Market Recap for Wednesday, May 10, 2017
The energy sector (XLE, +1.32%) was very strong on Wednesday as crude oil ($WTIC) bounced more than 3%. With crude oil up nicely again this morning, we should see more strength and leadership from the XLE today. Technology (XLK, +0.38%) and financials (XLF, +0.34%). Leading technology was the semiconductor space, which powered forward to yet another breakout. While nothing seems to slow this industry group, just be aware of a nasty negative divergence present on its weekly chart. Check it out:
This negative divergence has been present for months now and is a poster child for how indicators sometimes don't work. When I see these negative divergences, I look for corroborating evidence of a top - either a big heavy volume reversing candle or perhaps lost of the rising 20 week EMA support. We need to see further evidence of weakness and slowing momentum. So, for now, I'll remain bullish the semiconductors group - but with one finger on the sell button.
Asian markets were fractionally higher overnight, while European indices are fractionally lower. The U.S. is following Europe as Dow Jones futures are down 30 points with 30 minutes left to the opening bell.
I expect we'll see continuing strength in our major indices, but in order to see a breakout in the Dow Jones and a more meaningful breakout in the S&P 500, healthcare may need to be part of the mix. The good news is that the group is setting up in a very bullish cup with handle pattern. Check out the pattern:
There are a number of reasons why I'd expect this bullish continuation pattern to confirm. First, we remain in an 8 year bull market and I look for that to continue - until it doesn't. Second, two key industry groups are at or near very key short-term support where I'd look for a bounce. Those groups are highlighted below in the Sector/Industry Watch section below. Finally, these two groups are among the best performers historically during the period from May through July.
The healthcare sector (XLV) has now printed a handle in its cup with handle pattern and is primed for a move to the upside. It's likely to need help from two very influential industry groups - biotechs ($DJUSBT) and pharmas ($DJUSPR). The good news is that both of these groups are nearing key price support on their charts. Bounces, and eventually uptrends off support, should enable the XLV to make the breakout that the chart is portending. Take a look:
Biotechs have a very important support zone from 1710-1720 where both recent price support and trendline support intersect. Furthermore, the DJUSBT has important rising 20 week EMA support at 1727 (not pictured above), which was tested to the point on Wednesday. Clearly, a loss of 1710 would violate numerous technical support levels. There's a solid reward to risk in biotechs at current prices.
Pharmas have shown in the past that 500 has been a key pivot point and we're once again approaching that level. Should both biotechs and pharmas bounce from these important levels, the XLV should be on its way to a very significant breakout on its own chart, helping to fuel another rally in the benchmark S&P 500.
During MarketWatchers LIVE on Wednesday, I discussed seasonality and mentioned that for the months May through July, the Dow Jones U.S. Biotechnology Index is the best performing industry group over these three months. Below is the history by calendar month for the group:
July averages gaining 4.3% over the past two decades. May (+1.4%) and June (+0.6%) are also historically strong months. So while the DJUSBT faces technical challenges (primarily major price resistance near 1800), it will not hurt to have historical tailwinds as we approach and enter the summer months.
Key Earnings Reports
(actual vs. estimate):
BT: .53 (est)
ENB: .52 (est)
Key Economic Reports
Initial jobless claims released at 8:30am EST: 236,000 (actual) vs. 244,000 (estimate)
April PPI released at 8:30am EST: +0.5% (actual) vs. +0.2% (estimate)
April Core PPI released at 8:30am EST: +0.4% (actual) vs. +0.2% (estimate)