Market Direction and Stock Trends

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Now We Head Into The Most Bearish Half Of September
By: Tom Bowley | September 17, 2018

The NASDAQ struggled on Friday, while the Dow Jones and S&P 500 managed to finish with slight, fractional gains. The Russell 2000 was the clear outperformer, a bullish development as the U.S. Dollar Index ($USD) bounced off its recent price support level near 94.50:



Losing short-term price and trendline support in the 94.40-94.50 level could be problematic for small caps, but the bounce on Friday at least gave the small cap bulls reason to buy.

Financials (XLF, +0.71%), energy (XLE, +0.53%) and industrials (XLI, +0.50%) led the market on Friday as all other sectors finished in the red. Utilities (XLU, -0.53%) and consumer discretionary (XLY, -0.37%) were the two primary laggards.

Semiconductors ($DJUSSC) bounced for a second straight day after printing its huge reversing candle last Wednesday at key 3350 price support. Further strength from the DJUSSC would be bullish for equities, especially the NASDAQ.

In the financial space, life insurance ($DJUSIL) enjoyed a big day and is once again nearing key price resistance:



Financials are looking for leadership and they could certainly find it in the life insurance area if price and gap resistance in the 800-810 zone can be cleared.

Pre-Market Action

The 10 year treasury yield ($TNX) is above 3.0% this morning, currently residing at 3.01% and that could result in solid upcoming outperformance in financials if the breakout sticks.

It wasn't a great night overnight in Asia with the Hang Seng Index ($HSI) dropping 1.30%. China's Shanghai Composite ($SSEC) was also down more than 1% as trade tensions with the U.S. escalated. In Europe, we're seeing weakness across the board and that weakness is not helping futures here in the U.S.

Dow Jones futures are lower by 20 points as we approach the start of a new trading week.

Current Outlook

Transportation stocks ($TRAN) closed at another high on Friday, but it didn't come without some short-term concerns. The volume was extremely light and not indicative of a rally that's likely to continue and there's a negative divergence on the PPO that tells us that price momentum is slowing - a bad combo. This doesn't provide us a guarantee of lower prices, but it does signal caution:



We're heading into the most bearish part of September (see Historical Tendencies below) so selling down to the rising 50 day SMA is certainly plausible. The bull market rages on, and I believe we're going higher in Q4, but a temporary pullback to unwind the price momentum issue isn't out of the question over the next couple weeks. Proceed with caution.

Sector/Industry Watch

The financial sector (XLF) now sports the lowest SCTR among the key sectors. That simply tells us that it hasn't been the place to park your money in 2018. It has not helped that the 10 year treasury yield ($TNX) has been stymied since topping at 3.11% in mid-May. But with the TNX flirting with a possible short-term breakout above 3.0% and a rare inverse correlation developing between the XLF and TNX, it could be a solid time to overweight the XLF or look for potential trade candidates in that space. The long-term technical picture remains bullish despite the XLF's relative weakness:



In my opinion, 26-27 remains significant support on the chart and we're well above that right now. I'd look for the correlation above to return to positive territory, meaning that we'll likely see the XLF and TNX begining to move together. Should the TNX break above key yield resistance at 3.0%, the XLF would likely be a major beneficiary.

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