Trading Places with Tom Bowley

This NASDAQ 100 Giant Flashed BUY Yesterday; History Confirms It

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Market Recap for Thursday, July 5, 2018

U.S. equities rallied on Thursday, led by the NASDAQ and Russell 2000, which gained 1.12% and 1.15%, respectively.  The Dow Jones and S&P 500 tacked on lesser gains.  Technology (XLK, +1.41%), consumer staples (XLP, +1.38%) and healthcare (XLV, +1.04%) were the leading sectors, while brewers ($DJUSDB, +2.97%), tires ($DJUSTR, +2.83%) and semiconductors ($DJUSSC, +2.67%) led all industry groups.


Boeing Co (BA) and Embraer Aircraft (ERJ) inked a strategic partnership, but the market believed ERJ was the loser in the deal as it sunk more than 10% on the news.  BA was flat.

The NASDAQ 100 was led by a pack of semiconductor stocks with Skyworks Solutions (SWKS, +4.40%) performing best of all.  Also among the leaders was QUALCOMM Inc (QCOM, +3.71%), which climbed back above its 20 day EMA.  I mentioned recently that QCOM loves the month of July as it's gained an average of 4.6% during July over the past two decades.  I've provided a historical refresher on QCOM in the Historical Tendencies section below.  Here's the current technical view on QCOM:

The blue and red directional lines show the 6 month performance distinction of QCOM.  The blue directional lines show how QCOM has performed bullishly during the second half of the year, while the red directional lines show the poor performance during the first half.  Of course, this isn't always the case, but there is a historical tendency for QCOM to outperform during the second half.  Given yesterday's close back above the 20 day EMA (green arrow), this could be the signal for better days ahead for QCOM.  Keep in mind major price resistance exists near 67.50.  At Thursday's close of 57.38, QCOM has plenty of room to run.

Pre-Market Action

Despite a better jobs report than expected this morning, the bond market remains unimpressed.  The 10 year treasury yield ($TNX) is down 2 basis points to 2.82% this morning and remains in a very wide 2.72%-3.11% trading range.  Dow Jones futures, which were down more than 100 points before the nonfarm payrolls report, have rebounded after the report and turned positive.

Asian markets were solid overnight with gains across the board, while European markets are mixed in early trading.

U.S. and China trade tariffs totaling $34 billion take effect today.  In company news, Biogen Inc (BIIB) is up $40, or more than 13%, on trial results on an Alzheimer's drug.  Biotechs tend to perform exceptionally well in July and BIIB's news this morning won't hurt the group.

Current Outlook

It's time to take a look at the S&P 500 and include two of my favorite relative ratios to evaluate the health of the U.S. equity market.  The real key to watch is whether the relative ratios move up in sync with the S&P 500 as it breaks to new highs.  The reason?  We want to see bullish rotation "under the surface" of the benchmark index advance.  The S&P 500 is simply consolidating now, but positive correlation remains between the S&P 500 and both of my key ratios:

The red circles on the XLY:XLP ratio show that the ratio turned down and consolidated as the S&P 500 did the same.  But the ratio has been rising to corroborate the bullishness of equities during other periods and that's what we want to see continue.  The TRAN:UTIL has been less bullish of late and the ratio's drop beneath 14.60 should be monitored.  For a healthy market advance, I want to see this ratio move back above 14.60 and begin to move back toward recent highs from January and June.

On the surface, I'm watching the S&P 500 to see whether short-term price resistance of 2790-2795 is cleared prior to price support of 2675-2690 being lost.  Should the S&P 500 make the breakout above price resistance, then I'll turn to the ratios reflected above to see if they rise along with the benchmark.  If they do, it's a sign of sustainability.  If they don't, it's a flashing caution sign.

Sector/Industry Watch

Consumer discretionary (XLY, +0.50%) has lagged a bit of late, but it's understandable as it has now tested its first key level of price support.  It's been hovering near its 20 day EMA for the past eight trading sessions.  I'd watch for a clear break back above 110 to perhaps signal the next advance in its uptrend:

If the stock market weakens over the summer months, I'd expect to see the XLY find additional support just beneath 107.  The 50 day SMA, currently at 107, would also likely attract buyers.

Historical Tendencies

Given the technical development yesterday on QCOM, I wanted to provide you a reminder of how much better QCOM performs in the second half of calendar years.

Total average monthly gains since 1998:

January through June:  +4.3%
July through December:  +22.6%

Key Earnings Reports

None

Key Economic Reports

June nonfarm payrolls released at 8:30am EST:  213,000 (actual) vs. 190,000 (estimate)

June private payrolls released at 8:30am EST:  202,000 (actual) vs. 182,000 (estimate)

June unemployment rate released at 8:30am EST:  4.0% (actual) vs. 3.8% (estimate)

June average hourly earnings released at 8:30am EST:  +0.2% (actual) vs. +0.3% (estimate)

Happy trading!

Tom

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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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