becomes more widely available.
One thing i did notice though was how hard Samsung and Microsoft had sectioned off parts of the store to say look at me, look at our products. Everything is cheaper than apple, they have more choice, each area is at least 8 times the size of the Apple retail section within this store. They are pushing hard. Pretty crazy right? But then i walk to the Apple retail store and it is rammed with people…still.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net