Trading Places with Tom Bowley

Biotechs Continue Their Winning Streak But Have Price Challenges Ahead

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Market Recap for Thursday, August 30, 2018

Record Wall Street action was temporarily suspended on Thursday as all of our major indices fell in the final two hours to finish the day in negative territory.  Utilities (XLU, +0.04%) managed to eke out a small gain, but the remaining sectors stalled on Thursday.  Materials (XLB, -1.18%), which came into the day as the best performing sector over the past week, was easily the day's worst.  Nearly every industry group in materials was down 1% or more with nonferrous metals ($DJUSNF) falling 3.55%.  The drop occurred right after 20 day EMA resistance was tested and failed:


The DJUSNF tested overhead price resistance on Tuesday, which also coincided with that 20 day EMA.  The good news is that the PPO is now rising so another price low could print a positive divergence, marking a more significant price bottom.  There's still possible downside before then, however.

Financials (XLF, -0.77%) also struggled yesterday as several industry groups weakened that previously had been strengthening.  Life insurance ($DJUSIL) was a perfect example:

The recent uptrend is fairly solid, but the wall of price resistance at or just above 800 is just as solid, if not moreso.  The DJUSIL closed almost squarely on its rising 20 day EMA so Friday's action could be pivotal. 

Pre-Market Action

Global markets were lower overnight and this morning and Dow Jones futures are down 53 points with less than an hour to the opening bell.

The 10 year treasury yield ($TNX) is down 1 basis point to 2.85%.  Crude oil ($WTIC) is barely lower and did manage to close above $70 per barrel on Thursday.

Current Outlook

I continue to watch for short-term 60 minute negative divergences, especially on the NASDAQ, which has been the strongest index.  There was a slight negative divergence that I discussed a few days ago, but the next push higher eliminated that divergence:

That "potential" negative divergence was quickly eliminated because of the NASDAQ's strong action on Wednesday, but the PPO remains at lofty levels and the next price high could also result in a negative divergence.  The green arrows highlight the successful 20 day EMA tests throughout this two week rally.

Sector/Industry Watch

Biotechs ($DJUSBT) have had a very strong week and managed to gain yesterday while most of the market dropped.  While the group is nearing short-term overbought levels, it definitely appears poised to eventually challenge its January 2018 high.  But first up is its March reaction high:

Volume has been declining during this rally so breaking above 2175 and holding it seems rather unlikely in the short-term.  Over the past couple months, RSI readings at 70 have marked near-term tops as well and the RSI is currently at 69.

Historical Tendencies

The 31st of a calendar month ranks 4th in terms of calendar day annualized performance on the S&P 500 since 1950.  Here are the Top 5 days in the calendar month:

1st:  +46.41%
2nd:  +36.13%
16th:  +33.93%
31st:  +29.32%
5th:  +27.74%

Today is August 31st.  This doesn't guarantee higher prices today, it simply points out that there's a bullish tendency on the 31st.

Key Earnings Reports

None

Key Economic Reports

August Chicago PMI to be released at 9:45am EST:  63.8 (estimate)

August consumer sentiment to be released at 10:00am EST:  95.5 (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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