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Friday Flip Flop – Market takes back SOME of the Losses – Still Down 5% for the Month

Up and down we go – but mostly down

We're still stuck in that range but at least we haven't failed the 200 dma – yet.  The Russell has already failed and the NYSE was on the line yesterday but recovered to hold 12,500 and this morning the Futures are up a little so it doesn't look like it will be a total catastrophe into the weekend – so we still have that to look forward to.

As you can see from our S&P 500 chart, we're stuck in a range between the 5% and 10% lines on our Big Chart as well as between the 50-day moving average and the 200 dma and whichever way this resolves itself should set the tone for the 2nd half of the year but first, it may be a summer where we drift in-between.  That's why we're so easily swayed by any news item – when you are trading between major support and resistance – it takes very little to change your course. 

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We're still playing for Gasoline (/RBN19) to change it's course and we're very surprised to be losing $1,250 per contract at the moment on our long position from Wednesday's Live Trading Webinar and we now have 4 long contracts at an average entry of $1.935 with /RBN19 at $1.905 and the good news is it will be cheap to fill up our tanks ahead of the holiday weekend and the better news is we are still expecting a run up – maybe not until next week though…

Our theory is that the rollover of /RBM19 (June contract), which expires on Tuesday, is putting downward pressure on /RBN19 (July contract) and that the timing of the last EIA Report (through 5/17) failed to capture the orders for gas stations who are topping their tanks off this week – ahead of the holiday driving.  AAA expects this to be the busiest holiday driving weekens since 2005, when we were still a care-free nation who thought housing was a great investment.

The markets were high in 2005 also and they kept going higher for 3 more years before finally collapsing.  This morning, Durable Goods are down 2.1% for April but a lot of that is from BA and core Durable Goods are only down 0.1%.  Still, it's not a good trend over the past 6 months nor has it been very good since Q1 of last year so this economy, despite the President's claims, is not exactly humming along.

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It's the same with the Sentiment Polls – TELLING people how GREAT things are can fool them for a while but, at some point, people begin to realize that things aren't all that great and that change in sentiment can be very dangerous – for the people in power as well as for market investors.  What we've been seeing recently is lower and lower volumes and lower and lower bounces each time the market falls.  Today will mark the 5th straight week the Dow has closed lower than where it started – at what point should we actually worry that the trend has changed?

We're already well-hedged but that doesn't make our portfolios loss-proof – it only mitigates the blow on the way down.  In an ordinary market we would have more short positions but this is a twee-driven market, not a Fundamental one – and it's very dangerous to take short positions so we mostly use the Futures for quick gains and the Ultra-ETFs for our more serious hedges.  

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As you can see from our Big Chart, the Dow and the NYSE are both bouncing off their 200-day moving averages and we can use our 5% Rule™ to see where their weak bounce lines should be:  

  • For the Dow, the fall from 26,700 to the 200 dma at 25,434 was 1,266 so we expect a 20% bounce and we'll round that off to 250-points and call the base 25,450 and that means 25,700 would be the weak bounce line for today and 25,950 would be a strong bounce and I very much doubt we'll see that but making the weak bounce line and holding it into the close would keep us from getting more bearish into the weekend.  
  • For the NYSE a top at 13,069 to the 200 dma at 12,515 was a 554 point drop so 20% of that is 110 and we'll call that a weak bounce at 12,625 and a strong bounce would be 12,735 and you can see that's right where we topped out earlier in the week.  That's a good sign, as it means the 5% Rule™ is working very well in this market:

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Aside from Trump's fight at the playground with Nancy Pelosi, the big news this morning is Theresa May finally resignining (effective June 7th) as she fails to put forth a Brexit deal – so that's still up in the air for at least another month.  Japan lowered its ecomomic outlook as well.  In itsmonthly report, the government said that “weakness is seen recently in machinery investment” and that industrial production is “in a weak tone recently**.” Both phrases reflected a somewhat more negative view of the economy than in the previous report in April.  Oddly enough, we have those exact same weaknesses but our Government says everything is GREAT** (again). 

It does look like we're going to get a pop into the holiday as it's very easy to manipulate the markets on such a low-volume day and next week we're closed on Monday and there is not likely to be any pick-up on volume into the end of the month so we're probably stuck in this range until June – making it an ideal time to have a 3-day holiday.

Have a great weekend, 

  • Phil