Top of The Line

So many of the context pieces I monitor are flirting with the high-ends of their established ranges.

Either this is it, and we finally break range and explore higher prices or sellers are about to land a blow from the top ropes. I am watching USD/JPY, Oil, and Nasdaq semiconductors. Here’s the semiconductor chart:

Breadth is strong intra-day, but these context pieces have me trying to dig my heels in and stay bearish on the week.

I also have a lagging Nasdaq, fading copper stocks, and lackluster momentum in the favorites like Facebook, Netflix, and Tesla.

On my wish list is biotech softening up again. They are so strong. And some decaying breadth to motivate sellers to become initiative on the week.

This morning has all the makings of a pain trade. Cash on the sidelines had to wonder if they missed out by waiting for a retest of the lows. Sellers from yesterday had to take some heat. Now that we pushed just high enough to suck in some chasing bulls, sellers are responding.

Several momentum darlings were not participating this morning. Shares of Tesla haven’t been the same since Elon took the stage last week and presented his latest and greatest. GoPro continues to be a heartbreaker to any hopeful knife catcher. Tech overall has been a mixed bag.

The big winner so far this week is basic materials. Therefore it is no surprise that the volatility in oil post the 10:30am inventory stats is knocking the overall market around. The clearest way to monitor this action, however, is to keep an eye on the USD/JPY. This remains the key contextual piece. It is wound tight heading into Wednesday afternoon.

Keep it simple, a strong move above 120.25 is contextually bullish and a strong move below 119.75 bearish for stocks.

Index futures are pricing a positive open for stocks this Wednesday. The NASDAQ managed to print an extreme range as it moved higher on elevated volume. Price managed to hold Tuesday’s low before turning higher and trending for most of the session to make a fresh weekly high heading into the midweek trade. At 7am MBA Mortgage Application data came out much higher than expected. The initial reaction was a small buying pulse.

The only other economic event today is the Consumer Credit data at 3pm. Investors are likely to begin weighing the looming FOMC minutes (tomorrow at 2pm) into the decision process as today progresses.

Yesterday we printed a normal variation down. This day type is characterized as having a balanced, bell-shaped volume distribution. It earns the ‘down’ potion from extended price lower after forming initial balance (first hour of trade).   It carried a slight expectation for lower prices heading into today—thus its reasonable to surmise short sellers being in an uncomfortable position heading into today.

My primary expectation today is for buyers to push off the open and trade up to the open gap at 4341.25. This is also the VAH of a well established balance area formed around 09/18. From there look for sellers to step in and work into the overnight inventory to test down to 4304 where I expect buyers to defend and two-way trade to ensue with a slight positive drift.

Hypo 2 buyers gap-and-go up. Price takes out 4341.25 and overshoots it early, setting up a move to target the open gap at 4366.25. Stretch target is 4378.50.

Hypo 3 sellers work down through 4304, muddle about the 4300 century mark, then continue working lower to close the overnight gap down to 4289.50. From there they seek to target overnight low 4270.75 and Monday’s still open gap down at 4261.75 before two way trade ensues.

Levels:

One of the contextual pieces I follow is trading in line with my primary expectation heading into the week.  Here’s the excerpt from last Sunday’s Strategy Session:

 Transports could not hold their range last week and instead broke lower. Now we are left to wonder if this index will continue to discover lower prices or if instead it is still balanced but just in a widening range. The bracket low from the prior range still serves as a useful reference point [3431.30]. The expectation now is for any attempt back into this area to be defended by sellers.

Here’s an updated chart of the index, which managed to take out its lows alongside the NASDAQ while on the day, the other indices demonstrated relative strength, see below:

Biotech grabbed the headlines this morning with its standout weakness while the market otherwise entertains a 40 point Dow day aka real calm.

That’s because everyone wonders what the implications of our next under-the-surface correction might be.  Now that the basic material (oil) patch has already been incognito corrected, our methodical market can turn its attention to biotech—correcting their flamboyant valuations.

“The short answer is YES.” – Raul

In the 09/20/15 Issue of the Exodus Strategy Session, we looked closely at the Biotech industry’s market cap.  If you include the all Drug Industries into the equation the market cap equates to just below 9%.  Biotech as a standalone industry equals a mere 0.68% of the equity complex, almost paltry in size.  The rest of the data is presented below:

Data source: Exodus Market Intelligence

 As you were…

While the broad markets shows balance between buyers and sellers, the biotech industry is being dismembered.  Biotech ETF IBB is down over 3% already on the session.

Leading the way lower are the ones tinkering with God’s molecules over at Exact Sciences Corporation.  They caught a downgrade by an analyst from Benchmark and are being roasted on a spit—down over 40% on the session as of this writing.

Here are some other big biotech losers so far today:

Data source: Exodus Market Intelligence

Like flipping a switch, the overnight volatility we’ve experienced for weeks is gone.  NASDAQ futures traded on normal range and volume overnight on a session that was contained inside Monday’s range.  Price worked slightly lower but as we approach cash open the market is right around Monday’s MID.  At 7:30am Trade Balance data came out slightly below expectations and the initial reaction has been mute.

We have no other economic events on the calendar today.  The market will be left to discover prices and balance on its own.

Yesterday we printed a double distribution day.  It was not really trending price action but instead we saw a p-shape profile form atop a normal distribution.  The P-shape suggests a short squeeze occurred late in the session.

Heading into today, my primary expectation is for buyer to work into the overnight inventory and close the gap up to 4312.25.  From there they target overnight high 4314.  Sellers defend around the 4315 level and we churn and chop before continuing higher to target 4320.25 then the open gap up at 4341.25.

Hypo 2 sellers work in around the gap fill/overnight high 4312.25 – 4314 and roll price over.  Price works down below Monday’s low 4279 and targets the weekend gap fill down to 4261.75.  There’s a globex distribution down to 4253—if sellers can push below it, they open up the door for a fast liquidation down to 4200.  We may see a false move down into the slip zone where buyers defend 4244.

Hypo 3 sellers push off the open, leave the overnight gap open, and work down below Monday’s low 4279 and targets the weekend gap fill down to 4261.75.  Then it is eyes on the globex distribution down to 4253—if sellers can push below it, they open up the door for a fast liquidation down to 4200.  Again, we may see a false move down into the slip zone where buyers defend 4244.

Levels:

First of all, aside from those bastard APP shares I am having a decent day.  Last week I added some GARP exposure along with a few other positions.  They are faring well.  Plus the Silicon Valley soap opera is over and Twitter has a CEO.

I bought BIS early on for a decent price and the position is down a touch.  I would quite prefer more strength so I can get my real position in place.

Toward the close I added some hedge/short exposure via DXD.  The Dow is leading the bulls higher therefore I’ve shot some arrows in its direction.

I don’t need a ton of risk for this position.  A bit higher tomorrow and I’ll shed DXD.  But for now, I am adhering to my pool of data—despite the market of stocks working well to start the week.

American Apparel sucks in so many ways.  They had everything going for them.  They had the controversial branding, great locations, and unbeatable everyday clothes.

They just can’t figure out how to make money.  Cash flows can really do wonders for fixing sick companies.  And now they’ve filed for Chapter 11 bankruptcy protection.

Most of the best cuts and colors have been out of stock for months.  I doubt they will remedy this anytime soon.  As for the shares I own—they’re now worthless.  The hipster in me died alongside this horrific trade.

Call me short sighted, but I am sticking with the predominant conditions which are of the ping pong variety.

Several key contextual pieces are pushing into the high-end of their near term ranges.

Biotech is on a death march despite strong indices.

Issues have been lagging behind all morning inside the NASDAQ 100.

My robot friends and I like the short side of this tape.  We may be wrong today, even tomorrow morning, but come Wednesday we’ll be drinking motor oil and starting shit.  Ball, prepare to meet paddle.

h/t @clegger_2000 for this song, sung by a nice lady: