Current Market Environment – Pt. 2 Earnings Season Update

We are now in earnings season and, therefore, many of the stocks showing up on scans (https://www.simplertrading.com/trading-tools/simpler-trading-scannerhave upcoming earnings. That doesn’t mean to avoid them outright, but it does caution traders about the risk of outsized moves when companies report.

Overall, the market environment still favors the upside but there continue to be signs that the advance from early November might be late in development. For longer-term traders, this is an environment better suited to managing exiting long positions than establishing new ones. It also is a time to start thinking about strategies for short positions, but not time to execute those strategies. Shorter-term traders may have more new opportunity in this market.

But late in moves breadth tends to narrow with fewer issues leading markets higher. It is often only the best charts which reliably perform. Of course, that might mean that the opportunity exists chasing stocks which appear extended. We see a number of things to support this view. Most notably, the chart of the S&P 500 remains in a bullish configuration with price above all the daily exponential moving averages we track and with all the moving averages in bullish alignment where each smaller timeframe average is above the longer timeframe average. While the advance from November has been stalled for nearly a month, the sideways action is a typical example of a market consolidating. Consolidation almost always leads to continuation and continuing the recent trend would give us more upside.

The scanner Daily Internals page gives a quick snapshot of key indicators which can warn us about potential changes to a trend. All but one of the readings is “Neutral” giving us quick reassurance that we don’t need to be too worried about the uptrend. But the one outlier is the CBOE SKEW which is classified as “Bearish” because Friday’s 145 level came in above the 135 threshold. Sustained SKEW levels above or around 135 often precede market turns so this level tells us we need to look further. Combining the S&P 500 Put/Call ratio with the SKEW often gives us a better idea of whether we have a reason to worry. High SKEW is much more likely to be meaningful if the put/call ratio is low and it isn’t.

While it might be tempting to look for short candidates, it can be hard to know which stocks will be dragged higher if the overall market continues. If we wait until we see the broader market run out of steam, then we can use the scanner to find stocks where the broader advance only served to drag them up into resistance. So we can plan the strategy now and execute once we start to turn.

SPX earnings season

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David Starr

David Starr Elliott Wave Expert

After finding success in the business world and pursuing the entrepreneurial path, raising venture funding, and taking companies public, David began a more active trading career about 12 years ago.

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