Trading Places with Tom Bowley

Late Day Buying Sends Dow Jones Into The Record Books Again

Market Recap for Tuesday, October 10, 2017

The Dow Jones finished 69 points higher on Tuesday to close at yet another all-time high.  It's an illustration of how equities can remain overbought for an extended period of time.  The Dow Jones moved into overbought territory (RSI 70+) 7-8 days ago, yet we've seen the Dow push higher nearly every day, rising 400 additional points in the process.  It underscores the reason why shorting is simply not an option.  Bull markets use rotation to their advantage and Tuesday was a perfect example.  Over the past month, the two worst performing sectors were utilities and consumer staples.  Care to guess what led the rally on Tuesday?  Yep, it was utilities (XLU, +0.97%) and consumer staples (XLP, +0.88%).  Keep in mind that leadership from these two defensive groups over a long period of time would not be healthy for U.S. equities as it would suggest a lack of sustainability.  But rotation to defense, especially when key support is being tested in those sectors, is fine in my view.  Check out the long-term weekly chart for both:


During an uptrend, the rising 20 week EMA (green arrows) tends to mark excellent support and the XLU is bouncing off that recent support test.  The XLP, on the other hand, has simply been moving sideways for several months with many price support tests near 54 (green arrows).  Yesterday's strength came after a test of price support.  I don't look for continued leadership from these two groups, but when called upon, they rose up and buyers gravitated to both sectors at key technical support levels - a great sign of rotation for a bull market.

Pre-Market Action

This morning, almost everything is flat.  The 10 year treasury yield ($TNX) is flat.  Gold ($GOLD) is flat.  Crude oil ($WTIC) is flat.  Global markets are mixed, but all are trading at or near their flat lines.  There's no economic news to trade off of, but a couple of solid earnings reports from BLK and DAL should help a little.

Dow Jones futures are down 11 points as we approach another trading day.

Current Outlook

The NASDAQ is still trying to shake off some short-term 60 minute momentum issues.  While we're seeing little price action to suggest a big selloff is coming, I'd focus on NASDAQ support near the 6440-6460 zone.  Check it out:

Yesterday's low of 6560 will be the first short-term level of support that traders will be watching.  The gap higher and breakout above 6540 leaves the next layer of price support at that level.  And given the 60 minute negative divergence, I've marked (pink arrows) the rising 50 SMA, currently at 6553, and MACD centerline as areas that we could the NASDAQ gravitate toward.  That 50 day SMA resides squarely in the middle of that 6540-6560 support area.

Keep in mind that losing the 6540 level would not be a sign of impending doom.  Rather, it would simply suggest that very near-term uptrend needs a further rest.  That would then take me to the daily chart to watch the rising 20 day EMA, which is currently at 6492.

Sector/Industry Watch

I've written a lot about the outstanding seasonal performance of airlines ($DJUSAR) in October.  And right on cue, the DJUSAR has risen from 257.40 at the end of September to yesterday's close of 278.01.  That represents a gain of 20.61, or 8%.  It very well could be time for a pause, however, as a shooting star candle formed after reaching gap resistance.  I'd look for a bit of short-term weakness to test the rising 20 day EMA.  Here's the chart:

I would now consider the DJUSAR to be in a trading range that spans from the rising 20 day EMA, currently at 263 to gap resistance from late July near 283.  The reward to risk improves greatly for entering trades in this space as the index moves closer to its 20 day EMA.  Taking profits at the current level up to 283 makes sense if currently holding airline stocks.

Historical Tendencies

While most areas of the stock market perform very well during the seasonally bullish 4th quarter, that's not the case for toys ($DJUSTY).  There's an ugly negative divergence on the weekly chart for the DJUSTY and the following seasonal information doesn't bode well for the group:

October isn't bad as toys move up with the overall market, but November, December and January are all underachieving months.  I'd be careful with this group.

Key Earnings Reports

(actual vs. estimate):

BLK:  5.92 vs 5.59

DAL:  1.57 vs 1.54

FAST:  .50 vs .50

Key Economic Reports

None

Happy trading!

Tom

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