Trading Places with Tom Bowley

Two Bad Apples Don't Spoil The Whole Market Bunch

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Market Recap for Friday, April 20, 2018

The big news on Friday was the bond market.  The 10 year treasury yield ($TNX) closed just a tad above 2.95% and that was the highest close since late-2013/early-2014.  The TNX has climbed another couple basis points in early action this morning.  Higher treasury yields can be interpreted differently by different technicians.  For me, I believe treasury yields remain much closer to historic lows than to troublesome highs.  A strengthening economy with what has historically been incredibly low treasury yields is a very bullish combination in my view. And as money rotates away from treasuries, sending treasury yields rising, those proceeds are typically reinvested in equities.  That's why during short-term periods, the stock market sees its best results when treasury yields are on the rise.


Higher yields are good news for most financials (XLF, +0.04%), which helps to explain why that sector was the only sector to finish in positive territory on Friday on an otherwise miserable day - especially for the tech-laden NASDAQ.  Technology (XLK, -1.39%) trailed only consumer staples (XLP, -1.67%) as the worst performing group on Friday.  Computer hardware ($DJUSCR) was the notable weak link in technology as Apple (AAPL) lost more than 4% to approach short-term price support and its 200 day moving average:

A move below 164 on AAPL could trigger more technical selling with the major price support level, in my view, at 154 as that represented the candle body low on the early February panicked selling.

Alphabet (GOOGL) reports its latest quarterly results after the bell today, and that'll likely determine the short-term direction of internet stocks ($DJUSNS).

Brewers ($DJUSDB) represented the bad apple in consumer staples, breaking down from a bearish bear flag pattern to new lows:

Volume has been extraordinarily high as traders have abandoned many consumer staples areas and bearish confirmations like the one above will not help the sector attract buyers.

Pre-Market Action

We'll kick off a new trading week with higher treasury yields on everyone's radar.  The TNX is currently at 2.97%, up two basis points from Friday's close and approaching the psychological 3.0% level.  Technically, I'm more interested in 3.05% yield resistance, but all eyes will initially be on 3.0%.  Will that spook traders?  It seemed to on Friday, although I firmly believe it's more "noise" for the stock market and traders to deal with temporarily.

Gold ($GOLD) is under selling pressure with the higher treasury yields, losing nearly 1% to $1326 per ounce.  The key trading range on gold is roughly $1305-$1365 for now.

Globally, we're seeing mixed markets in Asia and Europe.  In the U.S., traders are trying to look beyond the higher treasury yields as Dow Jones futures (+53 points with a little more than 30 minutes remaining to the opening bell) are pointing to a slighly higher open.

Later today, after the closing bell, all eyes will be on Alphabet (GOOGL), which reports its latest quarterly results.

Current Outlook

Negative news headlines continue to garner much attention, whether it be North Korea, the trade war, higher interest rates, blah, blah, blah.  But under the surface, I continue to see very bullish action.  It's quite normal during selloffs and consolidation to see relative weakness in our four aggressive sectors - technology, consumer discretionary, industrials and financials.  But they've all held up quite well with the recent selling.  The weakest group has actually been consumer staples, which are now approaching relative lows not seen since 2011.  As the market tops and turns more defensive, money rotates TO consumer staples, not AWAY.  Check out how each part of consumer stocks - the aggressive consumer discretionary and defensive consumer staples - are performing relative to the S&P 500:

The S&P 500 remains in consolidation mode in the near-term.  A clearer signal of bullish action would be a breakout above gap and trendline resistance, accompanied with a bullish PPO centerline crossover and an RSI that moves back above 60.  Also, a drop in the Volatility Index below 14.50-15.00 would confirm a more bullish environment as well.

The relative charts above are very significant too.  If this were the start of a bear market, much more money would rotate to defensive stocks.  In the consumer stocks, we're seeing none of that and the above chart is evidence of a sustainable bull market.

Sector/Industry Watch

The Dow Jones U.S. Footwear Index ($DJUSFT) got off to a great start in April, but the last two weeks have been difficult as market rotation has gripped the group.  I expect to see a turn soon, mostly because the recent consolidation appears to be part of a bullish ascending triangle pattern:

I like this bullish pattern, especially given the fact that consumer discretionary stocks in general continue to perform well vs. the benchmark S&P 500 - as illustrated in the Current Outlook section above.

Monday Setups

For this week, I'm looking to a big footwear stock - Nike Inc. (NKE).  NKE has had a rough couple of weeks and pulled back from its double top earlier this month near 70.  It now sports an RSI of 47 and RSIs in the 40-50 range normally help to spot a short-term bottom in a rising stock.  Here's the current look at NKE:

Historical Tendencies

The upcoming week is not so great for NASDAQ stocks, but next week is very bullish.  Here's the breakdown and annualized returns for each period since 1971:

April 23rd through 27th:  -6.98%
April 28th through May 5th:  +37.89%

Key Earnings Reports

(actual vs. estimate):

AGR:  .78 vs .79

FE:  .67 vs .68

HAL:  .41 vs .41

KMB:  1.71 vs 1.71

(reports after close, estimate provided):

ABX:  .15

AMP:  3.50

AMTD:  .72

CNI:  .80

GOOGL:  9.21

WHR:  2.92

Key Economic Reports

April PMI composite flash to be released at 9:45am EST:  54.6 (estimate)

March existing home sales to be released at 10:00am EST:  5,528,000 (estimate)

Happy trading!

Tom

 

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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