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Weekly Market Analysis – August 20, 2018  [Premium Articles]

The new format of the weekly premium market report includes a market recap with commentary and analysis, equity ETF performance report, directional probabilities and mean-reversion signals of DJIA stocks, overbought/oversold signals of ETFs and selected large caps from S&P 100 index, and cryptocurrency analysis.

Weekly Market Recap (August 13 – August 17, 2018)

U.S. stock indexes were mixed on the week amid rising short-term volatility. The S&P 500 rose 0.59%, Dow Jones Industrial Average gained 1.41%, NASDAQ lost 0.29% and the Russell 2000 rose 0.36%. Consumer goods and utilities led advances. Basic materials and technology led declines. The 10-Year Note yield rose one basis point to 2.87%. Gold and crude oil were sharply lower. The U.S. dollar was lower. Bitcoin and ethereum rebounded after recent sell-off.

Markets at a glance – Week ending August 17, 2018
Market Week YTD OB/OS*
DJIA +1.41% +3.84% 68.26
S&P 500  +0.59% +6.60% 77.06
NASDAQ -0.29% +13.22% 69.34
Russell 2000  +0.36% +10.25% 91.78
Gold (GLD) -2.23% -9.21% 0.23
Crude Oil (USO) -2.77% +14.0% 4.52
U.S. Dollar (UUP) -0.16% +5.87% 81.82
Bonds (TLT) +0.27% -3.17% 91.45
Emerging (EEM) -2.27% -9.83% 3.37

*Overbought/oversold conditions are based on our proprietary  PAL OB/OS indicator in the weekly timeframe. Overbought conditions occur when value > 90 and oversold when < 10. 

Summary

  • Dow Jones rally supported broader market
  • Investors flocked to low volatility large caps
  • Nasdaq took a breather
  • Bond prices were slightly higher despite inflation concerns
  • Commodity sell-off accelerated
  • Quantitative analysis points to strong upward bias for stocks
  • Cryptocurrency prices rebounded after recent sell-off
  • Emerging markets fell but ended week off lows

Market Commentary 

Two weeks ago we wrote the following about price action in S&P 500:

We expect more whipsaw inside the horizontal channel between 2873 and 2802 in the next few weeks unless there is a major development that will provide a final resolution. 

and last week we also wrote:

The whipsaw continued as expected and now there is a potential mechanism to drive a short-term correction: the Turkish Lira crisis. Therefore, the probability of a test of crucial support near 2800 in S&P 500 has now increased.

Price action in the last four weeks has been confined inside a horizontal channel between 2873 and 2802. Last week there was a test of support at 2802 and the index rebounded to a high of 2855.63. Despite emerging market turmoil, investors and traders focused on better-than-expected earnings reports and it appears they are willing to push prices higher for a test of S&P 500 resistance near 2873.

Note that there was a mild sell-off in high beta large caps and tech stocks last week with bullish action concentrating on low volatility large caps. The ratio of SPLV (low volatility S&P 500 ETF) to SPHB (high beta S&P 500 ETF) is now where it was before the January correction.

Obviously, this ratio is not a signal of a correction and we have seen in the past this rotation taking place without affecting the uptrend. The rally in Dow Jones Industrial Average may be justified in the context of the index lagging the broader market, as shown in the chart below. However, at some point, a crowded trade in low volatility large caps will precede another correction.

Even after last week’s rally, the Dow is still 3.6% below its all-time closing high while the S&P 500 and Russell 2000 are only 0.8% below and NASDAQ-100 is 1.75% below. In past weeks lower risk securities were sold to finance riskier positions. In addition, some equity long/short program were shorting low volatility and buying high beta. This appears to be reversing now but it is early to say whether it is a signal of a coming correction but market participants are worrying about a possible contagion from the Turkish Lira and debt problems.

The good news for equity investors is that gold is still under pressure due to a strong U.D. dollar and not viewed as a safe haven. Despite persisting oversold conditions, gold fell sharply last week with GLD losing 2.2% of its value.

We have marked on the above GLD chart similar oversold conditions that occurred near the end of 2015 and 2016 and were followed by sharp rallies. This is a sample of two but is worth keeping in mind. If stocks start to correct there may be a rebound in gold. This may occur by the end of this year, if not earlier, as the ETF finds support near 107. But this is a highly speculative thesis.

Equity ETF Performance (total return)

ETF Week YTD OB/OS*
SPY +0.67% +7.73% 81.81
SPLV +1.76% +5.64% 78.24
SPHB -0.45% +3.89% 7.12
DIA +1.27% +4.84% 71.28
QQQ -0.37% +15.90% 69.81
IWM +0.49% +11.88% 92.19

*Overbought/oversold conditions are based on our proprietary  PAL OB/OS indicator applied to weekly timeframe. Overbought conditions occur when value > 90 and oversold when < 10. 

Technology (QQQ) is leading in the above table with year-to-date return of 15.90%, followed by small caps (IWM), S&P 500 (SPY), Low Volatility S&P 500 (SPLV), Dow Jones (DIA) and High Beta S&P 500 (SPHB) in that order.

According to PAL OB/OS indicator, small caps (IWM) are overbought. High Beta S&P 500 (SPHB) is oversold.

Quantitative analysis of DJIA stocks 

Notes

  • In the results below, the Last Date of weekly bars is shown as the last date of the week
  • The calculations are based on weekly adjusted data for Dow-30 stocks since 01/2000
  • Results are sorted by highest directional bias P-delta times significance S
  • Long/Short are not trading signals but refer to directional bias

The results indicate strong upward short-term bias.

TS is the profit-target and stop-loss,  P-long and P-short are the long and short probabilities, P-delta is the difference  (P-long – P-short), a measure of the directional bias and S is the significance of the result (for weekly data 0 means low or no significance.) 

There are 23 stocks with positive directional bias and 7 stocks with negative. The ratio of positive to total is 0.77. A ratio above 0.7 normally indicates strong positive bias and a ratio below 0.50 usually indicates strong negative bias.

Overbought/Oversold conditions

Overbought/oversold conditions are based on our proprietary  PAL OB/OS indicator in the weekly timeframe. Overbought conditions occur when value > 90 and oversold when < 10. Tickers are listed in the order of highest overbought or oversold condition.

Please note: Overbought/oversold conditions usually indicate bullish/bearish strength, respectively. Markets can stay overbought or oversold for long periods of time. Using these conditions in trading assumes evaluation in proper context. 

Dow 30 overbought count: 6/30 last week versus 7/30 two weeks ago
Dow 30 oversold count:       2/30 last week versus 0/30 two weeks ago

The above results indicate decreasing momentum in neutral territory.

Selected large caps from S&P 100

Overbought  BMY, WMT, PFE, MRK, LLY, ALL, TGT, VZ, CSCO, EXC, USB, UPS, MDT, EMR, UNH
Oversold OXY, BLK, XOM, CVX, MS

Selected ETFs (from a group of 36 symbols)

Overbought  UNG, XRT, XLK, IWM, TLT
Oversold GLD, SLV, GDX, XME, EZU, EEM, EFA, USO, DBC, EWJ, SPHB, XLB, TAN

Weekly mean-reversion signals

The mean-reversion signals are generated by our proprietary PSI5 algo applied to weekly data of Dow 30 stocks. Note: The mean-reversion signals are provided for informational purposes only and in this particular form do not constitute a systematic trading strategy, such as the one discussed in this article. Only entry signals are provided in these weekly premium articles but no exit signals since this is not a signal service. Usually, mean-reversion signals exit at the open of the week after the entry occurs but this is not always the case if the long signal is persistent.

The average profit/loss of mean-reversion signals in the last report from open to close of the week was +1.01% but the relevant strategy gained +1% due to previously open positions. The strategy is up +11.0% year-to-date. More details about the strategy can be found in this article.

New long-only mean-reversion signals were generated for:

HD, MSFT, NKE

Bitcoin and Ethereum analysis

Data as of Saturday, August 18, 2018, 5:00 PM EST. Click on the images to enlarge.

Cryptocurrencies took a breather last week after two weeks of intense sell-off.

Bitcoin rose about 4% after making a lower weekly low. Major support is near 5500 while bitcoin is not oversold yet according to PAL OB/OS indicator. We expect a test of 5500 support in the next few weeks but before that there is high probability of a test of resistance near 7150.

Ethereum rose about 9% after testing support at 280. We expect a retest of this major support level in the next few weeks. Ethereum is still not oversold according to PAL OB/OS indicator. There is high probability of a test of resistance near 360 before another test of the 260 support

If you have any questions, you can email us at: premium@priceactionlab.com

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

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