Schwab Live: Midweek Market Trend for July 19, 2017

Note: Lou Mercer is a guest writer this week for Lee Bohl. You can learn more about Lou Mercer here

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There are many trends that pop up out of nowhere and then disappear as they grasp adoption, almost as if we want to disassociate ourselves before we are the last one following them.  This pattern repeats itself over and over.  Do you remember baggy jeans, gangnam style, or when we couldn’t get enough cupcakes or frozen yogurt?  I am sure the end is near for kombucha, poki bowls, and hipster beards, but when it comes to the markets we want to  ride the trend as long as possible, and not be afraid to be the last one standing. 

The reason I bring this up is because summer earnings season has begun and it is off to a hot start.  The S&P 500 has 428 companies reporting earnings over the next 30 days with 78 over the next week.  All the major averages are at or very close to all-time highs. But for some reason, I am not hearing many traders overly optimistic.  Below (Figure 1) you see the S&P 500 closing just off a record high with short term support at the green arrow around 2400 which was previous resistance.  Some traders might use the Relative Strength Index over 70 as a way to measure if the market is overextended and possibly take some profits at that level.  

Source: StreetSmart Edge®

The Nasdaq closed Tuesday at an all-time high on the back of a big move in FANG stock Netflix closing up over 13.5%.  The story is much of the same here (Figure 2)as we continue to see higher highs and higher lows and the 50-day SMA above the 200-day SMA which traders might look at for an indication of the longer term trend.  Each pullback has been a buying opportunity.  At some point in the future that trend will change, but an experienced trader will trade with what they are seeing and not with what they want to happen.  

Source: StreetSmart Edge®

Currently nine of the 11 sectors are in uptrends confirmed by the 50-day SMA above the 200 -day SMA.  The only exceptions are telecom and energy.  Since it seems many are bored by the discussion of what is working, let’s look at financials and energy for some key levels both bulls and bears are watching.  Below is a chart of XLF (Figure 3). A key support level can be seen by multiple touches of the green line.  On the other side a key resistance level can be seen at the red line which represents the March and July highs.  Experienced traders that are trying to go long might either wait for a pullback to support or buy a breakout of resistance.  On the short side someone might find it advantageous to enter around here and look for profits as it comes down to support.  If they are wrong, they will find a quick exit as it breaks above resistance.   Keep an eye out for earnings this week and key comments from the European Central Bank on Thursday morning that might move the market.    

Source: StreetSmart Edge®

Finally we look at XLE.  The dotted trend line was drawn by connecting the lower highs and is right in line with the 50 day down trending SMA.  On the long side you need to use patience and not get in too early.  Just like things trend up longer than we think, they trend down longer than we think too.  Buyers want to wait for a break in the trend which is followed by higher lows and higher highs.  

Source: StreetSmart Edge®

Historically July is the 4th best month going back to 1933 with an average return of 1%.  During your summer trading take a look at the charts to help see the bigger picture.  Analyzing the markets is a KEY first step in building your plan, and charts cut through all the rumors, headlines and hype to paint an objective picture of what is really going on. I will use charts as a foundation for building my trade plan.  Stay objective, don’t fight the trend and have a clear exit strategy on where you are going to exit if you are wrong.  

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