Markets testing support at key levels

OUTLOOK: Week of October 22nd

If you go back to 1999 when the Fed was trying to control the growth and avoid inflation. They managed to stop inflation and growth! That led to the 2000-2003 downturn in the markets and the US economy. It wasn’t until tax cuts were enacted in 2003 that the economy reversed. The same activity is currently happening from the Fed. I am not speculating another market correction or downturn in the US economy, but we have to worry about current actions and manage our money accordingly. Thursday’s activity was directly related to the Fed and the determination to control something that is not controllable… inflation. For god sake let the free economy work and get out of the way. Buffer it if have to, but stalling growth in the name of inflation is not going to happen… Ask the Carter administration in the late 70’s how well that worked. We are looking a reestablishing our downside plays in light of the current developments. One day at a time one position at a time while the brain thrust attempts to control things it cannot control.  

The S&P 500 index closed down 1 point at 2767 as the index moved back to the 200 DMA. Three of the eleven sectors closed higher on Friday as utilities and consumer staples benefitted on the worries driving the market. Worries about the Fed’s activity once again takes center stage. The downside was led on the day by consumer discretionary and healthcare. Last week investors hit the sell button on stocks and the charts reflect the damage to the short-term trendlines and investors psyche. Direction is the focus as the bounce gives way to more selling and a not so pretty chart pattern. Watching for how this unfolds near term. The chart is holding the long-term trendlines off the January/February 2016 low. Patience and discipline… 

The NASDAQ index closed down 36.1 points to close at 7449. The index broke lower from the pattern of consolidation near the previous highs and support at the 7300 level. The move broke below the 200 DMA again and negates the bounce. The short-term trend from the April low was broken and still needs to be recaptured. QQQ is our indicator near term as we watch to see how the leaders respond… the last week, not so well.  PYPL, INCY, XRAY, JBHT, TTWO, and KHC made positive moves to end the week. Downside play looking attractive again. Watching where the next opportunities lie. $171.50 level of support on QQQ to watch.

Small Cap index made a move lower breaking below the 200 DMA again and holding the $152.28 as next support. Short side in play and renewed the move with more selling on Friday. The chart shows the negative trend since the August high. TZA entry $10.45. Stop $9.84. The reversal failed and looking at the weakest link in the sectors. Willing to see how this one plays out going forward.

Transports (IYT) moved lower and broke the $192.42 key level of support as the downside accelerated again.  This sector is another negative indicator for the broad markets as the downside gained momentum. The renewed downside in the sector came as the Fed talks impact the outlook for the economic picture… you have to move goods and people in growing economies… slowing ones? Not so much. Watching how this unfolds and looking at the downside trade. KSU and JBHT showed positive bounce on Friday.

The dollar (UUP) moved higher holding above the key support $25.17 as it responds to the FOMC decisions and issues globally. This puts the dollar at $25.47 at the close with a solid move higher. Watching as the buck remains in a trading range on the chart. The overall move higher is positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks.

Gold (GLD) Gold gapped higher last week getting some relief from the recent selling. The last five days are digestion for the move. The support at the $111.90 held and breaks upside from the bottoming consolidation. The dollar and geopolitics have been the catalyst for the metal… both up and down. Entry $114. Stop $111. Maybe our patience paid off with the upside move… looking for more upside. The gold miners (GDX) equally respond to gold moving higher. Flag pattern on the chart to watch for the continuation move higher. Entry $18.50. Stop $19 (adjusted). The stocks are oversold and looking for an opportunity in the bounce and reversal which we saw on Thursday.

Crude oil (USO) Crude spiked has moved lower from the September highs in response to markets and supply data. The speculation about demand rising or production decreasing has been driving the commodity higher and creating the day to day volatility. The commodity closed at $69.28 Friday. Now watching for direction or response to the selling.

Emerging Markets (EEM) failed to clear resistance and tested lower again. That test accelerated retesting the September lows and spiked below that level with a modest bounce that failed again and heading back to support. Too many questions in this sector with China providing the biggest question marks on trading tariffs. Emotions are high along with selling volume.

The Volatility Index (VIX) closed at 19.8 on Friday as the anxiety levels renew their upside pressure on Fed talk. There has been complacency in the index the last three months… but, it jumped higher as investors sold stocks. VXX at $35 is interesting if fear and anxiety result from the Fed intervention yet again.

For the second week, investors focused on the Federal Reserve comments relative to interest rates and the economy. The belief that the Fed will lead the markets lower pushed yields on the ten-year bond to 3.19% to start the week. Bonds moved lower on the action. The reality of this activity in bonds pushed investors to the reality this is not good for the consumer as it puts pressure on large purchase items such as automobiles and homes. Payments are higher and fewer people will purchase large items. Take a look at the new housing starts the last four months… Take a look at the global growth projections revised lower by the IMF. There is renewed speculation in the media and it is a selling opportunity for those wanting to take money out fo the markets. The weak attempt at a bounce this week ended with a retest of last weeks lows. Watching how this all unfolds with investors looking at another potential leg lower for the broad markets. There are no changes on the tariff front with China. The Small-Caps were the weakest sector for the week. The S&P 500 struggled to maintain support ay the 200 DMA on Friday. Seven of eleven of the sectors closed the week in positive territory offering some hope looking forward. Consumer staples, utilities, and REITs led the upside as you can see money moving towards the defensive sectors. The downside was led by energy, consumer discretionary, and basic materials. The start of the fourth quarter isn’t looking good with stocks heading lower. The FOMC minutes added to the Fed worries as it only confirmed the belief the Fed will continue to push rates higher. There is plenty of dynamics working in the markets overall and we will take it one day at a time as the short term trend comes into question. All we can do is manage our risk according to the charts and not speculate on what if… the greatest challenge for us all is not letting our emotions get involved in a process that requires a disciplined strategy and action.  

(The notes above are posted daily based on the activity of the previous days trading. The red comments are current day changes worth noting.)

KEY INDICATORS/SECTORS &LEADERS TO WATCH: 

Biotech (IBB) The sector breaks lower. Closed below the 200 DMA. Bounced and retesting the downside. Watching how the new week unfolds. Bear flag pattern developing on the chart.  

Semiconductors (SOXX) tried to bounce off the $167.34 support… failed broke lower on Friday and the downside is back in play. Entry $12.20. Stop $11.70. Higher volume on the selling is a bad sign. 

Software (IGV) The sector broke support at the $197.48 level, bounced, resumed selling and stilling on the 200 DMA. Short side trade offered again on break lower… watching patiently for now. 

REITs (IYR) UGLY decline in the sector as interest rates moved higher… The 200 DMA broke… tested the $75.21 support level and bounced back to that level on Friday. Watching how this unfolds. 

Treasury Yield 10 Year Bond (TNX) closed the week at 3.19% related to the Fed worries. The short side is in play. TMV Entry $19.65. Stop $21.20 (adjusted). Managing our position accordingly. 

Energy stocks (XLE) The stocks bounced off support at $72 after a third attempt to move lower… the move up and down is all predicated on the belief behind the supply data and crude activity… speculation is driving the activity making it difficult to trade or invest money. Closed at $71.53… downside in play.  

(The notes above are posted every weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

FRIDAY’s Scans 10/19: The drama continued Friday but managed to close flat on the day. The outlook is where all eyes are focused and the challenge remains the Fed, slower economic data, worries, and speculation. Downside returned after the attempted bounce failed with a retest of the current lows. Technically the charts are set up for another leg lower. We will see how it unfolds next week, but the bear flag pattern and higher volume on the selling than the buying don’t bode well for the near term direction. We will, of course, let this unfold and trade what the market offers.

  • Semiconductors (SOXX/SOXS) downside outlook… broke $167.34… short side entry on confirmation.
  • Small Caps (IWM/TZA) downside resume… testing previous lows… short side set up to take another leg lower.
  • Consumer Staples (XLP), utilities (XLU), REITs (RWR), telecom (IYZ) all positive bounce and patterns as money rotates to defensive stocks and what some deem as safer haven sectors.
  • Energy (XLE), industrials (XLI), basic materials (XLB), consumer discretionary (XLY), biotech (IBB), and technology (XLK)… not pretty on the charts as they set up for another leg lower testing and breaking near-term support.
  • Crude Oil (USO/SCO) downside in the commodity in play. Small bounce Friday, but the speculation factor is putting pressure on the downside near term.

Friday was a flat day overall, but the downside is still in place near term and the sentiment remains negative. VIX is elevated and the renewed test lower along with patterns and volume… leaning to the downside. Watching, practicing patience, avoiding speculation as we take what the market offers.

THURSDAY’s Scans 10/18: Welcome back to the Fed. They are the easy target here, but the reality is uncertainty looking forward. Yes, the Fed is creating the uncertainty by their actions and comments as it relates to an economy that is growing too fast? It creates uncertainty about interest rates and the longer term impact on the economic picture. We do know the Fed overreacts on interest rates and in turn, creates swings in the growth rates and in turn the markets. The downside activity on Thursday is a big negative… my view. The second leg of the downturn is now set up. How or what the catalyst is a matter of time. If we move lower the second leg is historically bigger than the first. Don’t assume anything… let it happen and take the trades accordingly and then managing the risk. Friday is not generally a good day for a bounce recovery… no headlines to lean that direction and the futures are pointing slightly lower.

  • Technology (XLK/TECS) more selling resumes in a key sector. Moves back to the 200 DMA. Negates the bounce and watching how this opportunity unfolds. Bear flag pattern on the chart.
  • VIX Index (VXX/UVXY) anxiety levels are rising. Flag pattern on the chart and upside pressure on nerves coming from the Fed and proposed future actions.
  • Emerging Markets (EEM/EDZ) renewed selling in the sector as interest rates rise along with the dollar. Short side resumes.
  • Semiconductors (SOXX/SOXS) selling returns to the previous leading sector. Not a good sign for the broad markets. Retesting the $167.34 level and short side opportunity could present itself again.
  • China (FXI/YANG) downside resumes breaks to new near-term lows and the outlook isn’t improving without some resolution to the tariffs. Short side trade remains in play… adjust your stops on the move.

The Scans are not pretty following a reversal day in the bounce. The NASDAQ 100 index sold back to the 200 DMA again… the downside looks stronger as the buyers continue to worry about Fed activity. Plenty of worries on the horizon beyond the Fed. The challenge for investors is keeping our heads while everyone loses theirs. Those who function with a predefined strategy and discipline to implement it are the ones that will be happy on the other side of what unfolds. Patience and more patience is required when things get ugly.

WEDNESDAY’s Scans 10/17: Not exactly the day many were looking for as it relates to the bounce unfolding into a reversal and resuming the uptrend… nothing happens according to our dreams. The test early and bounce back to even was still seen a failure to follow through on the bottom reversal on the charts. Patience is needed as we still have to confirm the move off the recent lows. Some buyers would help the cause, but we will allow this to unfold and look for the opportunities in either direction. Futures are pointing to a lower open on the day… watching how it unfolds today.

  • Financials (XLF) positive bounce follow through on the day as earnings give a boost to the sector. Cleared $26.90 on the close and a follow through would offer upside trade opportunity. Brokers and insurance leading the upside move.
  • Healthcare (XLV) added to the upside bounce as well. $92.85 offering an entry point for the sector. Watching the drug (IHE) and biotech (IBB) stocks as they lead the upside currently.
  • Telecom (IYZ) cleared resistance at the $28.62 level and showing some promise in the reversal.
  • Natural Gas (UNG/UGAZ) heading higher again after the test of $82.31. Upside remains in play raising the stop to the $82 mark.
  • Crude Oil (USO/SCO) downside push is offering a possible downside trade in the commodity. The move above $14.25 is positive and looking for a follow through for entry.

Markets remain in a game of reversal… needs to follow through and show some leadership conviction. We can only take what the market offers. Speculation is not a game we play and we will follow our strategy as it unfolds currently… patience remains a key part of letting the current direction unfold.

TUESDAY’s Scans 10/16: Nice bounce to follow through on Friday. The challenges remain and the moves are just that… a bounce. Need to see more follow through. There are some solid pattern developments for the leadership and some rotation to watch as this unfolds. The FOMC minutes out today could offer some interesting insights for investors or a catalyst to sell lower. Watching how the day unfolds as well as the current bounce attempt across the sectors and the broad indexes.

  • Technology (XLK/TECL) bounce follows through… needs to clear $72.30 level. Plenty of work left to do.
  • Software (IGV) bounce follows through… needs to clear $192.60 level. Scanning the sector offers some interesting opportunities in the stocks with a follow through upside.
  • Healthcare (XLV/CURE) big bounce back on follow through. $93 level to clear… volume… breadth… and stops on any entry points.
  • Biotech (IBB/XBI) big bounce back to key support at the $115 mark (IBB). The large caps XBI made a big move but has more work to do. This is the leadership for the healthcare sector overall.
  • Brazil (EWZ/BRZU) cup and handle pattern in place. The upside trade remains in play with some consolidation on move above resistance ($25.72). I like the setup for continuation of the upside move.

Plenty of activity on Tuesday… as stated it is about the follow through from here. Buyers are interested, but there is still plenty of challenges left and hurrdles to jump. Watching how this unfolds moving forward.

MONDAY’s Scans 10/15: Day of digesting, rotating, and watching. Not much to speak of across the sectors, but some individual stocks are making move. ADBE got earnings pop after-hours, ULTA made move to the top end of the pattern, and WBA broke from topping pattern. There are always positives somewhere… our jog is to find them. Too much talk about a market top from the talking heads. Letting this unfold with patience as number one priority.

  • Natural Gas (UNG/UGAZ) resumed the upside move after testing support at the $82.31 level.
  • Gold Miners (GDX/NUGT) added to the upside breakout trade we discussed last week.
  • Technology (XLK/TECS) short side trade still trying to show upside? Watching today.
  • China (FXI/YANG) at the top end of the range again? More downside or top? Watching today.
  • Emerging Markets (EEM/EDZ) short side trade remains in place and watching how this unfolds.

More juggling of the leadership and money looking for a place to rest short term. Taking what the market gives and turning a deaf ear to the talking heads. Let this all unfolds patiently.

(The Scan Notes are posted daily. The trailing five days remain on the update to follow the developments. These scans are looking for trends, reversals, breakouts, and other notes of interest.) 

Sector Rotation of S&P 500 Index:

Sellers looking to remain in control of the near-term direction. The bounce failed to push through resistance and the downside moves back to support or lower introduce another leg lower potentially for the sectors. Watching both up and downside moves in the sectors as covered below.

  • XLB – $58.44 support fails on the downside. Downside bounce was not convincing. Bear flag… breaks lower on Friday… short side still in play. 
  • XLU – The utility sector bounced off support at the $51.50 level and back to the previous highs completing a ‘V’ bottom. $54.75 resistance in play. 
  • IYZ – Telecom fell to support at the $27.63 mark and bounced… resistance at $28.62 again… needs to follow through on the upside bounce. 
  • XLP – Consumer Staples held support at the $51.86 mark and is back to the previous highs. Need to clear the $54.92 mark upside to continue. The defensive money is rotating. 
  • XLI – Industrials broke lower and move back to $73 level of support and not looking good near term. $71.43 target? 
  • XLE – Energy stocks fell with the market on Wednesday, fell on crude supply data on Friday breaking the $72 level of support and opening the downside potentially… 
  • XLV –  Healthcare broke the uptrend from the May lows and breaking the 50 DMA as the trendline. Consolidation or more downside? Watching how this unfolds on the week. 
  • XLK – Technology breaks lower opening short side trade. 200 DMA is key level currently and watching as we start the week. 
  • XLF – Financials have traded sideways amongst the noise on interest rates, Italy finance problems, and the anticipation on earnings. Tested July lows and watching how this unfolds. 
  • XLY – Consumer is under pressure from interest rates and Fed talk. Watching this week. 200 DMA broke Friday? Negative. 
  • RWR – REITs have been under pressure from interest rates. Bounced at $88 support… at the 200 DMA… letting the direction unfold on the bounce. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Markets are in a decision phase as they bounce… bounce fails to break higher… retesting the previous lows… set up for another leg lower. The first leg is always with high anxiety and emotions… the second is more methodical… watching how it unfolds this week. The rotation to defensive sectors shows the anxiety in play. The break of key leaders lower again shows the willingness to take money out of harm’s way. It wasn’t a bad week of trading just one that shows the potential for more downside. There is plenty of influencers on the markets currently. We have discussed the tariffs, interest rates, geopolitics, earnings, the economic picture, and many other issues over the last few months and they continue to stimulate speculation and now some selling. The Fed is currently the biggest influencer on investors psyche and they aren’t helping with the continued comments on inflation and higher rates to stall growth. I find it ironic that we spend some much money, time, and effort to stimulate the economy and promote economic growth… only to thwart it when it finally starts to happen. What happened to a free trade system where supply and demand determine growth. It is a natural law of economics that many forget as they get into positions of power and believe they can control the direction… this generally does not end well as history teaches. Maybe the Fed should go back and take an economics 101 class as a refresher. How this all unfolds is a matter of time and the reality rising through the smoke and noise. Taking what the market gives one day at a time… no reason to panic just follow your strategy… stops have been hit over the last two weeks on many positions locking in gains and avoiding losses (hindsight). Short side trades have been added and they benefitted with positive gains (hindsight). The uncertainty seen in trading leaves us patiently watching how this will unfolds (foresight). Being in or getting out of positions prior to major moves is a matter of discipline. It is not magic. It is not being a prophet. It is about following your defined strategy one day at a time. 

There is plenty to do short-term. Let it unfold… take the trades or opportunities offered… manage your risk and remember cash is a sector and there are times when it makes the most sense versus forcing something that really isn’t there… patience is a strategy as well. 

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.