Market Observations - as of Apr 6, 2018

By Carl Jorgensen - For Objective Traders - For educational purposes only. Not Financial Advice.

This was another volatile week in the markets where we saw large moves in both directions. Regardless

of what news may or may not have caused these moves, we saw a large drop on Monday, then almost a

50% bounce Monday’s drop on Tuesday. Wednesday opened with a large gap down near Monday’s lows

with a strong rally all day nearly closing at the prior week’s (Mar 29th) close. Thursday saw a smaller

range pause followed by a smaller gap down open on Friday with a brief rally the first half hour that

then turned to strong selling the following 5 hours. During the last hour of trading on Friday we saw a

small bounce off of the lows of that day that were also near to Monday’s (April 2nd) close. These

market moves saw participation by most all sectors, with the prior strong f.a.a.n.g. stocks and tech

sector showing more weakness this week than the overall market. The prior leaders looked like they

have lost their luster this week. However, due to their size & weighting, these tech leaders have a

significant impact on the indexes, funds and some sectors.

Overall this week we clearly saw a much wider range in both directions but ending with a net close

near the prior week’s close. All the major indexes remain below their 20 week SMA and above their 50

week SMA. Sector leadership changed nearly each day this week without a sector showing any

consistency as to being either the strongest or weakest. At the end of the week, weekly sector charts

did show us that the Healthcare and Biotech sectors had a very tough week.

In such a market, it is very difficult to find any stocks that have strength sufficient to ignore the

volatility and lack of trends. SCCO has been one of the very rare stocks that have held up well this

past month.

What we have done over the past two months to adapt to these markets, is focus on shorter time

frames. With strong moves only lasting a day or two, we can consider day-trading or very aggressive

and brief swing trading. We have shared over the past several weeks how we have used Trend Lines on

15min. charts to help identify changes in trend on key indexes. This helps us trigger more quickly a

change in momentum. However, with the volatility we see, we also will see more false break outs

when using this more aggressive technique. This is part of the trade-off when choosing a more

aggressive method that triggers quickly; it will also have more often false triggers. We saw this in

March with false Trend Line Break Outs of our Resistance Trend Line on Quad Witching Friday (Mar 16th)

and on the last trading day of Q1 (Mar 29th). Both of these fake outs were on non-normal days that see

a lot of volume due to their special date status. The following trading session resumed the prior trend

confirming that and each of these two TL Breakouts in March were false. This was seen right after the

open on the following day. This week we saw out Trend Line Resistance break during the day on

Wednesday (Apr 4th) that triggered us to go long with the strongest stocks at the time. Thursday saw a

small gain in as this break out seemed to continue. However, on Friday, the gap down followed by

strong selling suggested the bullish break could be another fake out. We will look at a 15min chart of

the S&P below; however, you will see similar TLBO (Trend Line Break Outs) in the Nasdaq, Dow and

Russell all on Wednesday of this week and in the bullish direction. You will also see the failures on

Friday of this week for these same break outs. Anything can happen next week … so we remain open to

every possibility. The key take away is; unless you are a very agile day trader, you may find it very

difficult in the current market conditions to find swing or position time-frame trades, and it might be

smart to sit it out for a little while. As we saw again this week, nearly every other day can be in a

different direction, and often can be a wide range day.

This week we will look at a few extra charts to see what has gone on in the past when markets get

volatile or when prices dip into correction territory. The past cannot tell us what will happen next in

the markets, it can only show us what has happened in the past. Our goal is to see if those past

behaviors could be statistically meaningful (if they occur more often than random would suggest) and

then use those behaviors as a guide to gauge what may be more likely to occur based upon similar

market conditions. No two market conditions will ever be exactly the same, since there are far too

many variables to consider (different participants, each with differing opinions, etc. etc. etc.). All we

can do as Technical Traders is identify and play the odds when we have identified and quantified our

‘edge’. What we have going in our favor is that human (mob) behavior has some particular traits that

are actually consistent enough to be somewhat predictable when making financial decisions. Also

acting in our favor is knowledge of how the big players move the markets with their own set of

methods to sway the public in ways to help create either demand or supply when there isn’t enough for

them to fill their large size objectives. Understanding these methods and behaviors helps us to not be

fooled very often, and can enable us to ‘ride the waves’ made by others.

With Q1 2018 now history, let’s look at the S&P monthly chart to see what we can see. I like to look at

much longer term charts to keep my overall market perspective in sync.

S&P 500 monthly chart as of Apr 6, 2018 - On this monthly chart we can see the bullish trend since

March of 2009, with several ‘corrections’ or dips in the price trend over the past 9 years. Using a Log

scale helps to keep a relative view where the past two years do not look as extreme of a rally as it

would appear in an arithmetic scale.

This chart compares the sizes of S&P Draw-Downs from a prior High Close over the past nine years.

Note that there are 12 drops that were in the -5% to -9.99% range and 5 in the -10% to -19.99% range.

This chart is from March 22nd. As of this week’s close at $2,604.47 (April 6, 2018) the S&P is now down

-9.34% from its record High close on Jan 26, 2018 at $2,872.87.

From a statistical study done over the past 70 years of S&P declines, we see that declines in the range

of -5% to -10% occurred 75 times and averaged -6% with the average decline lasting 1 month and the

average recovery lasting 1 month. Declines from -10% to -20% occurred 27 times with -13% being the

average decline lasting 4 months and recovering in 3 months on average. Declines from -20% to -40%

occurred 8 times with the average decline of -27% lasting 22 months and taking 57 months to recover

on average. Declines greater than -40% occurred 3 times with an average decline of -51% lasting 22

months and taking 57 months to recover on average.

S&P 500 weekly chart as of Apr 6, 2018 – We can see a wider range week this week than was the prior

week, and brief break of the 50 week SMA. The week closed down about 36 points with slightly higher

volume than average.

S&P 500 daily chart as of Apr 6, 2018 – Here we can see the large daily candles in alternating directions

this week. Monday’s close (April 2nd) was actually below the 200 day SMA which has not occurred since

June 27 2016. This SMA was crossed on every day this week but Thursday, with only Monday seeing a

close below. Monday was also the lowest close and lowest low since Feb 9th. The week ended with the

S&P near the bottom of its consolidation range (Orange Lines) for the past 2 months.

S&P 500 15 min. chart as of Apr 6, 2018 – Here you can see the Trend Line (Green) Break occur about

mid day on Wednesday (Apr 4th) and continue a little on Thursday. Friday broke down to this same

Trend Line (Green) and the long-term (2-year) prior Trend Line Support (Red line). A rally off of this

2590 support area next Monday would be one possible scenario that would be confirmed if price move

above Thursday’s (Apr 5th) highs. A drop below this 2590 support area is also a possibility for next week

as well as a 3rd scenario of sideways oscillations. Recent market activity suggests we are in for more

choppy roads ahead, so we prepare with multiple possibilities in mind.

DJIA weekly chart as of Apr 6, 2018 – Like the S&P, the Dow has also remained above its 50 week SMA

over the past two months of corrections. We see a wider range week this week compared to the prior

week, with a net small downward close this week near the middle of this week’s range.

DJIA daily chart as of Apr 6, 2018 – The Dow was the only major index to actually break below the Feb

9th lows this week. On Monday (Apr 2nd) we saw the Dow move down to briefly drop below both the 200

day SMA and the Feb 9th lows before bouncing the last hour to close that day above these two levels

but also above the prior lowest Close of 2018 seen on March 23rd.

NASDAQ weekly chart as of Apr 6, 2018 – The Nasdaq remains above its 50 week SMA and below its 20

week SMA (like all the other major indexes). We see a slightly smaller range week this week than last

week, but we also see lower lows and lower highs than the prior week, as well as four down weeks in a

row.

NASDAQ daily chart as of Apr 6, 2018 – Here we can see larger range days in alternating directions on

Monday, Wednesday and Friday this week , with smaller range days in alternating directions on Tuesday

and Thursday. We continue to see the Nasdaq inside its upward channel the past two months, closing

this week near the bottom of this range and not far from its 200 day SMA (Purple).

Russell 2000 daily chart as of Apr 6, 2018 – The Russell now has seen four down weeks in a row, and

again closed this week below both its 20 day and 50 day SMAs. The Russell remains inside its

consolidation triangle (Orange lines) and closed the week near the bottom quadrant of this range.

NYSE Advance/Decline line weekly chart as of Apr 6, 2018 – The market breadth oscillated a bit this

week as we saw alternating days in either direction, however remained nearly unchanged for the week.

VIX Weekly chart as of Apr 6, 2018 – Here we see the VIX finding resistance near 26% the past 6 weeks

while the bottoms of these weekly ranges have moved upwards over the same time period. This

suggests that we have not seen ‘fear’ and panic but steady selling over the past 6 weeks. The week

ending Feb 9th was more what panic can look like.

It is common for the VIX to move up very fast (panic) but then take its time settling back down to what

might be considered more ‘normal’. If we consider the 20 week SMA (Yellow) as what ‘normal’ could

be, then we see that SMA moving up the past two months.

Below we will look at some weekly charts of the S&P alongside the VIX to see what past market

‘corrections’ look like in the VIX, and what patterns we can see in their relationships.

S&P/VIX weekly chart as of 2009-11 – We’ve placed yellow arrows at some key points where the S&P

prices saw some volatile moves down and what the VIX did at that time. We can see three examples of

when the S&P made lower lows a month or two later but the corresponding VIX spike was smaller. We

see this same pattern happen [1] at the pair of arrows in 2008Q4 and 2009Q1, then [2] in mid and late

2010Q2, then again [3] in mid and late 2011Q3. Some folks might call these ‘W’ or double bottoms.

Note how the second Low in the S&P does not cause as much ‘fear’ in the VIX as did the first Low. We

also see a ‘V’ bottom in late 2011Q1.

Now let’s slide the chart over to see the past 3 years of this relationship (below).

S&P / VIX weekly chart as of 2015-18 – We again see these ‘W’ or double bottoms in the S&P with

corresponding and diverging VIX spikes. We see a pair in 2015Q3, 2016Q1 and maybe one now forming

in 2018? We also see ‘V’ bottoms in late 2016Q2 and mid 2016Q4. Each time the VIX Spikes up, it can

take several weeks for it’s to drift back down.

VIX daily chart as of Apr 6, 2018 – We can see the VIX in a range the past two weeks, where only on

Thursday of this week did the VIX barely move below both its 20d and 50d SMAs. Note the speed of the

spike up in early Feb, and the slower decline that follows. Note the slope of these two SMAs.

Index only Put/Call Ratio daily chart as of Apr 6, 2018 – The Put Call Ratio for just Index options

remained above 1.0 all week, but did not spike as much as it did the prior week. This could be due in

part to end of Q1 hedging activities by funds.

Oil daily chart as of Apr 6, 2018 – Oil dropped on Monday to its 50 day SMA, and then dropped again on

Friday to cross below both its 20d and 50d SMAs and close the week at $61.95.

Gold daily chart as of Apr 6, 2018 – Gold remained mostly horizontal this week as it danced on either

side of its 20d and 50d SMAs.

US Dollar Index daily chart as of Apr 6, 2018 – The US Dollar remained in a very narrow horizontal range

Monday, Tuesday and Wednesday this week. Thursday saw a small strengthening but was followed by

Friday’s drop back down to close the week mostly flat.

Next let’s look at a few key sectors to see what those charts may tell us about this week.

DJ Transports daily chart as of Apr 6, 2018 – The Transports oscillated with the markets this week and

briefly broke below the Feb 9th close level (Red Line) on Monday and Friday, but did not close below

this line. A close below this line would provide the 3rd and final criteria for a ‘Dow Theory Sell Signal’.

We did not get that confirmation this week, but Friday’s close was less than $10 above that level and

was the lowest close seen since Feb 9th.

XLF daily chart as of Apr 6, 2018 – The Financials remain weak and horizontal with a slightly wider

range this week. Friday’s close is near the bottom of the range for the past 2 months.

QQQ daily chart as of Apr 6, 2018 – The Tech sector (also XLK) provided both lower lows and lower

highs than the prior week, delivering the 4th down week in a row and closing near the bottom of its

range for the past two months.

SOXX daily chart as of Apr 6, 2018 – The Semiconductor sector also remained weak this week, delivering

a 4th week in a row with lower lows and lower highs. It is now near to testing support at its long term

(2-year) Trend Line (Red line). Note how the 20 day SMA turned south 2 weeks ago and the 50 day is

now starting to also point south.

XLU daily chart as of Apr 6, 2018 – The Utilities sector continues to mostly chop sideways with a gentle

hint of a positive slope as price remained above both its 20d and 50d SMAs this week.

XME daily chart as of Apr 6, 2018 – The XME close the week about flat, but did briefly see a move up off

of support on Wednesday and Thursday, just to give it back on Friday.

XHB daily chart as of Apr 6, 2018 – The Home Builders sector saw a brief rally on Wednesday that tried

to follow thru on Thursday with less momentum and volume. Friday saw a drop to give back about half

of these gains. Not the resistance found Thursday at the underside of the 50d SMA.

XLV daily chart as of Apr 6, 2018 – One of the weakest sectors this past week was Healthcare. The 200

day SMA acted like Resistance on Thursday.

IBB daily chart as of Apr 6, 2018 - One of the worst sectors this past week was the Biotech sector. The

IBB saw its lowest close this Friday (Apr 6th) since June 19th 2017.

Next let’s look at a few key stocks that we have been following recently.

AAPL daily chart as of Apr 6, 2018 – AAPL held up relatively well this week, compared to its fellow

stocks in the Tech sector. Support (Yellow line) from Sept 1 2017 highs held up to multiple tests last

week and again this week. AAPL rallied Wednesday to close above its 50d SMA on Wednesday and

Thursday, just to drop back down below where it closed on Friday. This week saw AAPL close near the

middle of its range for the past 2 months.

FB daily chart as of Apr 6, 2018 – FB continues to be suffering from increased scrutiny regarding their

gathering of personal information, their security and management of access or use of this information.

These kinds of issues are likely to not go away easily or quickly. FB’s price remained inside its prior

week’s range with above average volume the past 14 days. Zuckerberg is scheduled to testify in front

of Congress this next Wednesday and I suspect a lot of eyes will be watching that show.

Remember how the charts began to show us a divergence of FB and GOOGL from the rest of the

f.a.a.n.g. pack back in late 2017 as FB and GOOGL remained mostly flat while AMAN and NFLX kept up

their acceleration to new highs with AAPL close behind.

The past two weeks we have seen most of tech suffering from a fall from grace.

AMZN daily chart as of Apr 6, 2018 – AMZN had been one of the 2 strongest tech stocks until it dipped

below its 20d and 50d SMAs on March 27th and 28th. AMZN spent this week below its 50d SMA and closed

Friday below its long tern (2-year) Trend Line (Red).

NFLX daily chart as of Apr 6, 2018 – The other strongest tech stock has finally crossed below and closed

below its 50d SMA every day this week but on Thursday. Friday’s close was $2 above its Jan 29th High

(Yellow line) prior Resistance.

GOOGL daily chart as of Apr 6, 2018 - GOOGL again closed the week below its 200 day SMA, below its

long term Trend Line (Red) and near the bottom of its range the past 2 months.

NVDA daily chart as of Apr 6, 2018 – We saw how the Semiconductor sector was hit hard this week, and

NVDA not only remained below its 50d SMA all this week, but broke below last week’s support which

previously was Resistance (Green Line) from Nov 2017 highs. Friday’s close was just 55 cents above the

prior lowest close on Feb 5th.

MU daily chart as of Apr 6, 2018 – MU found support at its 50d SMA on Wednesday where it rallied

strong for that one day. All of the gains from Wednesday were given back the following day where the

50d SMA again held as support. Friday however, this support broke and MU closed below both its 50d

SMA and its prior Resistance (Yellow line).

MA daily chart as of Apr 6, 2018 – MA has been one of the few Financial stocks to hold up better than

the rest of the sector over this past month. MA traded in a similar range as the prior week; however, it

too broke below its 50d SMA where it closed near the bottom of this range on Friday.

SQ daily chart as of Apr 6, 2018 – SQ tested its 50d SMA as support last week and early this week.

However, it too finally broke down below its 50d SMA and its prior Resistance (Green line) from Jan 31st

highs on Wednesday and Friday this week.

GS daily chart as of Apr 6, 2018 – GS looks like most all of its sector, chopping horizontally below its

20d and 50d SMAs and near the bottom of its range over the past 2 months.

BA daily chart as of Apr 6, 2018 – BA saw another horizontal week, with chop expanding a little. Overall

BA remains positive for the year, unlike most other industrials.

X daily chart as of Apr 6, 2018 – US Steel remained mostly horizontal this week.

SCCO daily chart as of Apr 6, 2018 – SCCO has held up very well over the past month of volatile

markets. SCCO has been the rare stock that not only seems to ignore the overall market trends, but

also the sector trend. SCCO briefly dipped below its 20 day SMA late last week, but never came close to

touching its 50 day SMA. All three SMAs continue to slope upwards to the right and SCCO actually

briefly delivered a new all time high on Thursday (April 5th) this week 5 cents above its prior record

high seen on March 21st.

TSLA daily chart as of Apr 6, 2018 – TSLA again saw a very volatile week. Last week we saw a large

range day down on Mar 27th followed by a continued gap down the following day. After a 4-day rest

(Mar 28th – Apr 3rd) we saw a gap down open with and monster rally on Wednesday (Apr 4th). The Range

seen on Wednesday turned out to be the largest range day for TSLA since Aug 24th 2015, and TSLA is

known for seeing some really wild days. The rally continued the following day on Thursday to cross

above its 20d SMA at the close. Friday saw a relatively small pull back.

CAT daily chart as of Apr 6, 2018 – CAT saw a down week with a break below is Feb 5th Lows (Orange

line) support on Wednesday and Friday. The close Friday was only 14 cents above this Support level.

DE daily chart as of Apr 6, 2018 – Similar to CAT, DE broke below its Feb 9th lows (Orange line) support

on Wednesday and Friday this week. However, DE closed below this prior Support on Friday. The 200 d

SMA is the next level to look for support.

Both CAT and DE are below their 2017 close levels. CAT does far more business with China than DE.

DHI daily chart as of Apr 6, 2018 – The Home Builders sector popped on Wednesday this week, and we

see that here also with DHI which moved from its 200day SMA support and crossed above both its 20d

and 50d SMAs all on the same day. Thursday saw a little follow thru to the up side, with Friday pulling

back only to the 50day SMA now as Support.

HD daily chart as of Apr 6, 2018 – HD also moved up on Wednesday from its 200 day SMA as support to

close about a half dollar above its 20d SMA on that day. There was a small follow thru on Thursday, but

Friday saw half the two day gains given back and a close below its 20d SMA.

MSFT daily chart as of Apr 6, 2018 – MSFT had a big day on Wednesday this week from its Trend Line

Support (Orange line) but stalled at its 20d and 50d SMA as Resistance that day. The following day MSFT

could not break away from the converging SMAs. Friday saw about half of Wednesday’s gains given back

with a close below both the 20d and 50d SMAs. MSFT remains positive for the year.

We have seen another volatile week this week, with nearly alternating directions every other day. This

is a very difficult time for swing traders and longer term traders. Trying to catch a new trend early can

usually result in being chopped up most of the time, as did the Wednesday Trend Line Break that I

shared here and in the Skype chat room. However, this week has been a great time for Day Traders,

with wide range days 3 of 5 days. The most important part of trading is to stick to your plan. If you

are a swing or position trader (or investor), be patient, sit it out for a little while. There will be plenty

of opportunities soon. Do not be tempted into doing something you are not prepared for or skilled at.

Patience is one of the most important skills for successful trading, regardless of your time-frame.

Stick to your plan.

Trade Smart.

CJ