From the Desk of Steve Strazza @sstrazza and Alfonso Depablos @Alfcharts
This is one of our favorite bottom-up scans: Follow the Flow.
In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish, but not both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients.
Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We've had some great trades come out of this small-cap-focused column since we launched it back in 2020 and started rotating it with our flagship bottom-up scan, Under the Hood.
For the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B.
That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
We expanded our universe to include some mid-caps.
To make the cut for our Minor Leaguers list, a company must have a market cap between $1 and $4B.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Industrials Are Island Hopping
his is a zoomed-in look at the trailing month and a half of price action in the Sector SPDR Industrials ETF XLI. Industrials have the tightest historic correlation to the major averages in the US, so the index provides valuable information for the overall equity market.
Industrials just printed a failed reversal pattern, making for an excellent illustration of the choppy and trendless environment we’re in.
Earlier in the month, XLI launched higher from an island reversal formation. However, there was no follow through and the move immediately stalled. Friday, prices gapped right back into their old range, forming yet another island reversal.
We’re watching the pivot lows around 82.75. If we take those out, we’re likely to get a fresh leg to the downside. This is not just true for Industrials, but the broader market.
Check out this week's Momentum Report, our weekly summation of all the major indexes at a Macro, International, Sector, and Industry Group level.
By analyzing the short-term data in these reports, we get a more tactical view of the current state of markets. This information then helps us put near-term developments into the big picture context and provides insights regarding the structural trends at play.
Let's jump right into it with some of the major takeaways from this week's report:
* ASC Plus Members can access the Momentum Report by clicking the link at the bottom of this post.
A 14% rally in Energy last week (its 3rd best weekly gain in at least the past 30 years) was not enough to keep the long-term in the Energy sector from rolling over last week. This follows the down-turn in the long-term trend in commodities that we discussed last week.
The Details: The longest sustained up-trend in the Energy sector since prior to the Great Financial Crisis has ended. The trend for the Utilities sector also turned lower last week. For the first time since the COVID crisis none of the 11 sectors in the S&P 500 are currently in up-trends.
Here's a snippet that sums up a conversation I had with my Head Technical Analyst Steve Strazza this morning:
Me: Any trade ideas have you excited this morning?
Steve: Nothing. New lows everywhere today.
Me: I know. It's ugly.
Steve: I can give you a handful of nice charts that are breaking out, but they are all going to fail. Can't buy breakouts in this market.
Yep. That's where we're at. Putting on directional bets in either direction feels like a high risk proposition. Long breakouts are likely to fail, while short breakdowns are likely to get caught offsides in a wicked bear market dead cat bounce.
But this doesn't mean we're out of options to earn some profits. Options premiums remain elevated across the board, and we've got some areas with clean levels of support we can use as guiderails to sell some delta-neutral premium with higher-than-normal chances of success.
As we turn the page on another quarter in the crypto markets, we leave behind yet another period of aimless price action.
Bitcoin ended the period unchanged after giving back some of its slight gains earlier in the quarter. The leadership was outside Bitcoin, as Ethereum sported some modest gains.
Other names, like Polygon and Binance, are well above the lows achieved in the mass capitulation event in June. This came after Ethereum completed the transition from Proof-of-Work to Proof-of-Stake.
We have the Consumer Price Index data for September coming out on Thursday morning, and we have more Fed speakers this week as as well. Expect more tough talk about inflation.
Should the $SPY break down below 360.94, we can potentially head to the lows of 357.04.
I'm monitoring the $QQQ as well to see if it touches the lows at 267.01.
