foxex: Spinning Top

Chart Advisor | Focus on the Price

Wednesday, January 22, 2020

1. Broad market indexes pause at high levels

2. Is the market ready to pull back yet?

3. Facebook investors hesitate ahead of earnings

Market Moves

The Nasdaq 100 (NDX) managed to close .26% higher while the S&P 500 (SPX) and the Dow Jones Industrial Average (DJX) closed nearly unchanged. But since these indexes gapped higher to start the trading session, these lower closes imply that the day had more selling than buying. On net, however, it was only a bit more. Still the price action creates what is known among chart watchers as a spinning top candlestick. When this day pattern appears after a strong run higher, it can suggest that investors are getting nervous and that they might begin to take profits in the near future. Such an action right now could cause prices to drop unusually fast within a given day.

The chart below shows that investors remain largely optimistic, and perhaps too much so. The chart is a line of the put-call ratio as tracked by the Chicago Board Options Exchange (CBOE). Some traders use this to forecast big changes in the market. When the blue line is moving higher, investors and traders are buying more put options. When it is trending lower, it suggests that investors and traders are buying more call options. The green line overlaying the chart is a 40-day moving average of the put-call ratio. The last time it was this low was right before the market dropped precipitously going into 2018.

Is the Market Ready to Pull Back Yet?

As the markets paused their strong run-up to begin the year, it may be worthwhile to look for signs of weakness. The two stocks likely to show weakness at this moment are Netflix (NFLX) and Amazon (AMZN). These stocks have lagged the market so far this year. Right on cue their price patterns are showing evidence of investors taking profits.

The chart below compares the performance of the Nasdaq 100 as tracked by Invesco's index tracking fund (QQQ) with an equal weighted portfolio of Netflix and Amazon. Driven by Netflix post-earnings result, this duo seems to be diverging away from the rest of the index. It may seem like an obvious point, but astute chart watchers recognize that a good sign of a top in the markets shows up when previously high-flying stocks lose their steam. That shows evidence that institutional investors are banking gains and consolidating positions.

Read more:

IBM Earnings: What Happened

Regional Bank Stocks Look Set for a Move Higher in 2020

Facebook Earnings: What to Look For

SPONSORED BY INVESCO
The Complete Guide to ETFs
ETFs are becoming increasingly popular and soaring to new heights among investors. Invesco's insights can help you determine if these investment vehicles are right for you.
Learn More »

Facebook Investors Hesitate Ahead of Earnings

Facebook (FB) will announce their quarterly results next week, but investors seem to be standing pat in their anticipation of the company's earnings report. The importance of this is that FB shares are highly visible in the investing world. The stock is represented in nearly 300 different ETFs with roughly half of those holding it in their top 15 holdings. 78% of the outstanding shares of Facebook are held by institutions and over the past three months the percentage of institutional ownership has changed less than .03%—meaning very few funds want to sell the stock.

So the current chart behavior begs the question. If stocks are decidedly so bullish right now, why pause here on a stock so many people clearly want to own? The answers may vary but they all point to the same impact: markets may have reached a tipping point, in the short-term at least.

The Bottom Line

Stocks opened higher but sold off mildly throughout the day to remain largely unchanged. The put-call ratio seems to indicate an unusual degree of optimism among investors, while Facebook shares seem to have paused an entire week before earnings. Taken together these facts seem to indicate the market may be vulnerable to a short-lived pull-back in prices.