Trading Places with Tom Bowley

Relief Rally Begins, How Long Might This Last?

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Market Recap for Tuesday, October 30, 2018

Today's article will be limited as I'm having technical difficulties sharing charts, but I'll give you my thoughts.  Yesterday's action and reversal was important as our volatility measures - VIX and VXN - are at extreme levels where we tend to see market bottoms.  Also noteworthy is the fact that the S&P 500 (along with all of the other major indices) is holding above its February low.  On the S&P 500, the closing support level is 2582.  A close beneath that level could carry with it significant ramifications, most of which are quite bearish.


Despite the clearly bullish bias yesterday, the action was far from perfect as leadership came from communication services (XLC, +2.73%), energy (XLE, +2.31%) and materials (XLB, +2.29%).  The latter two were very oversold, but I don't look to energy and materials for leadership.  Technology (XLK, +1.12%) participated in the rally, but was near the bottom of the sector leaderboard, outperforming only two defensive sectors - healthcare (XLV, +1.07%) and utilities (XLU, +0.39%).  To carve out a bottom, we really need to see market participants grow more bullish and that isn't happening currently.

Pre-Market Action

Last night, Asian markets were very strong and that momentum carried over to Europe this morning.  Most major foreign markets were/are up 1% or more.  That's helping to lift Dow Jones futures, which are higher by 206 points with approximately 30 minutes until this morning's opening bell.

Facebook (FB) reported better-than-expected earnings last night, although they did fail to meet revenue expectations.  Nonetheless, the market is applauding the report as FB trades nearly 5% higher this morning.

Current Outlook

Let me be clear about a couple things.  First, I do not believe the bull market has ended.  Second, the Volatility Index ($VIX) remains extraordinarily high so look for fakeouts in both directions and make sure you have your Pepto Bismol handy.  Having said that, on an hourly chart if you connect the highs and lows over the past 3-4 weeks, you'll see a downtrend channel.  The top of the channel currently resides near 2720, while key price resistance in a 2730-2760 range.  Watch for a possible reversal in those areas, especially if a short-term rally consists of defensive sector leadership.

On the daily chart, price resistance and the declining 20 day EMA are the primary obstacles for the bulls in the near-term.  Those two key levels are 2725 and 2758, respectively.  Combining both the hourly and daily charts, it's fairly clear to me that 2720 through 2760 is going to be the critical zone to watch.  A break above this zone and I believe the bull market is resuming.  Failure would suggest more consolidation and volatile action.

Sector/Industry Watch

Energy (XLE) looks set to rebound.  After printing lower highs for 15 consecutive sessions, a reversing piercing candle printed yesterday with an RSI reading less than 30 for the past week or so.  It's time for an XLE rebound and I believe it started yesterday.

Historical Tendencies

One of the strongest days of the year for small caps (Russell 2000) is October 31st (today).  Since 1987, October 31st has produced annualized returns of +169.49% on the Russell 2000.

Key Earnings Reports

(actual vs. estimate):

ADP:  1.20 vs 1.10

ANTM:  3.81 vs 3.67

BAX:  .80 vs .74

EL:  1.41 vs 1.22

EPD:  .51 vs .46

GM:  1.87 vs 1.26

ICE:  .85 vs .80

K:  1.06 vs 1.07

S:  .05 vs (.01)

SNY:  1.07 vs .98

TEL:  1.35 vs 1.33

WEC:  .74 vs .71

YUM:  1.04 vs .83

(reports after close, estimate provided):

AIG:  .07

ALL:  2.17

EC:  .56

ESRX:  2.42

FISV:  .77

NXPI:  1.92

SU:  .71

WMB:  .18

Key Economic Reports

October ADP employment report released at 8:15am EST:  227,000 (actual) vs. 178,000 (estimate)

October Chicago PMI to be released at 9:45am EST:  60.0 (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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