MomentumOptions.com Pre-Market Update for 8/7/2017

Small-Caps Hold Crucial Support

8:00am (EST)

The market finished Friday on a high note but the week was mixed despite the Dow setting its 8th-straight record high and is riding a 9-session win streak. The S&P 500 also edged higher for the week but has traded in a 20-point range since mid-July, or 13 trading sessions. The Nasdaq was slightly lower for the week while the 1% pullback in the Russell 2000 held near-term support.

The Dow added 66 points, or 0.3%, to end at 22,092 on Friday. The blue-chips traded to a session and record high of 22,092 with resistance and blue-sky territory awaiting at 22,200-22,250. The 2-point pullback afterwards held rising support at 22,000-21,800. A move below 21,700 would be a bearish development.

 

The S&P 500 climbed 2 points, or 0.2%, to finish at 2,476. The index peaked at 2,480 at the start of trading with lower resistance at 2,485-2,500 holding for the 6th-straight session. Support remains at 2,465-2,460 with the low tapping 2,472 intraday.

 

The Nasdaq advanced 11 points, or 0.2%, to close at 6,351. Tech tested a low of 6,329 during the first half of action with upper support at 6,325-6,275 holding for the 2nd-straight session. A move below 6,250 and the 50-day moving average would be a bearish development. Resistance at 6,375-6,400 stuck following the rebound to 6,361 afterwards.

 

The Russell 2000 gained 7 points, or 0.5%, to settle at 1,412. The small-caps slipped less than a tenth-point to 1,405 on the morning weakness with upper support at 1,400-1,395 and the 100-day moving average holding. Resistance at 1,415-1,420 and the 50-day moving average. A move above 1,425-1,430 this week would be slightly bullish.

 

The S&P 500 Volatility Index ($VIX, 10.03, down 0.41) peaked at 10.50 intraday with lower resistance at 10.50-11.50 standing strong. Upper support at 10-9.50 was split on the low of 9.68.

 

Utilities were the strongest sector last week with the Financial and Industrial sectors posting moderate gains. Oil and Energy led the laggards, falling 3%, followed by Business Services and Technology. Medical, Basic Materials, and Consumer Discretionary were also weak.

The Utilities Selector Sector Spider (XLU) pulled back on Friday after lower resistance at $54-$54.50 held during the prior session. This level held twice in June and the recent attempt is forming a triple-top. These technical setups can be bullish, or bearish, with XLU needing to close above resistance to form a new base and possible breakout towards $55-$56. Near-term support is at $53.50-$53 and a rising 50-day moving average.

 

Copper flattened out after a strong breakout over the prior couple of weeks. The run to resistance at $2.90-$2.925 has temporarily stalled with Friday’s high reaching $2.898. Rising support is at $2.85-$2.825. Copper use to be a leading commodity indicator of equity returns but this is no longer the case. However if the U.S. returns to a true capital-expenditure driven economy like we had in 2005-2008, copper could continue to rise.

 

The Dow Jones Transportation Average ($TRAN) has been in a nasty downtrend since the middle of July but is showing signs of bottoming out. Support at 9,125-9,100 and the 200-day moving average held with a move below the latter a bearish development. The rebound to 9,290 and close above the 9,200 level for the second-straight session was a bullish signal on the move back above the 100-day moving average. Resistance is at 9,250 and the 100-day moving average.

 

The divergence between the Dow and the Transports is a little troublesome as it could signal a pullback in the blue-chips, at some point, if there is another move back below the 9,200 level. Dow Theory suggests that major trends must be confirmed by both the transports and industrials indexes. Confirmation of a higher trend is typically a bullish signal for the market. A trend lower for both can signal a possible pullback in the market.

With the Dow racing past 22,000 last week, I kept a close eye on the Transports closing out the week. I often say one day doesn’t make a trend bit the 3-day rebound looks encouraging. Dow Theory includes some aspects of sector rotation and we have seen that with Tech’s and Energy sector weakness versus strength in the Financial sector and other areas.

One troublesome sign was the action in the semiconductors. The Spider S&P 500 Semiconductor ETF (XSD) sank over 4% last week to test backup support at $62.50-$62 and the 100-day moving average. The close back below a downward trending 50-day moving average was a bearish development with resistance at $63-$63.50.

 

The Medical sector has been the weakest of the major industries with a 4.6% drop over the past week. The iShares U.S. Medical Devices ETF (IHI) topped out at the $170 level last month and best illustrates the damage being done. Near-term support at $162 from late May/ early June held with a close below $160-$159.75 and the 100-day moving average being a bearish development. Lowered resistance is at $164-$174.75 followed by $165-$165.50 and the 50-day moving average.

 

The bulk of 2Q earnings season will shrink in the coming weeks with 35 S&P 500 companies index reporting results this week. Afterwards, the Q2 earnings season will have come to an end for 91% of S&P 500 members by this Friday’s closing bell.

The results from the 420 S&P 500 companies that have reported account for 87% of the index’s total market capitalization. Total earnings for these companies are up nearly 12% from the same period last year on 5.6% higher revenues. Additionally, over 74% have topped EPS estimates and 68% have beat revenue estimates.

This week’s highlights include Twilio (TWLO) after today’s close.

CVS, Monster Beverage (MNST), Priceline Group (PCLN), Walt Disney (DIS) and Wayfair (W) are scheduled to release numbers on Tuesday.

Wednesday’s lineup includes Crocs (CROX), Jack in the Box (JACK), Mylan (MYL), Netease.com (NTES), Scripps Networks (SNI) and Wendy’s (WEN).

For Thursday, Black Box (BBOX), Canada Goose (GOOS), Kohl’s (KSS), Macy’s (M), Nvidia (NVDA), Snap (SNAP) and Trade Desk (TTD).

The week wraps up with Acushnet Holdings (GOLF), JC Penney (JCP) and Telus (TU) announcing results ahead of Friday’s opening.

I will mainly be watching the action in the small-caps and the Transports this week for possible clues on a continuing trend higher or failed resistance. Of course, the VIX is always a daily focus of mine but some Wall Street knuckleheads say its broken. The index has traded below the 10 level 36 times this year.