Markets are lower in afternoon trading in New York today. China fears have created uncertainty, and why we looked to short the Transports yesterday.

It seems like rough markets have a way of originating in China.

Thinking back to 2007, I remember watching the China markets meltdown. This process began well ahead of the US financial crisis of 2008.

Looking back at markets that you have lived and traded through, you amass a mental library of history and look to learn from it. Before 2007, I spent years as a Real Estate Agent and remember the days of people being approved for home purchases on variable ARMs and very low-income requirements. You just knew the music would have to stop at some point as banks loaded up subprime borrowers with debt that logic would dictate as unpayable.

The China markets started to crack ahead of the US markets back then.

Figure 1 - Shanghai Stock Exchange Composite Index March 24, 2007 - May 2, 2008, Daily Candles Source stockcharts.com

I do remember watching this market at the time. Other China indices fared even worse. Around this time, the $SPX experienced a pullback too, but one of a much lesser magnitude.

Figure 2 - S&P 500 Index August 1, 2007 - December 7, 2007 Daily Candles Source stockcharts.com

As we can see, the $SPX also pulled back around this time, but in more of a pedestrian manner, with a 5.4% pullback over an 11 day period versus 10.8% for China around the same time period.

It is important to note that the $SPX had pulled back prior to this time and rebounded to all-time highs. I am mentioning all of this as markets have memories and accelerated moves in China catch my attention. Let’s also mention the obvious here: the Covid meltdown in Feb - March 2020.

As China is grabbing all of the headlines today, let’s see how the Shanghai Stock Exchange Composite has fared yesterday and today.

Figure 3 - Shanghai Stock Exchange Composite Index March 17, 2021 - July 27, 2021, Daily Candles Source stockcharts.com

Yes, the Shanghai Composite is lower over the last two days. However, the sky isn’t falling, at least not yet. It is lower by 2.9% or so over the past two sessions. Note the support that was found around its 200-day moving average.

What All of This Means for Us

I believe it is smart to avoid getting too caught up in the daily headlines, for the most part. Price and divergences can tell better stories than any news headlines, which often come out much too late.

This is the reason that it made sense to target the Transports to the downside yesterday. We had a pattern of lower highs and lower lows, with clear divergence from the direction of the broader markets since May 1st. In case you missed it, you can read about the analysis of the Transports in the July 23rd publication and in yesterday’s July 26th publication.

As we targeted the short side of the IYT yesterday afternoon around $258.00, let’s see how the transports are faring in today’s market down day.

Figure 4 - iShares Transportation Average ETF March 1, 2021 - July 27, 2021, Daily Candles Source stockcharts.com

The IYT is lower by 2.54% as of the time of this writing. As discussed, the Transports were already trading lower versus the broader indices.

Right now, we see the RSI(14) at 40 and daily MACD crossover brewing to the downside with the fast line crossing the slow line.

We will hear from the Fed tomorrow.

The FOMC statement and subsequent press conference is slated for tomorrow. Those kinds of days can be tough to trade, and depending on the Fed’s tone, anything could happen.

Now, for our premium subscribers, let's look cover some potential take profit levels and strategies in IYT, and recap the other markets that we are covering. Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Rafael Zorabedian
Stock Trading Strategist

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Another day, another all-time large-cap equity index high, right? Today, let’s take a look at an ETF that could interest traders looking for a contrarian strategy.

The bull market has continued, albeit with some warning signs beneath the surface of the market.

Last week, markets flexed their resiliency muscles by quickly erasing a 700 + point Dow Jones Industrial Average on Monday and ending the week at all-time highs. Easy monetary policy has continued, and liquidity is high. There was no shortage of buyers that were ready, willing, and able to buy that dip.

Even though the Fed has telegraphed its message of increasing rates in the future, Fed bond purchases have continued for the time being. The purchasing of these bonds helps to keep rates lower and create liquidity across markets.

Since June of 2020, the Fed has been buying $80 billion a month in Treasury bonds and $40 billion in MBS (Mortgage Backed Securities).

There is quite a lot happening this week. Consumer Confidence is set for release tomorrow. We will hear from Fed Chair Powell on Wednesday with the FOMC statement and the subsequent conference call. Advance GDP and Core PCE are on the table for later in the week.

All of the above happens during earnings week for the tech giants, namely Apple, Facebook, Google, Tesla, Amazon, and Microsoft.

What can we do on a week like this when the S&P 500 is at or near an all-time high?

Last week, we examined the divergence of the Dow Jones Transports and the Dow Jones Industrial Average.

The Transports:

Figure 1 - Dow Jones Transportation Average March 8, 2021 - July 26, 2021, Daily Candles Source stockcharts.com

Transports have been weak, and today the index traded up to and touched the 78.6% Fibonacci retracement level from its July 1, 2021, high to its July 19, 2021 low. What is going on with the transports?

We can see lower highs and higher lows that have been occurring since May. Today is providing a nice bounce and intraday reversal so far.

As we can see, there is a downtrend in place in an otherwise sector uptrend dominant marketplace, let’s go with what is working here.

Looking for an ETF to take advantage of this downtrend is no easy task. Currently, I do not see a liquid way to take the inverse side of the transportation, so we will examine a short position in IYT.

Figure 2 - iShares Transportation Average ETF March 18, 2021 - July 26, 2021, Daily Candles Source stockcharts.com

We see IYT doing its job rather well, seeking to track the investment results of an index composed of U.S. equities in the transportation sector.

Considering this downtrend could be a way to gain some alternative exposure in today’s market.

We are in a big earnings and economic data release week. There could be volatility in either direction in the major indices.

Since I am cautious on the indices in the current landscape per previous Stock Trading Alert publications, a trade in the transports could be a way to take advantage of an existing countertrend, while the major market indices have been trading at highs.

Now, for our premium subscribers, let's look to pinpoint potential entry levels in IYT, and recap the other markets that we are covering. Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Rafael Zorabedian
Stock Trading Strategist

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Equities traded quietly higher in Thursday's NY session. Simultaneously, bonds were bid rather firmly, sending interest rates even lower. What is going on beneath the surface?

Greetings. I hope this article finds you and yours well. Today, we are taking a look at some additional market indicators and internals to get an unbiased perspective on things.

First, I want to preface things by mentioning that I am not suggesting that I am fully bearish on the S&P 500 or stocks right now. However, I am taking more of a cautious stance at the moment.

Figure 1 - S&P 500 Index April 15, 2021 - July 21, 2021, Daily Candles Source stockcharts.com

Nothing new to see here. Just another pedestrian pullback to the 50-day SMA and a bounce back. This pattern has repeated itself several times since the pandemic lows in the $SPX. It won't repeat itself forever - that would be too easy.

Since it is earnings season, let’s talk earnings multiples.

Feeling bullish? It can be challenging to get excited about an $SPX at 4400 with an estimated 46.40 P/E ratio (trailing twelve months). We are in the middle of earnings season, so we will have a clearer figure soon.

Figure 2 - S&P 500 PE Ratio 1870 - July 22, 2021. Source multpl.com

Stocks are not cheap by any measure, folks. However, with easy monetary policy and low rates, this is to be expected. What could be the catalyst to derail this freight train?

How about the Dow Transports? This index used to be talked about much more frequently and is followed closely by students of Dow Theory. We just don’t hear much analysis about it on Fox Business, CNBC, or Bloomberg these days.

The Dow Transports (Dow Jones Transportation Average) $TRAN is an index comprised of 20 companies.

Here are the index components and weighting as of December 2020:

Alaska Air Group, Inc. 2.55%

American Airlines Group Inc. 0.76%

Avis Budget Group, Inc. 1.80%

C.H. Robinson Worldwide, Inc. 4.61%

CSX Corporation 4.39%

Delta Air Lines, Inc. 1.94%

Expeditors International of Washington, Inc. 4.61%

FedEx Corporation 13.10%

J.B. Hunt Transport Services, Inc. 6.70%

JetBlue Airways Corporation 0.70%

Kansas City Southern 9.73%

Kirby Corporation 2.51%

Landstar System, Inc. 6.60%

Matson, Inc. 2.79%

Norfolk Southern Corporation 11.42%

Ryder System, Inc. 3.12%

Southwest Airlines Co. 2.26%

Union Pacific Corporation 9.91%

United Airlines Holdings, Inc. 2.11%

United Parcel Service, Inc. 8.39%

Figure 3- Dow Jones Transportation Index January 4, 2021 - July 21, 2021, Daily Candles Source stockcharts.com

Here, and in contrast to the Dow Jones Industrial Average, we can see that the Transports topped back on May 10, 2021. Proponents of Dow Theory would argue that this creates a lack of confirmation and that the subsequent highs in the Dow Jones Industrial Average are not valid due to this lack of confirmation.

What could be the reason for the stall in the Transports? Input Costs? While fuel costs have risen, what about the rise in retail spending? Is the stimulus-powered consumer pocket not enough to counterbalance the rising input costs?

If input costs are the reason for the stalling, what about the other companies that rely on raw materials to make their products? Recent inflationary data has not affected these companies' stock prices yet (for the most part).

What if the Fed eases off the gas pedal?

While it is very difficult (if not impossible) to pick market tops (and I don't advocate trying to do that), it is wise to look at certain market indicators to get an understanding of what is going on beneath the surface.

It is easy to look at the chart of the $SPX and see that it is moving higher, from the bottom left-hand corner of the chart to the top right-hand corner. However, that does not tell the whole story of what is happening in the US equity markets.

We will be monitoring the above and previously mentioned market internals and indicators for more clues in the coming days, weeks, and months. I think it is critical to be aware of metrics such as the above as the broader indices trade near all-time highs.

Now, let’s cover the markets we are monitoring for Premium Subscribers.

Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Rafael Zorabedian
Stock Trading Strategist

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The repeating technical pattern in the large-cap index has repeated itself once again. How long can this phenomenon last, and what is different in the underlying market this time?

Greetings. I hope this article finds you well and that you are using the strength in the equity markets today and yesterday to shore up your overall long exposure and getting some dry powder available.

Usually, I would be feeling like this is the easy part of the $SPX bounce; a quick move lower to the 50-day SMA, then the second up day where it just creeps higher on low volatility. That has been the pattern since the pandemic lows in March 2020.

Figure 1 - S&P 500 Index March 5, 2020 - July 21, 2021, Daily Candles Source stockcharts.com

We have discussed the 50-day SMA phenomenon at length in previous articles and used them as a basis for entries, so please feel free to peruse them for additional detail.

However, this time, I just couldn’t get as enthusiastic about it.

Yesterday, in an article for Premium Subscribers, we mentioned the percentage of stocks that are currently trading below their 200-day standard moving averages.

Figure 2 - MMTH Index Percentage of Stocks Trading Above 200-Day Moving Average July 3, 2018 - July 21, 2021, Daily Candles Source tradingview.com

We can see above that the percentage of stocks trading above their key 200-day standard moving average peaked back in February. Many stocks dipped below their key 200-day moving average during the selloff earlier on Friday and Monday. However, we do still have this internal market indicator showing weakness.

We also have the interest rate conundrum that is currently facing the markets. Please see the July 15th publication for additional color in this area.

CPI Data & Interest Rates

We have higher prices across the board for many goods and services. What continues to fuel the demand at higher prices? Direct stimulus and artificially low interest rates are partially to blame for this. When you logically think about this, what will happen when interest rates rise? Will they rise? What about if the Fed begins to taper bond purchases and the market throws a “taper tantrum”?

Delta Variant & Olympics

As the delta variant has been making its way around the newswires for several weeks, markets finally began to take notice last Friday. As the start of the Olympic Games is slated for July 23, 2021 (just 2 days away), there has been some chatter about the Olympic Games being canceled due to the delta variant. Let’s hope the games take place as scheduled.

Getting back to the equity markets, you may have noticed that the sectors that have been moving higher in the past several weeks have been limited; and only select names. This lack of broad market participation illustrates the percentage of stocks that are trading above the 200-day moving average. In today’s and yesterday's session, we have more of a broader market participation due to oversold conditions. Small-cap stocks have led the way, as they were a very oversold group heading into Friday’s and Monday’s price action.

In a healthy market, we want to see broad market participation with a high percentage of stocks trading above their key 200-day moving averages. I feel like we are close to an inflection point in the broader markets, and there are several risks that skew to the downside, more so than the upside.

From 1980 - 2019 ($SPX):

• July: +0.79%
• August: -0.15%
• September: -0.70%

The $SPX is up 1.32% in the month of July right now.

At a certain point, one would expect these factors to collide and for market participants to begin to view things differently; therefore selling the rip instead of buying the dip.

I can’t be the only one.

Now, let’s cover the markets we are monitoring for Premium Subscribers.

Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.

Thank you for reading today’s free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Rafael Zorabedian
Stock Trading Strategist

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