Market Recap for Monday, March 7, 2016
Monday was a strange day. First, there was bifurcated action where most of our major indices were able to tack on additional gains despite huge gains over the past few weeks and overhead price resistance at hand. The gains weren't big on Monday, but they were still impressive because there was an afternoon selloff from 1pm to 3pm EST that moved the indices into negative territory and the NASDAQ 100 ($NDX) was leading the way. That set up the bears for a real opportunity to turn the tide into the final hour. Instead, as we've seen quite often recently, the bulls' resolve was once again on display and a rally ensued into the close. The NDX still finished in negative territory, but it was well off its intraday low.
Leadership was a bit confusing in terms of evaluating the sustainability of this rally. The aforementioned relative weakness of large cap NASDAQ shares was not a positive, but buying in the final hour was impressive. Still, if you work your way down the sector leaderboard, you'll find that financials (XLF), consumer stocks (XLY and XLP) and technology (XLK) all finished in negative territory. At its most recent high, the XLK printed a negative divergence on its 60 minute chart. That resulted in weakness down to test the rising 50 hour SMA and a reset of the hourly MACD near its centerline. Here's the chart:
There are clear implications on the XLK if price and trendline support from 41.60-41.80 don't hold. You also can see how short-term 60 minute negative divergences have impacted trading on the XLK as they tend to halt rallies in their tracks.
Pre-Market Action
There's little earnings or economic news to drive action today. Traders will focus on global markets and there we've seen somewhat boring action overnight and this morning. China's Shanghai Composite ($SSEC) ended a few points higher and back above 2900. There's still a difficult test near 3000 ahead. The Nikkei ($NIKK) and Hang Seng ($HSI) both were down overnight. In Europe, the major indices are down, but off of earlier lows.
Dick's Sporting Goods (DKS) missed revenue and EPS estimates and lowered future guidance, yet the stock is only lower by 3%, not bad given the bad news trifecta. It'll be interesting to see if the results have a negative impact in the consumer discretionary (XLY) space today.
Current Outlook
Energy (XLE) and materials (XLB) have become relative leaders in 2016 and that's likely to continue after many months of lagging and positive divergences printing on both relative strength (vs. benchmark S&P 500) charts. Check out the visuals:
XLE vs. S&P 500:
XLB vs. S&P 500:
I am looking for relative leadership in these two sectors throughout 2016 after spending much of the past 18 months with relative oversold momentum oscillators.
Sector/Industry Watch
The Dow Jones U.S. Steel Index ($DJUSST) had broken down beneath significant price support at 180 on its weekly chart during the summer of 2016. On its most recent low earlier this year, the DJUSST printed a positive divergence on its weekly MACD and we've since seen a very strong rally to move just above the 50 week SMA. But now comes that key price resistance from broken support. Here's the chart:
Energy and materials stocks have been under a lot of pressure the past 12-18 months so they could have room to run. The exciting part with steel is that a break above 180 cold lead to its next huge price resistance test near 270 - that's 50% higher.
Historical Tendencies
March is typically a very strong month for the Russell 2000 as small caps have produced an annualized return of 18.46% since 1988. Only December has produced better results for the Russell 2000.
Key Earnings Reports
(actual vs. estimate):
DKS: 1.13 vs 1.15
Key Economic Reports
None
Happy trading!
Tom
