Trading Places with Tom Bowley

Recent Selling In Technology Improving Trading Opportunities

Market Recap for Wednesday, December 6, 2017

It was a bifurcated day on Wall Street with the NASDAQ being lifted by an improving technology sector (XLK, +0.64), while a very weak energy group (XLE, -1.30%) put the brakes on both the Dow Jones and S&P 500.  Consumer discretionary (XLY, -0.65%) continued its recent weakness off of Monday's shooting star candle.  We could see a rising 20 day EMA test on the current weakness, although I remain a big fan of this sector:


Check out the daily RSI.  It was in the mid-80s just a few days ago and it's still near 70.  Further consolidation is necessary to drain some of the risk out of the group for short-term traders.  The recent low on the long tail from last week should serve as solid near-term price support and the fact that coincides with the rising 20 day EMA (green arrow), all the better.

Pre-Market Action

Germany's DAX ($DAX) continues to hold onto price support in the 12900 area and that's been good news for the S&P 500, where we see strong positive correlation.  A breakdown in the DAX would add worries to an already overbought market here in the U.S.  Overnight, the Tokyo Nikkei ($NIKK) surged 1.45% to lead Asian markets mostly higher.

One day ahead of a big nonfarm payrolls report, Dow Jones futures are down 66 points while NASDAQ futures are slightly green as technology attempts to extend its recent recovery attempt.

Current Outlook

Sector rotation is a very important part of bull markets.  We know stocks don't grow to the sky and short-term overbought conditions, along with price momentum issues, typically result in periods of consolidation and relative weakness.  Technology had been the beneficiary of sector rotation throughout much of 2017, but finally rotation nailed technology to the wall and we've seen rather scary drops among many of the sector's biggest and best names:

NVDA:  17% decline
MU:  22% decline
GOOGL:  7% decline

Other lesser known companies (outside of technology) that traders had fallen in love with saw massive drops as well.  Consider the following:

RIOT:  50% decline
SQ:  28% decline

The good news is that many of these previous high-flyers have seen the selling and relief that they desperately needed.  Here are the current RSI readings of the above 5 stocks, keeping in mind that RSI readings of 40-50 can mark significant bottoms during uptrends:

NVDA:  36
MU:  41
GOOGL:  50
RIOT:  55 
SQ:  45

RIOT and SQ had RSIs above 90 (!), while both NVDA and MU had readings at or near 80.  The problem when stocks get so overbought is that eventual selling can be extremely severe and that's what we've just witnessed.  While volatility can make trading these stocks risky at any time, the significant pullback in the RSIs on these and other recent high-flying stocks suggests the reward to risk is much, much better now than it has been in weeks.  Of the above, GOOGL is perhaps the most stable and predictable, rallying off price support this week:

Two negative divergences on GOOGL's chart....and two pullbacks to price/gap support.  Two RSI readings above 70....and two pullbacks to RSI 40ish.  It's the way the market works in terms of rotation and profit taking.  As a short-term trader, it's what I bank on.

Sector/Industry Watch

Over the past week, the Dow Jones U.S. Medical Supplies Index ($DJUSMS) has tumbled nearly 5%.  That is setting up a potential bounce off price support and 50 day SMA support.  Have a look:

When I consider trades of individual stocks, it helps to look at the industry group's chart beforehand.  In this case, I'd view the DJUSMS bullishly since (1) we're in a bull market where most stocks will rise, (2) the DJUSMS has seen an unwinding of overbought conditions and now is much closer to price support than price resistance, and (3) prior to this pullback, the DJUSMS was a relative outperformer within the healthcare sector.

My next step is to trade stocks from my Strong Earnings ChartList, which currently holds 6 DJUSMS stocks:  BAX, ALGN, HYH, BDX, XRAY, HAE.  I would review those and look for stocks that are very near support with a solid reward to risk opportunity.

My Strong Earnings ChartList is nearly identical to EarningsBeats.com's Candidate Tracker ChartList, which they are offering to send as part of a special promotion.  There is a minor cost involved, but I want to pass this along as I've been asked on many occasions to share my Strong Earnings ChartList.  EB's offer accomplishes this.

Historical Tendencies

I've posted recently the bearish seasonal tendencies in December until the close on the 15th.  But every month shows profit taking from the 7th through the 10th calendar days.  Today marks December 7th so we should at least be aware of this historical pattern.

Key Earnings Reports

(actual vs. estimate):

DG:  .98 vs .94

MTN:  (2.00) vs (1.84)

TTC:  .31 vs .29

(reports after close, estimate provided):

COO:  2.64

Key Economic Reports

Initial jobless claims released at 8:30am EST:  236,000 (actual) vs. 240,000 (estimate)

Happy trading!

Tom

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