We’re All Gonna Die! (XLK,GM,F)
Just a moment to recap exactly where we are and how we got here.
To begin, our bull market began in March, 2009 and, despite the odd shimmy and shake, it continues apace, spurred ever higher by the machinations of a giddy central bank that refuses to take bear for an answer.
This past fall, with the election of Snidely Whiplash, the market kicked into overdrive, beginning what we believe is the final blowoff top to the bull that began in either 2009, 1981 or 1933, depending upon how cataclysmic your worldview.
But that’s for another time.
Today, we find ourselves at a crossroads. Not a difficult or impassable one, in the least. Rather, a point at which a pause is necessary before the next phase of the bull unfolds.
The Story of a President
When the latest phase of the bull was launched in November/December, it was the financials that assumed the leadership mantle. All the banks and brokerages saw double digit gains, at least, within just a few weeks. And after a few months, additional profits of 40% to 60% were booked.
And then the financials faltered. Or, perhaps, slid is a better word. Since early 2017, the entire financial complex has managed to move only sideways, with few new highs registered for the sector, though there haven’t been a great number of losers, either.
Why did it happen?
As we mentioned last week, Wall Street’s glorious process of ‘sector rotation’ came into play, and the baton was passed from the financials to the sexy techs, which posted similar gains over their leg of leadership, which appears now to be ending.
The next market leader is unknown, though we have seen spectacular recent performances from the health care/biotech group.
Will it continue? Hard to say. Is there another group waiting in the wings, tying up its Tretorns in preparation for a chance at the next leg of the sprint?
Could be, and we’re keeping our eyes peeled for it. But, again, it’s currently unclear.
What is clear is that the big-name tech stocks are not yet finished their retreat, as the following charts show.
Have a look here –
This is six months’ worth of the Technology Select Sector SPDR ETF (NYSE:XLK).
Since peaking less than a month ago, there’s not a great deal of good that can be said about big tech.
- To begin, the top was marked by an unmistakably prominent bearish engulfing pattern (black box) that was further enhanced by a massive volume spike on the same day.
- Volume coming into the highs was also pronounced (in orange), rising from an average daily turnover of eight million shares in March to better than thirteen million yesterday. That’s as good a sign as any that old hands are leaving the fold, only to be replaced by ‘suckers’.
- RSI and MACD are also decidedly bearish. An early sign of weakness flashed when RSI posted a wildly overbought signal (80+) in mid-May (red circle). It then ducked unequivocally sub-waterline some three weeks back while MACD just confirmed the bearish trend two days ago by submerging itself (in green).
- To top it off, we’ve seen two support levels sundered in the last five trading sessions (red lines) and, in what could be a major development, the completion of a Head and Shoulders top pattern, as well (in blue).
As to the Head and Shoulders top, it should be stressed that the duration of the formation, in our experience, matters a great deal. Those H&S patterns that trace out over the course of a year are far more reliable than, for instance, our present case of a mere two months’ interval.
If, indeed, the H&S formation is accepted by technicians, and acted upon, the downside count would bring XLK to at least $51.50, a decline from current levels of an additional six percent – not a great deal in absolute terms, but a potentially big score if leverage is employed.
The weekly chart for XLK also shows a number of potentially bearish indications.
Here they are –
To begin, we have a near-80 overbought RSI read on a WEEKLY chart, a development that almost always signals a top (red circle). That occurred in late May, less than two weeks prior to the stock’s all-time high. MACD has also since turned over and appears to be headed lower (in green).
But we bring you the weekly chart more to offer two possible support levels that coincide with simple Fibonacci retracement calculations (red lines).
The first is XLK $50.36, slightly below the aforementioned H&S count at $51.50,
and the second is at XLK $45, which would amount to a further 18% loss from current levels.
Either way, we’re projecting an upcoming decline in the techs that’s perfectly tradable.
Before we get there, however, we have one trade that requires your attention.
It was opened on the first of June in a letter called Dancing in Detroit. And there we urged you to consider selling the GM January 19th (2018) 33 PUT for $2.58 and buying the F January 18th (2019) 12 PUT for $2.40. Total credit on the trade was $0.18.
Today, the short GM PUT trades for $1.65 and the long Ford for $2.10. Buy back the former and sell the latter and you exit with $0.63 on nothing tendered. Accounting for minimal commissions gives you a gain of 320% in just five weeks. Call it 3200% annualized, if you got the stuff!
This Week’s Caper!
We’re going to trade XLK today, with an eye to a relatively large drop occurring over the summer months, followed by a strong move higher through the fall.
To that end, we’re buying near-term PUTs and selling longer term ones.
And it looks like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
XLK is currently trading at $54.88.
Many happy returns,