Market Observations - as of Apr 20, 2018

By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice.

The slowly fading volatility we saw last week continued the first part of this week until Wednesday,

when the VIX moved up a little then chopped sideways in a narrow range the rest of this week.

Likewise, the bullish short term trends we saw starting after the April 2nd lows, continued this week

until peaking mid day on Wednesday (April 18th), then slowly fading back down Thursday and Friday this

week. Overall this week was flat for most of the indexes, giving back most of the gains from Monday

and Tuesday on Thursday and Friday.

The Energy sector continued strong this week, with only a relatively small pull back on Thursday and

Friday. The semiconductor sector was hit hard this week, with more indications out of China as to

potential trade pressures being applied.

Earnings ramped up this past week, and continue next week. Market reactions have been mixed and

often are more correlated with the market’s and sector trends than actual company performance data.

As Technical traders, we are aware of when earning announcements occur but follow the charts for our

objective trading decisions. We do not listen to the news since it is often wrong, and always late. As

options traders, we have an added advantage since the Implied Volatility and Pricing of Options are

inflated in front of earnings announcements, and then that Implied Volatility is crushed after the data

comes out. By selling Options when they are expensive, and buying them back when they are cheap,

we can use the Earnings Volatility Crush to our advantage. Paying attention to when earnings come out,

and what range of Implied Volatility has been seen around prior earnings announcements for that

stock, we can use this behavior patterns to improve our odds and edge. Ignoring these behaviors can

end up hurting the less experienced and less prepared options trader.

After the markets close on Friday (April 20th) is when April Options contracts expire, and this fact can

also drive another behavior of options that options traders should understand and utilize in their

trading strategies. Understanding the ‘exercise’ and ‘assignment’ processes, as well as ‘pinning’ help

the options trader make better decisions as to how best to close, roll, or do a Conversion or Reversal.

Each week we look at charts for the major indexes, then a few Market Internals (statistics), a few key

commodities, several sectors, and then some key stocks. This is part of a daily ‘Top Down’ market

analysis process that helps keep the trader in sync with the overall market trends, changes, as well as

sector rotations. We encourage each trader to create their own process to do these types of

observations, since it not only helps keep a perspective on the markets, but also can reveal key

changes and opportunities as they occur.

Each week we also try to include one or two special observations about the markets, usually some

event that occurred that week that we can use as a timely example of some principle of market

behavior. Last week we showed [1] how the overnight Futures markets can give us clues of events or

changes that could be important before the next session opens. [2] An overlay study of the F.A.A.N.G.

stocks over the past 3 quarters and changes in leadership. [3] And some Sector and Stock price

reactions to Earnings on 5min. charts.

Over time, we hope you find these weekly examples useful for learning about how the markets behave,

and they spark your curiosity to study further on your own certain behaviors. This week we will look at

a different way of using the VIX to see when behavior returns to ‘normal’ after an expansion in

Volatility. We will also do a little detective work on some curious volume the middle of this week that

closely corresponded with the ‘peak’ and a trend reversal that followed.

We hope you will take some of these ideas from our examples, and do your own chart analysis to see

what ‘you’ find. This is a great way to learn by practice. Regardless if you confirm what I saw on your

own or if you find something different has happened, either way you will be building your skills. If you

find you agree, then your time practicing will help you confirm your beliefs about that behavior and

quantify that statistical advantage. If you find I was wrong, or you discover something very different,

great! Please let me know. I love to be wrong, ‘because that is often when and how I learn something

new. This way we both learn something that may turn out to be valuable.

Now, let’s look at the charts for this week.

S&P 500 weekly chart as of Apr 20, 2018 – We remain inside the Consolidation pattern for the past 3

months with this week opening and closing flat, after a test of the 20 week SMA as Resistance.

S&P 500 daily chart as of Apr 20, 2018 – On the daily chart we see price cross above the 50d SMA on

Tuesday with positive momentum stalling out on Wednesday. Wednesday was also the ‘quietest’

(narrow range) day of this week. Thursday saw Tuesday’s gains returned and Friday saw price cross

below the 50 day SMA to close near 2670, a level we have seen often over the prior weeks. Also the

Friday close was near the middle of the Consolidation range and just above the 20d SMA.

DJIA weekly chart as of Apr 20, 2018 – The Dow was also flat this week. It tried to break above its

Resistance Trend Line (Orange) this week with the 20 week SMA providing Resistance.

DJIA daily chart as of Apr 20, 2018 – Like the S&P, the Dow also crossed above its 50d SMA on Tuesday,

paused on Wednesday, and reversed on Thursday and Friday to end the week back below its 50d SMA.

Now that we have had 3 closes below the Trend Line Break out peak (Tuesday) we can now re-draw our

Trend Line from the Jan highs to the April 17th high. This then recognizes the false break out this week

as the DOW remains inside its (new) consolidation triangle.

NASDAQ weekly chart as of Apr 20, 2018 – The Nasdaq was also flat this week, beginning and ending

this week nearly on its 20 week SMA as this year has been mostly horizontal so far.

NASDAQ daily chart as of Apr 20, 2018 – Like the other indexes, the Nasdaq crossed above its 50d SMA

on Tuesday, then paused Wednesday before turning back down Thursday and Friday to end the week

back below the 50day SMA and near where it closed the prior week. We places a Fibonacci

Retracement study (Purple) from the Mar 13th High to the April 2nd Low, and found that the range of

this week found resistance a few cents below the 61.6% Retracement level, and Support Friday at the

38.2% Retracement level.

Russell 2000 daily chart as of Apr 20, 2018 – The Russell rallied Monday and Tuesday, paused

Wednesday and gave back only Tuesday’s gains on Thursday and Friday, ending the week with a small

gain and near the upper 1/3 of the Consolidation range.

Next we will look at a few ‘Market Internals’.

NYSE Advance/Decline Line daily chart as of Apr 20, 2018 – We saw market Breadth increase Tuesday

and Wednesday to new highs for 2018, before slipping back down Thursday and Friday to end the week

near where it ended the prior week.

McClellan Summation Index daily chart as of Apr 20, 2018 – The acceleration of changes in breadth

were mild this week, showing only gaps between days and little change during each day.

VIX daily chart as of Apr 20, 2018 – Here we can clearly see the VIX break below its 50d SMA last week

and continue to slowly drop Monday and Tuesday of this week. Then on Wednesday the VIX bounce a

tiny bit to break the down trend and remain in a narrow range (15.3% to 17.2%) for the rest of this

week.

Let’s look at the ‘Volatility’ of the VIX as a way to observe periods of expanding vs. contracting market

volatility. This is an observation I have found a bit more useful than just using the VIX Value as an

indication of high or low volatility. This is due to the non-symmetrical nature of the Options volatility

that the VIX calculation is based upon. This is all based upon human nature. When markets begin to

drop, fear can increase nearly instantly, and market participants become willing to quickly pay up for

insurance before it becomes even more expensive. In the case of when markets have bottomed and

begin to rally, market participants more slowly become calm and may re-enter the markets as soon as

they feel the dust has settled. Each participant makes this transition to calm at their own pace, and

each person is different at how quickly (or slowly) they become ready to take on new risks.

This non-symmetrical behavior can be seen in the VIX, as it can increase in values with large swings up

very quickly, but decreases back down much slower, with smaller swings, to eventually return to the

prior complacent levels. Using the % values of the VIX as an indicator of market sentiment tends to be

skewed as a result, so I looked at other ways to measure the volatility of the volatility. ATR (Average

True Range) can be applied to the VIX to measure the size of its swings, and removed the ‘base’ value

from where these swings may have originated. Keltner channels on a chart create a band around the

base data (VIX) to show an ATR based band above and below the data value. The width of the band

expands as data swings get wider and contract as swings get narrower. Setting the same valued (time

period) for both a Keltner Band study and an ATR study, help to see the width of these changes. The

width of these bands expand and contract, and when the base value is removed (or made a straight

line) the ATR study is what we see as a result.

Below we show 30 min charts over the past 6 weeks of the VIX and the ATR of the VIX, and the SPY.

The Red Box highlights when the VIX swings exceeded 0.5% change in the (14 bar) average of 30 min VIX

data.

During this expanded Volatility period (Red Box) seen in the markets, the VIX began this from a 16%

value and ended at a 20% value. According to this study, market volatility calmed back down by April

11th. Whereas, if one were waiting for the VIX to return back to its prior level of 16%, you would wait

until April 17th.

This is a different way to look at VIX data that takes a relative view of the size of the VIX’s 30min

swings, and not its absolute value to gauge market sentiment. This is one tool that can help a bullish

only investor decide when they may be comfortable to re-enter the markets, after the ‘dust has

settled’. No method is perfect, and each has its pros and cons. I hope this creative analysis causes you

to think of other ways to look at market data and compensate for some of its behaviors. It is creative

thinking that can help add to your overall edge.

Oil daily chart as of Apr 20, 2018 – Oil pulled back only a little on Monday of this week, paused on

Tuesday and then surged upwards on Wednesday this week. Thursday briefly saw multiyear new highs

then a small pull back to end the week Friday up about 1% for the week.

Gold daily chart as of Apr 20, 2018 – Gold remained in a narrow range and horizontal this week.

US Dollar Index daily chart as of Apr 20, 2018 – The US Dollar Index chopped sideways under its 50d SMA

most of this week until moving up on Thursday and Friday to close this week above its 50d SMA and just

above 90.

Next we will look at a few key market Sectors to see how this week played out.

DJ Transports daily chart as of Apr 20, 2018 – The Transports crossed above its 50d SMA on Monday as

well as broke above its Trend Line Resistance (Orange line). The Transports remained above both this

TL and its 50d SMA all this week. The peak on Wednesday was $1.35 higher than the prior High seen on

March 13th. The small drops on Thursday and Friday did not give back all of this week’s gains.

Note the unusually high volume on Wednesday this week. This is the largest volume in over two months

for the Transports. If we look at a 5min. chart for this week (below) we can see when most of this

volume spike occurred.

DJ Transports 5min. chart as of Apr 20, 2018 – Note the large volume spike about mid-day on

Wednesday. This is far larger than any other volume spikes. The Dow Transportation Index is made of

20 stocks, and if we look at the 5min. charts for all 20, we quickly will see two that show extreme

volume near the same time on Wednesday. (Hint: look at FDX and MATX). Sometimes thinking like a

detective can reveal some interesting data, and once in a while, possibly some opportunity.

XLF daily chart as of Apr 20, 2018 – The Financials remain horizontal this week, in spite of some very

strong earnings reports.

XLE daily chart as of Apr 20, 2018 – With the strength in Oil prices again this week, no surprise to see

the Energy sector continue its rally this week. Note the very small pull back on Friday did very little

damage to this week’s gains. XLE was often one of the strongest sectors most days this week.

QQQ daily chart as of Apr 20, 2018 – The Tech sector was hit hard this week, ending the week flat after

a brief pop above the 50day SMA the middle of this week. Like the Nasdaq, we also applied a Fibonacci

Retracement study on the QQQ chart to see a very similar story for this week, finding resistance at the

61.8% level and Support Friday near the 38.2% level. (Same story with the XLK if you prefer to use that

ETF.)

SOXX daily chart as of Apr 20, 2018 – The Semiconductor sector was hit very hard this week. The brief

peek above the 50d SMA on Tuesday ended Wednesday with Thursday and Friday dropping the SOXX

back to nearly the lows of the first week of April and the two year Trend Line support (Red line).

XLV daily chart as of Apr 20, 2018 – The XLV tried to move above its 200day SMA this week, but found

resistance at its 50day SMA on Wednesday, just to return all of this week’s small gains on Thursday and

Friday to end the week back below its 200day SMA.

XRT daily chart as of Apr 20, 2018 – The retail sector continues to be hurt by Amazon fears. The tiny

gains in the first half of this week were all given back and then some by the end of the week with the

XRT crossing and closing below its 20d SMA. Note how all the SMAs are nearly horizontal now.

XHB daily chart as of Apr 20, 2018 – Homebuilders again dropped this week, after testing the 50 day

and 200 day SMAs as resistance. XHB is back down near the lows of this year.

XME daily chart as of Apr 20, 2018 – The mild rally last week from the cross above the 20 day SMA

continued this week, with a gap up at Wednesday’s open that also broke above the Trend Line

Resistance (Orange line) the same day. Thursday and Friday saw a narrow range pause while price kept

most all of this week’s gains. When we dig deeper, we see the few stocks that account for most of

these sector gains while others have moved little.

Next let’s look at some key stocks that we have been following to see what these charts tell us.

AMZN daily chart as of Apr 20, 2018 – As we have seen over the past few months, Amazon and Netflix

have been the strong leaders in Tech, while the other f.a.a.n.g. stocks have shown some weakness.

Amazon rallied strong this week to not only cross above both the 20d and 50d SMAs, but also above its

Trend Line Resistance (Orange line) this week. The pull back on Friday was not enough to cross below

any of these three references. AMZN is not far from a retest of its All Time Highs. Remember, AMZN

reports earnings next week on April 26th after the close.

NFLX daily chart as of Apr 20, 2018 – NFLX did deliver new all time highs after reporting earnings

Monday (Apr 16th) after the close. Most of these gains were kept as this week remained inside of

Tuesday’s range (aka ‘Gap-n-chop’).

AAPL daily chart as of Apr 20, 2018 – Apple was hit hard this week, giving back nearly all of its April

gains on Thursday and Friday of this week, as well as crossing back below both its 20d and 50d SMAs.

The 200 day SMA provided support on Friday. Apple reports earnings on May 1st.

GOOGL daily chart as of Apr 20, 2018 – Alphabet gapped up on Tuesday to then hover near its 50day

SMA the rest of this week. It is also back near the middle of its range for the past 3 months.

NVDA daily chart as of Apr 20, 2018 – NVDA pulled back a little this week to close below its 50d and

near its 20d SMA. Considering the ugly sector this week, this is not too bad.

MU daily chart as of Apr 20, 2018 – MU was mostly horizontal this week then crossed below its 50d SMA

on Friday. Not too bad considering how ugly this sector was this week.

SQ daily chart as of Apr 20, 2018 – The Financial sector has been mostly horizontal the past two weeks,

and SQ has been one of the very few to move up this week. MU crossed above its 50d on Tuesday and

above its 20d SMA on Wednesday where it remained above both the rest of this week.

GS daily chart as of Apr 20, 2018 – GS reported earnings last week on Tuesday before the open, and was

knocked down like most of the Financial sector has been.

BA daily chart as of Apr 20, 2018 – BA moved up a little this week, from its 20d SMA support on Monday,

and above its 50d SMA on Wednesday. BA hovered near its 50d SMA the rest of this week. BA reports

earnings next week on April 25th before the open. The prior (Jan 31st) earnings were responded to with

a gap up. We will see what happens this next week.

LMT daily chart as of Apr 20, 2018 – LMT made a nice slow, steady, low volatility rally off of its 50day

SMA last week. Lockheed reports earnings next week on Apr 24th before the open. Increased military

spending should give a positive outlook, you would think. However, as we know, anything can happen.

X daily chart as of Apr 20, 2018 – US Steel has been mostly sideways for over a month, with only a tiny

move up on Wednesday this week.

SCCO daily chart as of Apr 20, 2018 – SCCO continues to ignore the market trends, and move on its own

path. SCCO again delivered a new all time high this week on Wednesday.

FCX daily chart as of Apr 20, 2018 – FCX crossed and closed above its 50d SMA on Tuesday (Apr 17th)

then gapped up at the open Wednesday, above its Trend Line Resistance (Orange line). FCX ended the

week not far below its Feb 26th prior Highs.

AA daily chart as of Apr 20, 2018 – AA has been a beast the past two weeks. AA reported earnings on

Apr 18th this week and delivered nine year new highs on Thursday. The pull back on Friday remained

above the Jan 2018 highs (prior Resistance as new support).

CAT daily chart as of Apr 20, 2018 – CAT crossed above its 50d SMA Monday, and remained above this

SMA Tuesday thru Friday this week. Friday gave back part, but not all, of this week’s gains as a $0.78

dividend was paid.

HAL daily chart as of Apr 20, 2018 – HAL continued to move up this week along with oil prices. HAL

slowed to a horizontal channel the last 3 days of this week.

RIG daily chart as of Apr 20, 2018 – RIG continued higher this week, exceeding Jan highs on Wednesday

this week. Note the increased volume the past two weeks.

We continue to see markets that seem to have quick responses to news events and less so to Earnings

data. Overall, we continue to watch the charts for changes, and adapt with them.

Anything can happen next week: a drop that continues from Wednesday’s highs (Apr 18th), or a rally to

resume an uptrend started after the April 2nd lows, or mostly horizontal oscillations & chop for a while

longer. The key is to establish your clear criteria for when you see sufficient evidence in the charts to

make your decisions.

Trade Smart,

CJ