Trading Places with Tom Bowley

Transportation Services Is A Live Case Study In Rotation After A Negative Divergence

Market Recap for Wednesday, November 1, 2017

U.S. stocks jumped higher out of the gates at Wednesday's open, but was unable to hang onto those gains - especially on the NASDAQ.  We did see a bit of strength in the final couple hours, though, after the FOMC policy announcement stated that interest rates would remain unchanged for now with a potential rate hike in December.  Traders expect that rate hike so there was a bit of relief perhaps that no action was taken currently.


Crude oil prices ($WTIC) have been on the move higher of late and yesterday's intraday high of $55.22 per barrel threatened the first close above $55 in 2 1/2 years.  It didn't materialize, however, as WTIC closed at $54.30.  Still, energy shares (XLE, +1.13%) were buoyed by the attempt as the XLE traders increased their interest (volume) in the group:

I'm expecting to see higher prices ahead for the XLE, but first we need to see a confirmed close above 69.00.

Seven of the nine sectors finished higher with utilities (XLU, -0.56%) and industrials (XLI, -0.06%) the only two to end the session lower.  The former likely was being sold as it neared overhead price resistance just beneath 55.50.  The bearish engulfing candle that printed will likely encourage more short-term technical selling in this group.

Pre-Market Action

Q3 productivity and initial jobless claims both came in better than expected as the bond market searches for direction after the Fed left interest rates unchanged on Wednesday afternoon.  The Bank of England raised rates this morning for the first time since 2007.  Crude oil ($WTIC) is hovering just beneath key price resistance at $55 per barrel.  Gold ($GOLD) is flat and trying to hang onto short-term price support near the $1270 level.

Stocks are mixed around the globe a day after huge gains in Germany ($DAX) and Tokyo ($NIKK).  Futures here in the U.S. are literally flat with Dow Jones futures unchanged a little more than 45 minutes before today's opening bell.

Apple (AAPL) is set to report its latest quarterly results after the closing bell today.  Facebook (FB) followed a similar path by posting very solid quarterly results last night after the closing bell.  Its stock is down about 1%, however, in pre-market action after a very nice pre-earnings move higher.

Current Outlook

The bond market hasn't really shown its hand after the FOMC policy decision on Wednesday.  The Fed decided to leave rates unchanged now, but did appear to be on track for another rate hike in December.  There was little volatility when the FOMC made their announcement at 2pm EST yesterday.  One positive thus far has been the 10 year treasury yield's ($TNX) ability to hang onto rising 20 day EMA support.  I'd continue to watch it closely.  A rising TNX many times leads to rising equity prices as bond prices retreat.  Here's the daily look at the TNX:

The recent breakout in the TNX above the prior 2.40%-2.42% yield resistance zone was bearish for bonds and bullish for equities.  The TNX failed to hold onto that 2.40%-2.42% yield support area, but still is looking to hold short-term trendline support, along with its rising 20 day EMA.  If it's able to do so, we could see money rotate away from bonds, helping to fuel another stock market climb.

Sector/Industry Watch

The Dow Jones U.S. Transportation Services ($DJUSTS) ran into short-term momentum issues a few weeks ago and it's been consolidating ever since.  Another trip down to the October low would potentially rectify the negative divergence in play as that would result in a 50 day SMA test and would likely send its daily MACD back to centerline support for a "reset".  Here's a look at the technical picture:

I like this group, but it's in the grips of rotation right now.  A much better reward-to-risk setup occurs on a retest of the 267 price low, which in turn would represent a 50 day SMA test and likely a MACD centerline reset as well.

Historical Tendencies

The Dow Jones U.S. Commercial Vehicles & Trucks Index ($DJUSHR) has a history of performing very well in the fourth quarter of the year, posting 70% of its annual gains in this quarter alone.  November's 5.2% average monthly gain is the group's highest monthly average of the year:

Caterpillar's (CAT) blowout earnings resulted in a gap higher in the DJUSHR a little more than a week ago and it's since been working off overbought conditions.  Further profit taking could set up trading opportunities in this space given the seasonal strength ahead.

Key Earnings Reports

(actual vs. estimate):

ADP:  .91 vs .85

BABA:  1.29 vs 1.04

BCE:  .69 vs .67

BDX:  2.40 vs 2.38

CI:  2.83 vs 2.36

DLPH:  1.66 vs 1.56

DWDP:  .55 vs .45

EPD:  .28 vs .31

EXC:  .85 vs .86

ICE:  .73 vs .71

NWL:  .86 vs .92

PH:  2.24 vs 2.02

RACE:  .74 vs .72

RDS.A:  .50 vs .45

SNY:  1.71 vs 1.73

YUM:  .68 vs .66

ZTS:  .65 vs .63

(reports after close, estimate provided):

AAPL:  1.87

AIG:  (.83)

ATVI:  .50

CBS:  1.08

ED:  1.54

EOG:  .10

MTD:  4.30

RSG:  .63

SBUX:  .55

Key Economic Reports

Initial jobless claims released at 8:30am EST:  229,000 (actual) vs. 235,000 (estimate)

Q3 productivity released at 8:30am EST:  +3.0% (actual) vs. +2.5% (estimate)

Happy trading!

Tom

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