ChartWatchers Newsletter

Bearish Sentiment Suggests Market Will Move Higher

As I prepared for the MarketWatchers LIVE segment on sentiment today, I was surprised to see investors and money managers are getting very bearish. Put/Call ratios show a bearish bias as well. It is important to remember that sentiment is a "contrarian" indicator. It works a bit like the VIX which more of you may be familiar with. When the VIX begins showing climactically higher readings, that is bullish; while climactically lower readings are bearish. 

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Patience, Patience, Patience

Q2 earnings season has come and gone and traders liked what they heard and saw. This is the primary reason the market has come to life, in spite of some things going on out there that might normally spook the market.

For those of you out there who don't know what we do at EarningsBeats it's actually a simple - but powerful - concept. We scan for companies that beat earnings expectations, have strong looking charts and present high reward to risk trading opportunities. I wanted to point this out because an important part of the equation is to exercise patience after a strong earnings report and response, taking advantage of subsequent pullbacks to key technical or price support levels.

For example, look at the chart below on SGMS, a stock that beat earnings expectations, gapped up on strong volume and then pulled back perfectly to a key level of support.

You can see the skyrocket move the stock made over a two day period that resulted in more than a 45% move higher. Yet if you had chased the gap higher you would have been buying in right at the top, and who likes to buy at the top? Instead, this is a case where patience can be rewarded. And this is why we waited to alert our members with an initial entry price of $34.90 on August 10 with a second entry on a pullback to $34 (which did happen) with a stop loss of any close below the 20 day moving average (it held) and a price target of $38.90. In other words, a very high reward to risk potential made possible by exercising patience.

The stocks that we scan for - those that beat earnings expectations and have strong charts - end up in our "Candidate Tracker." If you would like to see a sample just click here.

Finding suitable trading candidates can be very tricky. But if you do your homework you can zero in on those stocks that beat earnings expectations and get a positive market response. These are the types of stocks traders gravitate to and if you can exercise patience as part of the process it has the potential of being very rewarding.

At your service,

John Hopkins
EarningsBeats

Aerospace Has Been Strong, But It's Relative Strength Momentum Is Weakening

Bull markets are fueled by sector and industry group rotation.  Throughout the bull market since 2009, we've seen each of the key aggressive sectors take their turn leading on a relative basis.  Within each sector, we also see relative leadership and weakness among industry groups.  For example, over the past month, aerospace stocks ($DJUSAS) have performed extremely well.  In fact, the DJUSAS is one of only two industry groups in the sector that have moved higher and its 4.17% gain over the past month easily beats defense stocks ($DJUSDN).  Take a look at the one month performance chart among industrial groups:

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Stocks Have A Bad Day, August Is Living Up To Its Reputation

S&P 500 FALLS TO SIX-WEEK LOW... Selling pressure resumed with a vengeance today. And a lot of support levels have been broken. Chart 1 shows the S&P 500 falling back below its 50-day average to the lowest level in more than a month. Volume was higher. More serious damage was done to smaller stocks. Chart 2 shows the Russell 2000 Small Cap Index closing below its 200-day average for the first time in more than a year. Yesterday's message explained why it was important for the RUT to find support around its 200-day average. It's failure to do so is a bad sign for the market. The same is true with transports. Chart 3 shows the Dow Transports plunging more than 2% today and closing just below their 200-day average. Airlines were the biggest losers. My message from yesterday also explained why it was important for that group to hold that support line. That makes today's big selloff even more troubling. All market sectors fell today with the biggest losses in technology, industrials, financials, and cyclicals. Staples and utilities suffered the smallest losses which is normal in a market pullback. The CBOE Volatility (VIX) Index spiked 32% higher, while the Nasdaq 100 Volatility Index (VXN) surged 30%. It looks like August is living up to its reputation as one of year's most dangerous months. And September still lies ahead.

With Earnings Season Winding Down Whats Next?

As earnings season winds down traders are going to be looking for new reasons to be long the market. So far, according to Thompson's Reuters, 460 of the companies represented in the S&P 500 have reported earnings with almost 74% beating expectations. This is 10% above the long term average and helps explain why the market has been so strong, at least until last week when we saw some deterioration.

Take a look at the chart below to see how the S&P fell sharply late in the week. Importantly, it closed below all key technical levels, putting the bulls behind the 8 ball for the first time in nine months.

Generally, when a trend line is broken, there's a decent chance you will see lower prices. In the case of the S&P, it's quite possible the S&P could now test its 200 day moving average, currently at 2346, a level that if reached, could present traders with a high reward to risk opportunity.

Should the S&P work its way down to the 200 day, traders will want to look for those stocks that have held up the best during the correction. This should include companies that beat earnings expectations and could be attractive to traders.  For example, take a look at the chart on Apple, a company that hit it out of the park when reporting earnings, has pulled back $5 off its high, remains above all key technical levels and is likely to be sought after highly should it pull back further if the S&P works its way lower.

In this case it might be worth looking at taking a position in the $152.50 to $156 range with an eye on picking up some points on any rebound while keeping a tight stop in case selling accelerates.

At EarningsBeats we scan for those companies that beat earnings expectations and consolidate them in our "Candidate Tracker" that is then made available to members. This allows them to watch for high reward to risk trading opportunities on pullbacks. If you would like to see a sample of the Candidate Tracker just click here.

There's no guarantee the market will keep falling but for sure the bears now have the technical advantage. So why not zero in on those companies that beat earnings expectations, have held up well on the pullback, and could be ripe for a nice bounce? Sounds like a plan to me.

John Hopkins

EarningsBeats.com

Two Potential Double Tops to Watch Going Forward

Doubles Tops are forming in two key ETFs, the Semiconductor SPDR (XSD) and the Consumer Discretionary SPDR (XLY), and chartists should watch these important groups for clues on broad market direction in the coming week or two. First, let's talk about the Double Top. These patterns form with two peaks near the same level and an intermittent trough that marks support. A break below support confirms the pattern and targets a move based on the height of the pattern. 

Achtung! A Double Top is just a POTENTIAL Double Top until confirmed with a break below the intermittent low. In other words, the trend is still up as long as support holds. Furthermore, Double Tops are bearish reversal patterns and trend continuations are more likely that trend reversals. 

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Are The Transports Falling Off The Rails?

The Transportation indexes look like they are struggling here. That's not usually a good thing.

There are three components: Railroads - $DJUSRR, Airlines - $DJUSAR, and Trucking - $DJUSTK. Starting with the railroads, this has all the making of a derailment. There is a double top on the price chart. The multi-month negative divergence on the MACD compared with price looks to match the 2015 top and the Relative Strength uptrend has been broken again.

Continue reading "Are The Transports Falling Off The Rails?" »

Market Is Very Overvalued

The market has been rising ahead of earnings for over two years, and it is very overvalued. Nevertheless, bullish investors seem unconcerned. The chart below shows the S&P 500 Index (black line) in relation to where it would be if it were undervalued (P/E 10 - green line), fair value (P/E 15 - blue line), or overvalued (P/E 20 - red line). The current price is far above the overvalue side of the range, because the S&P 500 has a P/E of 24.

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The Table has Been Set - The Earnings Smorgasboard

Everyone likes a good meal, especially an all you can eat buffet. And if you are a trader, you've just been served up an earnings smorgasboard.

So far,  per Thomson Reuters, over 400 companies in the S&P have reported for Q2, 2017, with almost 73% beating earnings expectations. This is good news for traders since there could be some great reward to risk opportunities, especially for those who are patient.

One stock that rose sharply after its recent report was Netflix when they released their numbers after the bell on July 17. In fact the stock rose almost 16% the day after the report, and a few percent higher over the next few days, not too shabby.

However, unless you owned the stock into its earnings report, you would have missed the bulk of the move higher, and it's awfully risky to chase a stock that has gapped up like NFLX did on July 18. That's where patience comes in because you can see from the chart below that NFLX has settled down, pulling back almost 6.5% from its peak, creating the possibility of a high reward to risk opportunity for those who missed out the first time around.

For example, in this case NFLX is closing in on both gap and technical support, a level that could be worth considering, with a very tight stop in case the stock continues to go lower. Perhaps an entry as close to the 20 day moving average as possible with a stop at the bottom of the gap on July 18, and a price target up near the recent high of $190. So very little downside to upside risk.

At EarningsBeats we scan for those companies that beat both top and bottom line expectations. Some of these become trading candidates where we provide entry, stop loss and price target levels to our members. I've decided to have a webinar this upcoming Monday to go over a number of companies that reported recently and beat earnings expectations. I will be joined by Tom Bowley, Senior Technical Analyst at StockCharts.com, who will give his thoughts on specific charts. If you would like to joins us for this FREE webinar, just click here.

Earnings Season brings with it winners and losers with traders particularly attracted to those stocks that beat earnings expectations and have strong charts.The key is to zero in on the "best of the best" to help increase the odds of making a successful trade.

At your service,

John Hopkins
EarningsBeats

Friday's Strong Job Report May Not Be As Strong As It Looks

IS THIS THE REAL UNEMPLOYMENT RATE? ... Friday's job report saw 209,000 new jobs added during July which was well above expectations. Hourly earnings also saw a July again of 0.3% which attracted the most attention. That, however, leaves the year over year rise in wages at a relatively flat 2.5%. That's higher than the inflation rate, but well below what we should be seeing at this point in the economic expansion. Chart 8 shows the unemployment rate falling below its 2007 low of 4.4% to the lowest level in sixteen years (2001). Economists at the Fed remain puzzled as to why wages aren't rising faster in the face of near full employment. That may result from looking at the wrong numbers. The unemployment rate shown below (U-3) doesn't include people who have stopped looking for work; and counts part-time workers as fully employed. A broader measure of unemployment (U-6) includes those unemployed or underemployed and currently sits at 8.6%. That's twice as high as the number everyone is looking at. The spread between the two is also much wider than it was in 2000 and 2007 when the unemployment rate was this low. That suggests that we're nowhere close to real full employment. So does the low percent of workers participating in the work force.

LABOR PARTICPATION RATE IS STILL TOO LOW... The labor force participation rate currently sits at 62.9% which is close to the lowest reading since 1977. That rate measures the percent of adult Americans who are no longer participating in the work force. Prior to 2000, the rate rose consistently for forty years. It peaked at 67% in 2000 and fell more sharply after the 2008 financial crisis. It bottomed in 2016 at 62.8% and has barely budged since then. That also seems to suggest that there's still a lot of slack in the work force. The current annual wage gain of 2.5% is also well below the 4% level seen in 2000 and just prior to the financial crisis in 2008 when the unemployment rate was this low. Something seems to have changed over the past two decades. I suspect it's the fact that deflationary forces took hold after 2000 (and again in 2008) and are just now starting to lift. That would account for why employers have been slow to higher and more stingy with wages. I can't help but wonder if the Fed is taking all of these factors into consideration. If it isn't, why not? And if it is, why does it remain so puzzled about the lack of wage inflation? One reason is that the Fed expects an economy nearing full employment to produce higher wages. But it may be looking at the wrong numbers to gauge full employment (or ignoring those that paint a weaker picture). It also believes that higher wages lead to higher inflation. I suspect it's the other way around. And that higher inflation leads to higher wages. It's harder for employers to raise wages when they can't raise prices enough to offset higher labor costs. That hurts their bottom line. Rising prices encourage more hiring and higher wages.