Weekly Market Analysis for June 17, 2018

As part of my personal fascination with the markets and in an effort to stay up to date with what the markets are doing, I’ve been developing my own market analysis dashboard to provide a high-level view of how they are moving.

The purpose of this analysis is to describe what has happened in the market, not a prediction of what is expected to happen. Based on what is happening the markets, we can identify low-risk trading opportunities where we can limit our risk and frame a trade with at least a 2:1 risk to reward. This analysis is also used to determine what type of market we are in, and therefore, what trading strategies will work best.

I utilize an indicator called System Quality Number (SQN) to evaluate the direction an instrument over multiple time frames. SQN takes the average of the daily percentage gain or loss over the period and then divides it by the standard deviation over the same period and the multiples it by the square root of the period. This provides a value that can then be mapped to a directional classification. Here’s the legend that I use:

 

Market SQN Legend

Value

Market SQN Classifications

< -0.70

Strong Bear

-0.70 to 0

Bear

0 to 0.80

Neutral

0.80 to 1.5

Bull

> 1.50

Strong Bull

These values come from Dr. Van Tharp’s analysis, which can be found here.

I also utilize an indicators called Average True Range Percent of Close (ATR%) to measure volatility. ATR% is very similar to ATR where you measure the range from the closing price on Day 1 to the closing price on Day 2. However, since ETFs all have different price ranges, I divide this value by the closing price to get a percentage. This gives me an indicators that I can compare across multiple ETFs. Here’s the ATR% legend that I use for classification:

ATR% Legend

Value

Market ATR Classifications

0 to 1

Quiet

1 to 1.75

Normal

1.75 to 3.5

Volatile

> 3.50

Very Volatile

Finally, I use Exchange Traded Funds (ETFs) to evaluate markets and sectors. ETFs provide broad exposure to a market which can be utilized to determine how money is flowing into or out of a market.

This analysis is based only upon my own personal model of the markets in an effort to learn more and make additional distinctions. In no way should this analysis be considered financial advice and is provided only for educational purposes.

Market Overview

Market Overview
SQN(100) Market Classification
Market Ticker Direction Volatility
Dow Jones Industrials DIA Bear Normal
S&P 500 SPY Bear Quiet
Nasdaq QQQ Neutral Normal
Total Market VTI Neutral Quiet

Looking at the market overview, we see that the Dow Jones Industrial and the S&P 500 have entered Bearish territory over the past 100 days, but volatility is normal to quiet which is not indicative of a bearish market. In fact when we will take a look over multiple time frames in my world market model, we’ll see that it is only the 100 day SQN that is flashing bearish, which is why it is important to evaluate a market over multiple time frames.

Both the Nasdaq and the Total Market funds are showing neutral, as both of these instruments have been moving predominatly sideways in the last 100 days.

World Markets

World Markets

Note: My data provider does not provide data for some ETFs listed above. I will work in the future to identify a different ETF or push additional data from another provide to fill out these missing fields.

The US Markets have been very strong over the shorter-term periods of 25 and 50 days, particularly the Nasdaq which has pushed into Strong Bull territory. Small Caps and the Russell 2000 have also seen excellent returns over the same periods, and that now appears to be pushing over into the Mid Caps as the SQN(25) is showing a Strong Bull values while the SQN(50) is only Bullish. This could mean that money has starting flowing into this sector and therefore there may still be an opportunity for some follow-through gains. Let’s take a look at the IJK chart:

IJK Chart June 17, 2018

This shows a really nice chart pattern. We’ve had multiple higher lows and recent breakout above previous resistance and then a small pullback where we will expect to see previous resistance become support. We could easily set up a low-risk trade where we enter on a breakout above Friday’s high, and then put a stop $1 below Friday’s low. This definitely has a  Risk:Reward of greater than 2:1.

Mexico and Latin America are just getting hammered, all in Bearish or Strong Bearish territory. We could start looking here for follow through plays, particularly Chile who is only showing Bearish on the SQN(25).

Asian markets are a bit of a mixed bag with China and India doing well, but Singapore and Thailand on the low end of the spectrum.

Europe and African markets also not doing great, with the most short-term weakness in Austria and Spain.

Interest Rate Products

Interest Rate Products

With the Fed raising interest rates, it comes as no surprise that US bonds have not been performing well. What is interesting is that bonds have been doing a bit better in the short-term (last 25 days) when compared with the long term (100 and 200 days). This means that there may be some opportunities to enter to the short side after some short-term gains, if the longer-term trend towards higher interest rates continues.

TLT Chart June 17, 2018

Taking a look at the 20-Year US Bond (TLT), we can see that the market has been mostly sideways since February. However, a breakout to either the upside or the downside might be able to be framed with an acceptable risk to reward.

Real Estate

Real Estate Markets

Real Estate has been mostly flat with a slight downturn given the rising in interest rates, with China staying mostly flat.

Commodities

 Commodities Markets

With rising interest rates, commodities have been where we’ve seen the highest gains but where we’ve also seen some recent weakness. It remains to be seen if this is a short-term pullback or a reversal.

USO Chart June 17, 2018.png

Taking a look at US Oil (USO), we’ve been in a nice uptrend with a recent pullback to support. The question now is are we looking at a buying the pullback, or finally breaking down. Personally, I’ll be waiting on the sidelines to see which way the market wants to react before taking a position. A breakout to the upside would give a nice limited risk trade with a stop around $13 and a target at $14.50.

Currencies

Currency Markets

The Euro (FXE) has definitely been in Strong Bearish territory over the last 100 days. There’s been some recent strength, so it might be worth looking for an opportunity to get in on the short side there. A similar story exists for The British Pound and the Canadian Dollar. The Brazilian Real has seen some recent gain as the SQN(25) is only Bearish as compared with Strong Bearish for the other time frames. However, the US Dollar is the only currency on the list trending to the upside.

In the future, I’ll want to start taking a look at some cryptocurrencies to track their performance, although we can certain debate if these are actually currencies or a commodity.

Summary

In summary, lots of good opportunities out there. I will continue to refine this report and publish it when I can. Questions or comments can be emailed to shane.brewer@gmail.com

Believe nothing, no matter where you read it, not even if I have said it, unless it agrees with your own reason and your own common sense. -Buddha

 

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