Trading Places with Tom Bowley

Medical Supplies Print Reversing Candle, Small Caps Surge And Monday Setups

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Market Recap for Friday, March 2, 2018

The Dow Jones finished with a 71 point loss on Friday, thanks in part to another very weak performance by McDonalds (MCD).  Apparently, their $1, $2, $3 menu is falling short of expectations and it's clearly reflected in recent price action.  MCD now has a SCTR of 11, placing it on a par with Proctor & Gamble (PG) and Merck (MRK), but still soundly beaten (in a bearish way) by General Electric (GE), which remains under significant selling pressure.


Outside of the Dow Jones, however, market action was quite solid on Friday.  The Russell 2000 small cap index ($RUT) surged on Friday in one of its best performances of 2018.  The U.S. Dollar Index ($USD) recently bottomed and has shown strength of late.  That tends to cause money to rotate to companies that do business primarily here in the U.S. as they are not affected by currency translations.  A rising dollar can have negative EPS consequences for large multinational businesses doing a large part of their business in foreign countries.  So watch the USD.  If it continues to rise, I'd expect to see more outperformance by small caps, who had been lagging recently.  Here's the latest chart of the RUT:

The relative performance of the RUT hasn't been very good, but that could change if the USD holds support near 88 and begins to trend higher.  I discussed the fact that I like the dollar to rise from current levels in my Trading Places blog article from last Wednesday.  Feel free to check it out.

Among sectors, healthcare (XLV, +1.01%) was the top performer as medical supplies ($DJUSMS) reversed off key support.  More on the DJUSMS in the Sector/Industry Watch section below.  Technology (XLK, +0.95%) also had a strong day as semiconductors ($DJUSSC) rebounded after two days of selling.  Volume was heavy and notable on the DJUSSC rebound as well.  Despite the recent pullback in the 10 year treasury yield ($TNX), utilities (XLU, -0.26%) found itself in a very familiar spot - lagging the other eight sectors.

Pre-Market Action

It's a fairly uneventful morning, although shares in Hong Kong fell precipitously with the Hang Seng Index ($HSI) down nearly 700 points (-2.28%) overnight with many large financials leading the losses there.

In Europe, we're seeing mostly strength this morning as the German DAX ($DAX) attempts to climb back over 12,000.  More on that in the Current Outlook section below.

With 30 minutes left to the opening bell, Dow Jones futures are lower by 82 points.

Current Outlook

There's been a fairly tight positive correlation over the years between our benchmark S&P 500 and the German DAX.  So it's never a good thing when the DAX is testing key price support levels.  Actually, testing them isn't such a bad thing, but breaking key price support would be.  The DAX finished very weak last week and is on the precipice of a significant price breakdown:

Just about any technician will tell you that a price support line tested several times is more important than testing a prior low not previously retested.  The same holds true for trendlines.  A trendline connecting two points on a chart is not nearly as significant as one that has 5-6 successful tests.

Sector/Industry Watch

The Dow Jones U.S. Medical Supplies Index ($DJUSMS) had a great day on Friday.  While its daily chart wasn't looking so good heading into Friday's action, the weekly chart actually had looked much more promising:

Negative divergences tend to lead to 50 period SMA tests and/or PPO centerline tests (pink arrows).  There was simply a price momentum issue here and it's been resolved now.  This bullish weekly pattern makes the daily reversing bullish engulfing candle more powerful in my view:

The positive divergence is a solid signal that the worst of the selling is over.  I'd look for higher prices in this group over the next few weeks.  A close beneath the 835 level would negate this analysis.  Until then, trading in this space makes good technical sense.

Monday Setups

Given the surge in small caps on Friday and the potential bottom in medical supplies stocks, my Monday setup is a small cap medical supplies company - ABAXIS, Inc. (ABAX).  ABAX recently reported quarterly results that topped Wall Street's expectations on both a revenue and EPS basis.  I look for a return to its recent price high:

Consider a closing stop beneath 65.50 and a target of 76.00.

I'll be adding other setups later this morning.  You can access them by CLICKING HERE.

Historical Tendencies

Since 1971 on the NASDAQ, here's the March breakdown in terms of annualized performance:

March 1-15:  +15.92%
March 16-31:  +5.54%

As you can see, March isn't a great month for the NASDAQ, but it's not bad either.  Strength tends to be concentrated more towards the first half of the month.

Key Earnings Reports

None

Key Economic Reports

February PMI services index to be released at 9:45am EST:  55.9 (estimate)

February ISM non-manufacturing index to be released at 10:00am EST:  58.8 (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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