Technology upside to start the week

OUTLOOK: August 8th

The markets moved higher, but they lacked strength and conviction… again. The Dow (DIA) again posted new highs even if it was a small gain. The NASDAQ (QQQ) remains in a consolidation pattern near the highs and made a positive move to lead the indexes to start the week. Apple (AAPL) did its part to help with a solid gain on the day to lead technology sector higher as well. Overall it is still one of those uptrends that people are complaining about. Volume, breadth, conviction, and internals are all worrisome, but the indexes continue to see the buyers step in at each opportunity. The sellers are taking their shots at each new high… proceed with caution with your stops in place.

Eight sectors ended Monday on the upside with consumer staples (XLP) and technology (XLK) leading the upside. Hope springs eternal with the buyers showing another push when the downside looks ready to take control. The downside was led by energy (XLE) and financials (XLF). Energy moved back below the 50 DMA and the downtrend is still in play on the chart. The S&P 500 index closed 4.1 points at 2480 and still near the highs and a consolidation wedge is present on the chart. The biggest movers in the index on Monday were semiconductors (SOXX, ON),  COL (continuation of the breakout), TSN (moved to a new high on a gap up), LRCX (bottom reversal started), KLAC (bottom reversal started), and ORVO (bottoming attempt to move higher). The downside leadership came from energy (XLE) NFX, MRO, PSC, NOV and CHK. Each confirmed downside break in patterns and some short opportunities. Gold (GLD) moved through the $120.45 resistance but tested lower on the jobs report Friday and holding. The dollar (UDN) moved higher finally following a decline on the dovish outlook from the Fed and their shift to liquidate their balance sheet and held Monday. The emerging markets (EEM) gapped higher from the trading range to new high and holding a move sideways. The Volatility Index (VIX) closed at 10 with intraday activity but nothing to change the outlook from investors. Watching how it unfolds and what opportunities it presents if it continues higher. Manage your risk and stay focused on the horizon, not the rear-view mirror.

The scans for Monday were positive for technology (XLK), semiconductors (SOXX), and other leaders, but it failed to show any real conviction on the upside moves overall. Brazil (EWZ) continued higher in the current uptrend. China (GXC) showed some upside as well with KWEB, BABA, HTHT, SINA, YY, and BZUN showing positive upside moves. Base metals (DBB) gapped higher from the trading range to continue the uptrend. Social media (SOCL) added a nice gain on the upside. Solar (TAN) gapped higher to continue the uptrend. Energy stocks sold again with the downside still in play. The small caps (IWM) bounced off support with a test of $139. The bounce is not convincing leaving the downside risk in the sector my bias for now. Upside move was positive, but still, lacks the volume and conviction to keep the buyers motivated. The challenge remains a lack of conviction about direction with some rotation in place and some pattern breaks. Taking what the market gives and watching for trends, reversals, support, and volume… they will lead you to what is moving and the best opportunities for trades currently.

The was jobs report put a positive end to an otherwise negative week. The shift on the charts is to a sideways movement of consolidation with value or safety driving the direction. What does all of that mean? Simply put nerves are rising about the seven-year uptrend for the markets. Data isn’t supporting the moves as the economy shows modest to no growth overall. The unemployment data on the surface looks great, but income and amounts of people leaving the job force raise plenty of questions. Two charts that validate the rotation last week are IWM -1.3% and DIA +1.2%. This movement is worth our attention as the new week unfolds. Crude oil remains the leader, but energy (XLE) has not followed the lead. The move in IEO and XOP on Friday got my attention, but they will need to follow through to gain any traction. The undercurrent of worry remains along with some speculation on where the markets go near term. The VIX index moved off the lowest point reacting to the chatter about Fed activity impacting stocks looking forward. The move lower on Friday reflects the lack of anxiety present in the markets currently. There is plenty to ponder both positive and negative going forward. Earnings are helping with individual stocks, but not the sectors. As seen in tracking the S&P 500 leadership the biggest moves have come from positive earnings. Volume was weak for the week as investor enthusiasm for risk fades. Data is still not driving… news and speculation are. The key word remains to be PATIENCE. Not something many traders like. We all want to believe we can see forward, but the reality is we can only see today. Thus, we must do what our strategy tells us to do today and tomorrow will take care of itself. Hard lessons to learn as our analytical brain wants us to believe we have the solution and can predict the future. Keep your stops in place and your eyes focused on the horizon taking what the market gives.

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare is back with traders exiting the sector and looking for more interesting ground. The Senate failed to pass healthcare reform and can see the impact. No positions as our stops were hit and we watch to see how the current test lower sets up… short trades are starting to look attractive. Large caps look more attractive currently with XBI attempting a bottom reversal from the recent selling. 

REITs (IYR) had been lagging in response to interest rate worries related to the Fed promise to hike rates multiple times this year. The sector tested the $76 level of support and bounced back to resistance and tested, and bounced… The shift in outlook for the Fed holding rates steady for now has shifted money back to the REITs. We continue to focus on managing our risk and collecting our dividend as this all unfolds. This is a growth and dividend holding with a 4.2% dividend currently. Entry at $75.75. Stop $76.25 (adjusted).

Treasury yields (TNX) moved back to the 2.4% level as the Fed talked of raising interest rates. The move to 2.2% came on the comments from Ms. Yellen and the Fed taking on a more dovish role towards rates. Just when you thought it was safe to go back into the water… the Fed changes its mind. TLT rallied on the comments and watching for the opportunity to unfold on a follow through. $124.10 entry, stop $122. TLT moved back to the July highs and tested to end the week… positive for now.

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility within the trend is speculation and news driving money. The selling was more of the speculation, just as the current buying is on speculation the dollar and the Fed will remain neutral. Bounced off support at the $114 level, cleared resistance at the $117.38 mark (entry) and heading towards the $120 target (hit last week). Stop $117. Negative move on the positive jobs reports Friday… watching this week.

Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but the weaker dollar is having some influence near term. The move above $48 this week brought plenty of speculation and the bottom reversal on the double bottom pattern is in full bloom. Entry hit at $47.50, stop $44.35. Taking what the commodity gives and not asking any questions… purely managed as a technical trade.

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices. The move lower and test of the $63.70 level kept the downside in question… but, the bounce on the rise in crude only adds to the confusion. $66.25 level to watch for opportunity. Close above it and looking for follow through and entry at $67. Need some volume and conviction from investors.

Volatility Index (VIX) This week was more interesting for the index closing at 10 showing some activity, but not enough to rock stocks. The Fed comments following the FOMC meeting brings some anxiety and with it, we will watch what transpires short term.

The sectors were rotating again last week as money moves towards value stocks and bonds. We have to take it one day at a time and see how it all unfolds. The S&P 500 and Dow indexes are testing the moves to new highs and the NASDAQ is a cause for concern following its positive move higher. Our job is to let the opportunities develop… have a strategy for trading or investing in them… and then managing the process based on our belief and disciplined approach. Sounds simple? It is except for the six inches between our ears that process what we hear as it impacts our beliefs. Have a strategy for every position and trade/invest according to the strategy… don’t let the news or others sway you from the task at hand.

Daily Scan Results:

MONDAY’s Scans (8/7): a positive day for the indexes and the leadership, but no real shifts in the overall trend. Looking for some leadership in the data, but that continues to be lackluster as the economy drags forward. Despite all the whining and complaining the market continues to inch higher and we progress with it albeit with our stops in place.

  • Semiconductors (SOXX/SOXL) bounce from the recent test and remain challenged on the upside… individual opportunities look better, but the risk is also higher in the current environment. ON, LRCX, NVDA, TSM, and MCHP offer positive looks.
  • Brazil (EWZ/BRZU) showing positive upside again in the current uptrend.
  • Energy (XLE/ERY) downside weakness showing again as the oil services (OIH) stocks show more weakness.
  • China (GXC) holding the uptrend with KWEB, SINA, BABA, HTHT, BZUN and other pushing higher in the current uptrend.
  • Technology (XLK/TECL) upside in play with a move to the top of the consolidation pattern. Worth digging into the sector for the leaders versus the whole. AAPL, NVDA and MCHP are few on the move.

Still proceeding with caution as this current environment unfolds. LBJ, DBB, EDC, TAN and KOL all in positive uptrends as well.

FRIDAY’s Scans (8/4): A positive day with the jobs report helping push stocks to the upside. We will take it in stride and see how the upside unfolds to start the new week. Taking it one day at a time as the future unfolds.

  • Biotech (IBB/LABU) bounced off support and watching for a follow through to the move and possible bottom reversal short term.
  • Gold Miners (GDX/DUST) negative response to the economic data and sold lower… watching how this unfolds relative to a short trade.
  • Homebuilders (ITB/NAIL0 showing positive signs again with a new high in the current uptrend. BLDR, IBP and BLD show positive breaks upside in the scan of the sector.
  • Crude Oil (USO/UCO) positive move testing with a wedge pattern at the top of the current uptrend. Watching how this unfolds in the coming week. FCG, IEO, XOP all showed possible bottom reversals?
  • Financials (XLF/FAS) upside break and continuation of the uptrend in play. Large banks (KBE) and insurance leading the sector higher (KIE).

Positive end to a lazy week for stocks… need the follow through on Monday if we are to see improvements above and across the sectors.

THURSDAY’s Scans (8/3): Not the best of days for the broad markets. The downside was modest, but the internals are a concern. Small and mid caps are showing weakness near term with a test of support. The most common pattern in the scans are topping patterns as we test the first levels of support.

  • Semiconductors (SOXX/SOXS) confirmed the move below the 50 DMA and setting up a downside opportunity.
  • Treasury Bonds (TLT/TMF) solid upside move as yields test support at 2.2%. Break higher positive for our position in the bond.
  • Biotech (IBB/LABD) downside looking positive as the bottom reversal in the short ETF shows a positive pattern.
  • Volatility Index (VXX/UVXY) upside possibility as the nervous talk rises.
  • Solar (TAN) upside still in play as buyers continue to like the sector. Leadership worth digging into.

Movement is still slow and questionable as it relates to the broad markets. Watching how this all unfolds near term. Patience is key.

WEDNESDAY’s Scans (8/2): Some positives and some negatives developing on the day… another mixed review for stocks overall. There was little activity among the sectors that changed anything. The words caution and patience remain my focus.

  • Brazil (EWZ/BRZU) the break above resistance at $33.51 hit the entry point and the follow through the last three days have been positive for the country ETF.
  • Small Caps (IWM/TZA) downside move is worthy of note. Technically it moved to the bottom of the current range, but the sentiment towards the growth sectors is shifting on the charts.
  • Semiconductors (SOXX/SOXS) showing signs of selling as moves below the 50 DMA and sentiment towards the sector mirrors the small caps relative to growth stocks. Watching how this unfolds for possible short trade.
  • REITs (IYR/SRS) short side showed some muscle, but still in the uptrend and within the trading range. Watching for investors response moving forward. Uptrend still the bias.
  • Technology (XLK/TECL) upside showed positive signs for the sector overall despite the move in semis. AAPL was the big mover in the sector accounting for the bulk of the positive move overall.

Caution, patience and discipline define our approach for the near term.

TUESDAY’s Scans (8/1): a positive day as money flow higher to start the month. Plenty of questions and looking for the leadership.

  • Financials (XLF/FAS) posted positive upside and attempting to break from the current pattern again. Insurance (KIE) and large banks leading the upside move. Sum of the parts makes up the whole. Look for the leaders.
  • China (GXC/YINN) upside still in play and stops need to be adjusted to $93.50. HTHT, CTRP, BZUN, BABA, and KWEB leading higher.
  • Apple (AAPL) leading the upside charge overnight on the news around iPhone 8. Watch for break above $154. XLK will benefit as well as the QQQ.
  • Biotech (IBB/LABD) break lower as $319.57 penetrated and looking at how the downside plays out near term.
  • Europe (IEV/EURL) leading upside witha break from the consolidation pattern. Watching for the follow through on the move.

Overall some positives on Tuesday and the need to follow through is key… that comes with a rational reason for investors to put more money at risk near term. Watching for the rational reason…

MONDAY’s Scans (7/31): end of the month and no changes to the lack of activity. Watching as money rotates to crude, Europe and other areas of interest. I don’t like what the current activity and watching for the opportunities in the juggling near term.

  • Crude and energy sector continues higher UCO, UGA, TAN, and others move higher. The energy stocks (XLE) are still lagging the move. Natural gas (UNG) falls more than 4% as the weakest link in the energy complex.
  • Brazil (EWZ/BRZU) breaks above the $33.50 level to show a positive move on the upside.
  • Semiconductors (SOXX/SOXS) setting up a downside trade with a break of support and the 50 DMA… patience as it unfolds.
  • Europe (IEV/EURL) upside looks attractive still in the country ETF. Euro is gaining on the weaker dollar and thus far the ECB has balanced the easy money program for a struggling economic picture.
  • China (FXI/YINN) positive upside continues for the country ETF and positive outlook on weaker dollar.

Overall not pretty, but not exactly ugly either. Watching how all the back and forth unfolds and if the upside trend continues. Stops in place and take what the market offers.

Sector Rotation:

  • XLB – Materials moved higher pushing above the $50 level and moving toward 2015 high. Hit the entry at $48, Stop $54.50 (STOP HIT). Moved to a new high clearing the $54 mark. Still testing support at $54 and watching how it unfolds.
  • XLU – Utilities bounce off support at the $50.88 level and have followed through nicely the last month. Entry $52.25, Stop $51. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Watching for now how this unfolds as sector moved back above the $31.35 mark. Entry $31.60, Stop $30.90. Some buying? Watching the $32.65 mark for the upside continuation.
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The Fed talks last week to stand still on rates put a positive reversal in play. Watching for a move above $55 to get my interest near term. Some help in the upside bounce off the low as earnings help the sector.
  • XLI – Industrials – remains in a positive uptrend since the break higher in November. Entry $67, Stop $66. The positive trend was questioned with the downside move. An uptrend in place as the money flow remains positive but watching how it starts the week.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. There is still the issue of uncertainty towards the stocks. Held $63.70 support and bounced as the dollar weakness helps the price of crude. To many question marks for now to take any positions. Scanning the sector is the only way to trade currently up or down. NFX, DVN, MRO, HES, and APA post positive moves to end the week.
  • XLV – Healthcare hit the low and established a pivot reversal relative to rumors around the election… then the election… attempted upside move and trend reversal… but, failed to hold the move. The second attempt with double bottom worked itself into a break above the $71.78 resistance level. Entry at $70 as cleared resistance. Stop at $78.50 (adjusted). Patience is key as this unfolds. Stops in place with the run higher and test. Trading in a range for now. 
  • XLK – Technology made the move back near the highs as the semiconductors bounce off support. Uptrend breaks short term and test of support at the $54.75 mark in play. Entry $48.50. Stop $56 (adjusted). Semiconductor weakness is the key to how this unfolds near term… they bounced and so did the sector. Give room for this trade to work upside. 
  • XLF – Financials pushed lower on earnings and Fed talk on interest rates. Earnings were good… not great, but worrisome in light of the Fed. That failed to impact the stocks and thus, the downside was in play. Entry $23.85, Stop $24.50 (adjusted). The break above that range was positive as the upside showed some strength, but still cautious as seen in the stalled move. Patient for now. Money rotation as investors look for value trades versus growth.
  • XLY – Discretionary Consumer broke above resistance with a positive trek higher. Entry $83.50. Stop $88.50 (adjusted). Had a positive break to new highs and some leadership from the sector to boot… testing that move at support as the topping pattern unfolds. Cleared $90 resistance and watching. 
  • RWR – REITs reacting to the current uncertainty around the Fed and positive attitude towards risk as money made some rotation. The longer term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Tested the bottom end of the range and bounced on the Fed comments and now has room to breathe again… patience is key. Traded sideways for the week.

Rotation is back as the Fed talk on interest rates, a weaker dollar, weaker economic picture, and earnings are all pushing money around. I am cautious and optimistic on some sectors and avoiding other. Interesting rumblings about the FOMC meeting as money rotates in response to the action taken. The weaker dollar favors the multinationals and commodities… watching how this will unfold near term. The negative movement in technology, biotech, and semiconductors got the attention of traders… watching how the week unfolds with the rise in volatility in play.

FINAL NOTES:

Investors are nervous plain and simple. Volume is lagging. Data is positive overall for earnings and the winners are being rewarded. Money is rotating to value versus growth. This remains a market in transition and with that comes opportunities. Those are outlined above in the scans and sector notes. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long term.

ONE DAY at a time is the key for now. Take a longer term view for your overall portfolio and manage the risk of your short term trades accordingly. See you next week.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.