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Minyanville's T3 Morning Market Call: Don't Ignore Faulty Signals in Erratic Market


The market has been resilient so far this year, but don't trust a bounce blindly.

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The market is becoming increasingly erratic at upper levels, as the S&P (INDEXSP:.INX) saw its sharpest sell-off of the year on Monday, had a snapback on Tuesday, and then gave back all its gains on Wednesday. After Tuesday's bounce, traders were starting to throw up their hands and assume we would rally back to highs like we have done repeatedly so far this year, but yesterday's sell-off has reinvigorated bears. Futures are slightly higher this morning, but it will be interesting to see how the up open is treated.

Earnings season is in full gear this week, with some more major names reporting today and tomorrow. Thursday's major earnings reports include IBM (NYSE:IBM), Google (NASDAQ:GOOG), Morgan Stanley (NYSE:MS), and Chipotle Mexican Grill (NYSE:CMG). Friday's major earnings reports include American Electric Power (NYSE:AEP), McDonald's (NYSE:MCD), Schlumberger (NYSE:SLB), Under Armour (NYSE:UA), and General Electric (NYSE:GE).

Faulty signals have grown louder this week with the dislocation in the commodities markets and continued relative weakness from key sectors like the Transports ETF (NYSEARCA:IYT), Russell 2000 (NYSEARCA:IWM), and the Homebuilders ETF (NYSEARCA:XHB).

The iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) has been trading in a steady uptrend and has reclaimed the support of all key moving averages. The bond market's strength is another concern for equity investors.

The intense sell-off of the Gold ETF (NYSEARCA:GLD) after it broke below its major support level of $148.50 shows that the Fed's actions are becoming incrementally less effective, and worries of deflation are resurfacing again. Economic growth is slowing significantly abroad, and it's starting to happen here, too. GLD is up almost 2% pre-market. Watch Monday's high to see if it can enter the gap.

Despite lower oil prices, there continues to be weakness in the transports. Earlier this month, the sector saw three big down days and was among the biggest losers on Monday, showing a head-and-shoulders pattern. A break below the neckline at around $104 could trigger another round of selling.

Several major banks reported what looked like solid earnings this week, but have been sold off since. JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) started off financials sector earnings on Friday, and despite decent reports have been out of play since. JPM touched its 100-day moving average on Wednesday, while WFC saw smaller losses but also broke a key support levels at $36.55.

Goldman Sachs (NYSE:GS) released seemingly solid earnings on Tuesday but was sold right off the open on Wednesday. It broke below a descending channel in place since February and breached below its 100-day moving average, a move it hasn't done since August. The longer it stays below this key moving average, the higher possibility we could see lower prices in the coming sessions.

Bank of America (NYSE:BAC) sold off almost 5% after coming out with a decent earnings report Wednesday, marking downside resolution to the intermediate wedge pattern in place since March. Next major support level standing at $11, which could be a better buyable spot.

The first-quarter profit for Morgan Stanley is higher than expected, at $958 million. MS has been under pressure since a harsh sell-off in February 20 and briefly touched its 100-day moving average on Wednesday. The recent damage seems to be contained at the $20.80 level, but its nearly two-month downtrend has stayed intact.

Apple (NASDAQ:AAPL) broke below its key support level of $419 on Wednesday, after holding the crucial level two previous times. It touched $398 and its next bigger support stands at $380. Two major Apple suppliers -- Cirrus Logic (NASDAQ:CRUS) and SanDisk (NASDAQ:SNDK) -- are trading lower, which is further evidence that AAPL could test deeper supports.

Nike (NYSE:NKE) held up well under pressure Wednesday yesterday and gained 0.66%. The stock has been in play since its powerful earnings gap on March 22. The next breakout level is $61.38.

Salesforce (NYSE:CRM) traded in an ascending channel and formed what looked like a bear flag. CRM announced its 4-for-1 stock split on Wednesday and it goes into effect today.

Yum Brands (NYSE:YUM) may also have a bear flag in place after its harsh sell-off earlier this month. A break below its recent pivot low of $65.28 could trigger the next round of selling.

Lennar (NYSE:LEN) has been the weakest-acting stock in the weakest sector, the homebuilders. LEN has lost the support of most key moving averages. A break below Wednesday's low of $37.39 could be the first stop on a potential downside for LEN.

Another weak performer in the weak transports is UPS (NYSE:UPS), which seems to be forming a rounding top. A key support level for UPS is $81.79, and a break below this could send the stock down to its 100-day MA.

UniPixel (NASDAQ:UNXL) was on fire Tuesday and Wednesday, amid an erratic market. UNXL announced its secondary offering after the Wednesday close and the stock traded lower by 7% to the $35 level. The previous breakout level was $34.

Shares of eBAY (NSADAQ:EBAY) fell more than 2% in after-hours trading as the company's second-quarter earnings and sales forecasts were below Wall Street analysts' expectation. The results for the first quarter were in line with forecasts. EBAY can be seen as yet another example of how inline reports are not enough with the market at all-time highs, just as we've seen with banks.

UnitedHealth (NYSE:UNH) has been consolidating nicely above the powerful pro gap on April 2, showing commitment. A move through $63.28 with volume could help UNH to break above its all-time high of $64.61 from 2005.

Overall, trust your rules and process. If the market starts acting violently erratic or indecisive and there are technical red flags, at least be more cautious if you are not getting short on bounces in certain stocks or sectors. The market has been resilient so far this year, but don't trust a bounce blindly. Shorting is difficult and hard to time on a day-to-day basis, but you can always hedge a portfolio on a swing basis.


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