Trading Places with Tom Bowley

Software, Internet Stocks Bounce Off 20 Day EMAs, Lead Technology Rally

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Market Recap for Wednesday, May 23, 2018

Technology (XLK, +0.74%) rallied on Wednesday to move back near two month highs and creep closer to its all-time high close.  Both software ($DJUSSW) and internet stocks ($DJUSNS) performed well to lead the rally:


The green arrows highlight the rising 20 day EMAs that are currently holding as key support.  That's bullish action during uptrends and should continue to be respected in an advance.

Utilities (XLU, +0.91%) were the best performing sector on Wednesday as the 10 year treasury yield ($TNX) fell 5 basis points to 3.01%.  That drop in treasury yields hurt the financial space (XLF, -0.64%), although the XLF did manage to close well off of its earlier low.  The weakness in financials was to be expected after its failed breakout attempt on Tuesday.  That failure was illustrated in my Trading Places blog article yesterday.

Lowe's (LOW) reported revenues and earnings that fell short of Wall Street's expectations, yet the home improvement retailer managed to rally more than 10%.  Home improvement stocks ($DJUSHI) gained 2.46% to lead the consumer discretionary sector (XLY, +0.72%) and are featured below in the Sector/Industry Watch section

Pre-Market Action

The 10 year treasury yield ($TNX) has fallen another 3 basis points and currently resides at 2.98%.  While still in an uptrend, this morning's drop will likely make it difficult for financial stocks to gain ground.  Gold ($GOLD) is up $9 per ounce and is nearing key resistance at $1300 per ounce.  Crude oil ($WTIC) is down 1.38% in early trading and is likely to put further short-term pressure on energy shares.

Dow Jones futures are lower by 57 points and look to follow the lead of other global markets, which were mostly lower overnight and this morning.

Current Outlook

The NASDAQ bounced nicely and outperformed other major indices on Wednesday as it continues to trade in very bullish fashion.  On the following 60 minute chart, you can see the current flag formation:

I'd like to see the NASDAQ continue to hold onto support near 7300 and eventually make the breakout above 7450.  This period of consolidation began after signs of slowing momentum (negative divergence).  The flag pattern has unwound overbought conditions and positioned the NASDAQ for a bullish breakout.

Sector/Industry Watch

Home improvement stocks ($DJUSHI) got a lift from Lowe's (LOW) quarterly earnings report, despite the fact that LOW missed both its revenue and earnings forecast.  Still, it's more about the market's reaction than it is about the news and the following chart suggests traders were happy with the LOW report:

Momentum is bullish and strengthening but the DJUSHI still needs to negotiate gap resistance.  The red arrows above mark tests of this level over the past couple weeks.

Historical Tendencies

Yesterday, I pointed out that Intuitive Surgical (ISRG) loves the months of June and July.  Well, the other side of the story is Western Digital Corp (WDC), which really struggles during June.  WDC has risen in the month of June only 26% of the years over the past two decades.  Furthermore, WDC averages losing 6% during the month of June over the past 20 years and that's by far its worst calendar month performance of the year.

Key Earnings Reports

(actual vs. estimate):

BBY:  .82 vs .75

HRL:  .44 vs .45

MCK:  3.49 vs 3.54

MDT:  1.42 vs 1.38

RY:  1.65 vs 1.62

TD:  1.27 vs 1.17

(reports after close, estimate provided):

ADSK:  .03

DXC:  2.19

Key Economic Reports

Initial jobless claims released at 8:30am EST:  234,000 (actual) vs. 220,000 (estimate)

March FHFA house price index released at 9:00am EST:  +0.1% (actual) vs +0.6% (estimate)

April existing home sales to be released at 10:00am EST:  5,600,000 (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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