When the markets gap up, as they did during the bullish trend from February through April, we are much more apt to see bullish continuation.
Sector Heat Map – February and March
Recall Ron’s sector heat map. This visual “trading tool” monitors sector rotation. It’s easy to deduce that sector performance was a tailwind for the indices during this period. It moved from red in January, through orange in February. Rotation continued to green in early March.
What do we see now? For starters sectors have changed. They are no longer the tailwind we experienced in February and March. On the contrary, sectors have moved bad to yellow and orange, with few exceptions. Leading sectors for the past several weeks, like semiconductors appear to see distribution. Ron updates this spreadsheet after the closing bell on Fridays.
Considering the above, we thought a descending pattern made sense, as highlighted on Thursday morning. Price action broke the trend line from the February lows, extended through the Brexit close. RSI, stochastic and MACD are pointing lower. We are a little skeptical of futures pushing higher in the pre-market, given the above points.
When price action produces a series of lower highs, as we see now, gaps in the morning often fail or fade. Be ready for the latter. Additionally, dark pools were selling heavily yesterday.
SPY found support at our Thursday target at 211.20 (dividend adjusted) or 211.24 in the chart below. There is a possibility we could bounce back up to the 50ma (216.00 zone) and the descending trend line, given the current “mixed” sector rotation model above.
MACD, stochastic and RSI will need to reverse course quickly for this scenario to work.
Sector performance highlights buying in the “defensive” sectors, XLU, XLV, XLP. This usually happens when institutions start to position for further declines. While we could change trend on the back of big cap company earnings reports, we are compelled to lean towards a defensive posture at the current time.
The “Gas Distribution” industry group led the utilities sector on Thursday. Ranked by SCTR score are the top six stocks in the group. Spectra Energy was a new entry yesterday.
The chart pattern looks fairly bullish. Bollinger bands are tight, showing a change towards expansion. RSI is rising, along with stochastic. If MACD makes a full turn as histogram suggests, prices should continue their bullish path. Monitor for increasing volume.
Spectra Energy Corp is expected* to report earnings on 11/02/2016 before market open.
Futures are gyrating higher, with the dollar exhibiting strength too boot. Bond yields are higher as well, so something will give early in the session.
Finally, I’d like to point out that Fry-days are not the best day to start new positions. With fall in full color, my advice is to get outside and enjoy your day. Make yours an early weekend, as we envision prices settling between 212.50 and 214.50 into the close. If things change, I will alert you to those developments.
Happy Trading – Vinny
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