Market Recap for Thursday, October 20, 2016
Industrials (XLI, -0.54%) and technology (XLK, -0.46%) were the two weakest sectors on Thursday and this bull-bear battle continues for yet another day with apparently no end in sight. The only sector to finish in positive territory was healthcare (XLV, +0.47%), led by medical equipment ($DJUSAM) and biotechnology ($DJUSBT). The weakness in the XLI and XLK, however, hasn't turned technically significant at this point as you can see from the two charts below. First, the XLI:
The XLI, like the benchmark S&P 500, was down on Thursday, but remains within its trading range. Also, trendline support is holding for now as well. A close beneath 56.50 could turn the tables on the bulls, but until then I'd consider the current sideways consolidation pattern to be bullish.
Next, the XLK:
The XLK looks better to me than the XLK as technology shows several levels of support beneath current price and the ETF remains well above its uptrend line.
Crude oil ($WTIC) fell from its key $52 per barrel resistance level - not a huge surprise as I expected to see formidable resistance there - but it's slightly higher this morning and currently resides near $51 per barrel. A breakout would be extremely bullish to the energy sector (XLE).
Pre-Market Action
Crude oil prices ($WTIC) are up slightly this morning, although they have fallen off the highs from earlier this morning. Traders are watching $52 per barrel neckline resistance as the cue to buy crude oil for the longer haul. The 10 year treasury yield ($TNX) is down slightly this morning to 1.74% as traders look to see if yield support can hold in the 1.71%-1.74%.
The dollar strengthened again on Thursday and gold failed at its declining 20 day EMA test. The dollar appears poised to further strengthen and I'd expect to see that coincide with higher treasury yields.
U.S. futures are lower this morning with the Dow Jones futures down 77 points at last check. Be very careful is today marks a breakdown in our major indices as next week is the worst historical week of the year. Check out the historical performance by calendar day in the Historical Tendencies section below.
Current Outlook
The 3+ month trading range continues and sector rotation is the name of the game right now. Most of the rotation has been bullish during this consolidation period, but we need price confirmation in the form of an S&P 500 close above 2190. To the downside, the number remains the same - 2120. As a reminder, here's the current range that I'm watching:
The 2120 support level to me is very clear. There's only been one test of 2190 resistance, but that's the most critical level to the upside. In order to get there, we'll need to break through trendline resistance which now is approximately 2160. So an even tighter range to watch would be 2120-2160, very narrow indeed.
Sector/Industry Watch
Industrials (XLI), as mentioned earlier, represented the weakest sector on Thursday. The reason? It's simple, railroads ($DJUSRR) were crushed, dropping more than 4.50% on the session. Since the DJUSRR uptrend began in January 2016, the rising 20 week EMA has held up nicely as support as shown below. Check it out:
The green arrows above show multiple successful tests of the rising 20 day EMA support and also rising trendline support. A weekly close beneath 1190-1195 would violate both so be aware of that. A breakdown here also could have a significant impact on the ratio of transports vs. utilities ($TRAN:$UTIL), which I monitor to confirm the sustainability of any rally.
Historical Tendencies
Next week begins the worst historical week of the year. Here are the annualized returns on the S&P 500 since 1950 by calendar day affected:
October 24th (Monday): -30.36%
October 25th (Tuesday): -60.81%
October 26th (Wednesday): -40.58%
October 27th (Thursday): -21.92%
The worst day of the 22nd to 27th bearish period is actually the 22nd, which falls on Saturday this year. The annualized return for October 22nd is -96.29%. October 28th begins a very bullish historical period that I'll discuss next week.
Key Earnings Reports
(actual vs. estimate):
ERIC: .04 vs .09
GE: .32 vs .31
HON: 1.67 vs 1.61
IPG: .31 vs .28
MCD: 1.62 vs 1.48
MCO: 1.34 vs 1.18
PH: 1.61 vs 1.57
SAP: .68 vs .79
STI: .91 vs .89
SYF: .73 vs .68
Key Economic Reports
None
Happy trading!
Tom
