Three Big Things Seem to Be Happening

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Some big things seem to be happening as the worst month in years draws to a close.

Not to waste time, here they are:

  1. There are signs of equities bottoming.
  2. The U.S. dollar is ripping higher.
  3. Retailers may be pushing higher into their quarterly results and the holidays.

First, the S&P 500 has had three noteworthy candlesticks in a row. Friday was a “spinning top,” closing near its open despite large swings. Monday was an “outside day,” with a lower low and higher high, followed by an “inside day” (just the opposite) on Tuesday.

Chart watchers consider all three of these formations as potential reversal patterns. That would suggest a potential rebound, given the recent selloff. Just for the record, the index ended yesterday’s session down 7.9 percent below its September close — putting it on pace for the worst month since May 2010.

As highlighted in our weekly Market Action webinar, TradeStation’s charts can show how long moving averages are rising or falling. In this case, the 10-day moving average on the S&P 500 has declined for 19 straight sessions, the longest losing streak in almost six years. Have the bears gotten long in the tooth?

S&P 500 with key patterns marked. Prices as of 10/30/18.

Next, the U.S. dollar index (@DX) hit its highest level yesterday since May 2017. It seems tied to weakness in Europe (where third-quarter growth missed estimates) and rising interest rates in the U.S.

Usually the market responds to a strong dollar by favoring smaller companies with a domestic focus. That could draw attention back to the Russell 2000 ETF (IWM), which is back to its lowest levels since February.

On the flip side, investors often sell precious metals when the greenback climbs. Interestingly, gold futures (@GC) have recently stalled around a three-month high.

The final trend to emerge on Tuesday was upside in retailers, several of which report earnings in the next 2-3 weeks. Many companies in the space also held up much better than the rest of the market over the last month’s selloff.

There’s been positive news and calls by experts following the sector as well. Target (TGT) CEO Brian Cornell, for instance, continues to describe the consumer environment as the best he’s ever seen. Deloitte has repeatedly predicted a strong holiday. And yesterday, a strong bullish call by Wedbush sent Nordstrom (JWN) to its highest level in almost three years.

JWN, you might remember, is one of the “Four Horsemen of the Retail Post-Apocalypse.” Clients may also recall that companies in this sector also rallied into their last set of numbers in August. Stick with Market Insights for more over the next week.

One more potential argument in favor of retailers is that most of them are domestic and thus less vulnerable to the stronger dollar cited above.

In conclusion, this isn’t a trade recommendation and everyone needs to do their own homework. We just wanted to highlight patterns emerging in the market as a historically volatile month draws to a close.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.