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Banks Lead Reversal Off Major Support And UNH Could Be Ripe For A Strong May

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Market Recap for Thursday, May 3, 2018

The Dow Jones was the only major index to finish in positive territory on Thursday, but it could have been so much worse.  In the first 90 minutes of trading, the S&P 500 found itself back below 2600 and within just 14 points of its double bottom at 2581.  We've seen intraday moves beneath 2581 in 2018, but no closes below that level.  Volatility ($VIX) was on the rise, so it was very important to see buyers step up over the final five hours yesterday.  Banks ($DJUSBK) are perhaps the most important group to watch as fundamentals (economic strength, higher treasury yields) suggest this is a group that should be trending higher, not lower.  A breakdown in price action would definitely cause me to pause a bit and re-evaluate my position on the  market.  But banks made a nice kick save in the form of a hammer:


This type of candle at key support can be a launch point, so banks represent a very solid reward to risk long entry at this point with a tight stop if the index closes beneath 455 (perhaps 450 if you want to provide a bit more room).  Despite the turnaround in banks, financials (XLF, -0.85%) still finished as the second worst performing sector yesterday, barely outpacing healthcare (XLV, -0.90%).  Medical supplies ($DJUSMS, -1.94%) fell as Anika Therapeutics (ANIK) and Cardinal Health (CAH) tumbled 24.68% and 21.42% on disappointing earnings results.  Still, it wasn't a complete washout in the group as AxoGen (AXGN) managed to make a very bullish ascending triangle breakout:

This pattern measures to 46 with the rising 20 day EMA now the key support.

Pre-Market Action

There was selling overnight in Asia, while Europe is mixed this morning.  Global markets no doubt are watching to see if the U.S. can hold onto key price support, especially that 2581 level on the S&P 500.  Failure to do so as we enter the historically bearish part of May (6th through 25th) would not likely bode well.

Nonfarm payrolls were a bit disappointing this morning (164,000 vs. 191,000) and Dow Jones futures are lower by 94 points roughly one hour from the opening bell.

Current Outlook

Are you bullish?  If so, it's time for some relative strength in transportation stocks ($TRAN).  They've been declining relative to utilities ($UTIL) throughout the current downtrend.  If the Fed is correct and we're looking ahead to a strengthening economy and higher treasury yields, then the $TRAN:$UTIL ratio should see a breakout:

The last big move higher in the TRAN:UTIL (late-November through mid-January) resulted in a soaring S&P 500.  If the Fed is correct about a strengthening economic picture, we should rebound in this ratio as we're now testing key relative support.  A breakdown here plus a breakdown in banks plus a breakdown in the S&P 500 beneath 2581 is what the bears want to see.  But holding all of these key support levels is necessary for the short- to intermediate-term bullish argument.

Sector/Industry Watch

Drug retailers ($DJUSRD) fell to fresh new closing lows on Thursday following the drop in CVS Health Corp (CVS) shares.  CVS disappointed Wall Street with revenues that fell short of consensus estimates.  Also, its guidance failed to impress traders with the result being a significant breakdown in the group:

If there's one silver lining, it's that CVS has yet to break that previous low established in late-March.

Historical Tendencies

Unitedhealth Group (UNH) easily topped revenue and earnings expectations when it reported its quarterly results the morning of April 17th.  That resulted in a gap higher from the April 16th close.  UNH filled that gap yesterday, while also successfully testing its rising 20 day EMA support in the process.  This could be significant as UNH is one of the best seasonal performers in the Dow Jones during the month of May.  UNH has risen during 14 of the past 20 Mays and has produced an average May return of 2.2% over these past two decades, despite the Dow Jones losing 0.2% in May on average over that same period. 

Key Earnings Reports

(actual vs. estimate):

AON:  2.97 vs 2.79

BABA:  .91 vs .88

CBOE:  1.38 vs 1.27

CELG:  2.05 vs 2.00

IDXX:  1.01 vs .93

NWL:  .34 vs .26

VFC:  .67 vs .65

Key Economic Reports

April nonfarm payrolls released at 8:30am EST:  164,000 (actual) vs. 191,000 (estimate)

April private payrolls released at 8:30am EST:  168,000 (actual) vs. 190,000 (estimate)

April unemployment rate released at 8:30am EST:  3.9% (actual) vs. 4.0% (estimate)

April average hourly earnings released at 8:30am EST:  +0.1% (actual) vs. +0.2% (estimate)

Happy trading!

Tom

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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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