Low Volume and Lack of Direction Remain

Tuesday, November 13th

Big drop early on gap lower open. Immediate rally back to the 1380 close on the S&P 500 Index. Then a push towards the 1390 level into lunch only to close lower at 1374 and below the 200 day moving average. What does it all mean? No volume for one, indecision for two, and a lack of clarity overall. Good day to play golf in Florida!

NASDAQ takes out support and moves lower. Technology stocks continue to put pressure on the index and the outlook isn’t improving. The index continues to be the leader on the downside and today’s move doesn’t produce any confidence relative to the short term outlook.

Risk/reward as we discussed is the key. Too much risk still present short term as the speculation trades are rampant. Nothing wrong with it if that is the way you want to trade, but it doesn’t fit our strategy. Thus, we will remain patient here and let the direction define itself near term.

Below we are outlining the reality of the current trends and the opportunities short term.

What am I watching?

Volume is a concern this week and next with the Thanksgiving Holiday. Traditionally a slow trading period, but it has been very slow the last two days. Watch to see how this is handled and don’t get sucker punch on the swings.

Cisco beat earnings after hours and was trading higher by 8 percent on the news. This could help technology stocks tomorrow. Watch to see if the overlap helps. Hopefully Chambers won’t talk it down as he normally does on the conference calls.

The volatility index pushed towards the recent highs last week and today fell back near 16? If the fear factor is rising relative to the fiscal issues we should see a spike higher in volatility. Watch SVXY on the upside this week as trade opportunity.

Dividend stocks continue to struggle as investors worry about the hike in taxes. Utilities (XLU), Telecom (IYZ), Staples (XLP), and REITs (IYR) have dropped on the worry. XLU is the fund to watch for a bounce once this settles out. Oversold is oversold and it may fall further. $34.15 support is the level to watch.

Patience — can we have enough to avoid the potential pitfalls setting up short term.

1) US Equities:

S&P 500 Index / Sectors-to-Watch –

The index broke the 200 day moving average today and opens the door for further downside risk. The issues surrounding the market are keeping it in check for now, but the worry over the fiscal issues remain a concern. 1357 remains the key support level near term to hold. The intermediate term uptrend line is coming into play off the November 2011 low. Patience as this all unfolds.

Volume has been very low the last two trading days and that is allowing the market to get pushed around intraday. Watch and let this all unfold. Jumping in and out of positions currently offers too much risk for my taste.

The Scatter Graph below starting point is 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and then renewed the trek lower. The downside leadership has been in Utilities and Telecom, but technology and energy have joined the party. The majority of sectors are selling lower and the downside remains in play.

ProShares Short S&P 500 index ETF is the trade to hold for now relative to the index. Entry $35.20 on the break above resistance. Stop $34.80 on a reversal short term. Hit the Entry on the pullback test Friday. Manage the risk and expect some volatility in the trade.

Breaking the Sectors Down:

Financials – Fell below $15.50 support on XLF. A break of this level is the entry on SKF (short financials). Downside still in play with a stall for now. Watch and manage the risk of the trade.

WATCH: SKF – (11/9) Entry 37.85 – Stop 36.90 Mange the leverage volatility.

XLU – Support at $34.15 is the level to watch for now. Bounced Tuesday? WATCH: XLU – Entry $34.85

XLK – No support yet. Watching the $28 level to hold?

XLV – 38.85 support level to watch. Break lower negative, bounce opportunity?

XLB – 35.55 support level to watch. Global picture has an impact on the sector.

IYZ – 23 support level to watch. Dividend tax rumors hitting the sector.

XLE – 68.80 support level to watch. Broke 200 day and demand story pushing sector lower.

XLI – at the bottom of the trading range support at 36. Watch and let this play out short term.

XLP – attempting to hold the 200 day moving average. Could play the bounce off support if it holds.

XLY – 45.20 support level to watch. Consumer is still in play with retail stocks holding up into the holidays.

On my Watch List looking forward:

Short opportunities are building in each of the sectors, but we are technically oversold. Thus, we have to be cautious how we build any short positions. We have discussed all the data and negative outlook for fundamentals. They have validated those issues the last two quarters, but now the fiscal cliff and the election are coming together to provide the catalyst on the downside. Patience is the key word to follow.

The VIX index (S&P 500 Volatility Index) didn’t signal fear again today? In fact, the index held the move lower despite the move lower late in the day. as investors seem content to watch and see how the meeting go this week over the deficit and budget. Watch and be patient as this all plays out short term.

NASDAQ Index – Confirmation on the break below 2660 raising short interest. QQQ support is $63.15 and we have tested it the last three days, but managed to break lower today? A break lower is good for adding a small position in QID.

WATCH: – QID – Entry $31.45 / Stop $31.20 – (11/9) Manage the volatility of the play.

2) Currency:

Dollar – The dollar bounce continues as the weaker outlook in Europe is hitting the euro. The play continues on the upside short term for the buck.

WATCH: UUP – Entry – $22.05 – Stop $21.90 Creeping higher day by day on fear in Europe.

Euro – Watching for the oversold conditions to produce a bounce and the dollar to decline as the “fiscal cliff” issue gains momentum. Watch for a play to develop in the euro near term. $125.80 support level to watch short term.

YEN – moved higher the last couple of days as bounce off support? Worthy of watching. 200 day MA resistance. Entry $123.75.

3) Fixed Income: Yields are dropping.. Again! There was a big shift on the 30 year bond down to 2.274% and the 10 year bond fell to 1.58%. We are moving back towards the summer lows as the fear factor jumps… money moves to higher ground.

Treasury Bonds – TLT break above the downtrend line as bond rally. Watch to see how this plays out short term with $120.80 support. $124.60 is resistance (broke well above on fear rally). Investors have not been able to decide on direction, but the fear generated put the bonds back in play short term.

WATCH: TLT – $123.60 entry (11/7) – Stop $125.15

Emerging Market Bonds – the reversal off the high has reached short term support at $120.80. A move below the 50 day moving average would be a negative technically. Watch for the downside opportunity or a bounce off support as a trading opportunity.

WATCH: Tested support again at $120.80 and bounced (11/12). Entry $121.15 / Stop $120.70

High Yield Bonds – We discussed the downside risk several months ago, but the rally negated any entry points to be short the bonds. However, we hit the point of exit on the bonds with the break of $91.80 on HYG. Watch for a confirmation on the downside, and at $91.50 short the sector (HYG or JNK).

WATCH: HYG – short play at $91.50 (11/9). Entry $91.50 / Stop $$92.25

4) Commodities: The commodity sector continues to be a challenge and not clear leadership. The chart below shows the bounce in natural gas (purple), platinum (green), Palladium (gray) and base metals (yellow) This has become a sector to trade due to the current volatility. PALL up 4.5 percent, Platinum (PTM) up 3 percent, and Natural Gas (UNG) gained 4.8 percent on the day .

WATCH: GLD – Holing the $167 support.  Watch to see if upside can gain any momentum. Hit entry opportunity at $167.20. Still opportunity on the upside fear in stocks.

WATCH: SLV – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance.

WATCH: DBB – Selling gave way to hope with a bounce off the near term lows. Sitting on support. ENTRY – $18.25 (Tuesday)

WATCH: OIL – Cleared $21 entry on the bounce last week, but failed to follow through. Watch for follow through…

WATCH: UGA – Entry $56.25 / Stop $54.80 – Fell again today to support.

WATCH: UNG – Jumped 4% on the day.

5) Global Markets: The NASDAQ Global Market Index broke below the 200 day moving average last week and the downside has accelerated. The EAFE index broke support, ASIA is holding up thanks in part to the rally in China and Latin America continues to trade near the low from the summer. Still no clear direction in the global markets as the risk remains high.

WATCH: EFA – Testing support at the 200 day moving average. Broke $53 support – short set up in play. EFU is in position to break higher at $19.85 ENTRY.

WATCH: EEM – Testing support at the 200 day moving average, but broke support today. EEV is breaking higher and the entry is $25.80. Emerging markets have been in an established downtrend.

6) Real Estate (REITS) – The sector tested support at $64 (IYR). We broke support last week and took out the 200 day moving average. The downside is in play for now. The downside accelerated in NLY and REM as well. Short is the play.

WATCH: Volatility within the trading range (broke lower added position 11/9). SRS – Entry 26.35

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector. Greece back on the table along with Europe. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and holding the 50 day moving average.

WATCH: International Corporate Bonds (PICB) – Testing and remains in trading range at the 50 day moving average.

Watch: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

Watch and play according to your risk tolerance on any position taken. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside of your portfolio.