Trading Places with Tom Bowley

Semiconductors Fail At Key Resistance, Cause NASDAQ To Fail

Market Recap for Friday, September 1, 2017

The latest government nonfarm payrolls report came and went.  The number was a bit disappointing, but the U.S. stock market handled it quite well and the bond market surprisingly sold off.  Normally, you'd see traders move into bonds on weak economic news.  That was the case in early trading, but there was a recovery by day's end.  The Current Outlook section below highlights the latest test of 10 year treasury yield ($TNX) support.  That bounce in yields helped to lift financials (XLF, +0.28%) during the first half of the trading session Friday, but afternoon selling derailed many areas of the market, including financials.  The XLF appears to be printing a bottoming head & shoulders pattern on its hourly chart that will be important to follow today:


The XLF appears to have broken its down channel (red parallel lines) with Friday's early action and a quick reversal to the downside could print the reverse right shoulder.  A definitive break above 24.90 would be bullish, especially given the sudden strength in the hourly MACD.

Energy (XLE, +0.97%) and materials (XLB, +0.65%) led the Friday rally with the XLE's break above its declining 20 day EMA its first since early August.  The group still has lots of work to do on its chart technically and I'm not interested in trying to bottom fish in a group that's significantly underperformed in 2017.  The XLE needs to clear its 20 week EMA on a closing basis - something it's not done since early February - before I'd consider exposure in this sector.

Small caps outperformed on Friday as the Russell 2000 gained 0.59%.  The NASDAQ 100 actually fell into the close and finished slightly in negative territory, thanks in large part to profit taking in the software group ($DJUSSW) and a key price reversal in semiconductors ($DJUSSC) - see the Sector/Industry Watch section below for a visual on the DJUSSC.

Pre-Market Action

Rising tensions regarding North Korea is once again in the news and U.S. futures are down in response.  With less than 30 minutes left to the opening bell, Dow Jones futures are lower by 61 points.

Crude oil ($WTIC) is up more than 1.5% this morning and gold ($GOLD) remains in favor as treasury yields have come under pressure once again.  The TNX is down 5 basis points to 2.11% and threatening the yield support discussed below.

Current Outlook

The stock market will be taking its cue from the bond market this week as the 10 year treasury yield ($TNX) attempts to hang onto key yield support at the 2.10% level.  That's where we've seen significant reversals in the past and a reversal here again would help to propel financial stocks higher.  Here's the chart:

I'm looking for a bounce to the 2.25%-2.30% area to test the downtrend line.  That would help equities as money would be rotating from more defensive treasuries to more aggressive equities.

Sector/Industry Watch

The Dow Jones U.S. Semiconductors Index ($DJUSSC) is a gauge of technology strength or weakness.  While this group has been strong and a leader for quite awhile, I didn't like the finish on Friday, which could signal some short-term weakness.  Here's the reversing candle and false breakout on Friday:

The DJUSSC made its breakout intraday only to fail by the close.  That's a short-term bearish signal.  The good news, however, is that the daily MACD is improving so watch the rising 20 day EMA for support.

Monday Setups

The U.S. stock market was closed on Monday, so this week's setups are being provided today for this holiday-shortened week.

I'm going to concentrate on financial stocks this week as the 10 year treasury yield ($TNX) hit support last week and bounced.  I'm expecting to see a further rebound in the TNX and that would spark interest in financial stocks.  CINF blew away earnings estimates on August 2nd and saw a very nice gap higher the following day on much higher than normal volume.  Since then, however, the combination of profit taking and a falling TNX sent CINF down nearly 10%.  It appears to be starting an uptrend so I like it at the current level:

The gap after earnings was quite ominous with a heavy volume black candle printing.  We've since worked off very overbought conditions now, however, and I'm looking for a resumption of the prior uptrend.

For more setups this week, CLICK HERE.

Historical Tendencies

Since 1971, the NASDAQ has risen in every calendar month more often than it's declined, including September where it's moved higher 25 times while dropping 21 times.  September is the only month on the NASDAQ, however, that's produced negative annualized returns (-5.55%) over the past 46 years.

Key Earnings Reports

(reports after close, estimate provided):

HPE:  .26

Key Economic Reports

July factory orders to be released at 10:00am EST:  -3.1% (estimate)

Happy trading!

Tom

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