Big Bounce Helps, But Does it Change Anything?

Monday, November 19th – WEEKEND UPDATE

So much for my notion of move back to the 200 day moving average. The S&P 500 index managed to do just that today. No waiting, do not pass go, just go directly to the 200 day with a gain of 1.6 percent in one day. The notion that the markets were oversold bore out today and the end result was a big bounce. Of course you know what this means… will it hold or test the move? Always questions to be answered in this market environment and none of them are easy.

The comments from the politicians were positive relative to the fiscal issues facing Washington and in the end investors bought into the solution is coming rhetoric. We all know what will happen if the solution doesn’t materialize soon. What Washington considers dealing with and what I considers dael with the problems relative to the budget, are two different things. I can hear the first clink of the can being kicked down the road already. The only question to answer is how far will it kicked?

What changed versus last week? Positive reinforcement that they (the politicians) get it and they are willing to work together for resonable solutions to the challenges. Yes, and I can fly. At the first sign of non-cooperative language or bickering begins, how will the market respond? This is a dangerous road we are going down relative to the reason for the move higher today. Time will tell, but we still have to manage the risk of our money.

My question is simple… Did the sellers relinquish control today? If so, the market will continue the upward trek. If not, the bounce will reverse and the downside resume near term. Watch for a target of 1400 on the S&P 500 index short term.

What am I watching?

What happens tomorrow? Follow through? Or retreat? Watching to see.

Can the market bounce? The answer is yes, but the gap open left little room for the trading opportunity.

Oil remains in the current narrow range. Jumped higher on the gap open as well. The upside could resume if the sentiment towards stocks resumes a positive bias.

Treasury bonds reversal on a market rally. TBT is the trade on the upside. Got the move today.

Manage all the short plays cautiously if the momentum picks up from buyers on Monday. Hit all our stops… Still may be opporunities if the optimism wears off. The gap lower was not¬†helpful at all today.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index rallied on the hope of resolution to the fiscal cliff. Thus, the oversold issues facing the market get some relief.

The Scatter Graph below has a starting point of 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, basic materials, energy and others have joined the party. The majority of sectors are selling lower and the downside is in play. If we move the pivot point close to 11/6 the financials are in the picture on the downside as a leader along with industrials. That reflects those two sectors catching up with the others.

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 on the chart. Stop $35.50 on a reversal short term. Took the entry 11/9. Manage the risk and expect some volatility in the trade.

Breaking the Sectors Down:

Financials – Bounce in play. cleared $15.45 resistance on the move today. Watch for confirmation and follow through on the bounce.

WATCH: SKF Р(11/9) Entry 37.85 РStop 39  HIT STOP TODAY $38.20

XLU – Watch the bounce at $34 on Friday for a follow through on the upside. Got it.

XLK РWatching the $27.20 level to hold from Friday bounce. Networking and Semiconductors are the key short term to this turning around. Bounced gaining 2.7%.

XLV – 38.75 support level to watch. Break lower negative, bounce opportunity? (Watch for bounce trade) Got it.

XLB – 34.77 support level to watch. Global picture is adding to the impact on the sector. Moved back towards the 200 day moving average.

IYZ – 200 day moving average support level to watch. Back above the 200 day.

XLE – 68.24 support level to watch. Watch oil prices to provide a bounce if they rise. Moved back to the 200 day.

XLI – Watch and let this play out short term. Bounced?

XLP – 34.10 bounce after breaking below the 200 day moving average. Above the 200 day again.

XLY – 200 day moving average support level to watch. held and bounced.

On my Watch List looking forward:

The housing sector has turned the corner just in time to see a train coming head on. The sales have improved and inventories drawn down, not to mention the homebuilders stocks have have climbed better than 45% during the year. Why the train comment? The budget issues facing the country need income to feed the deficit. Thus, what better place to go than the interest deduction for interest on a home loans. If the rumors are true, that change could derail any continued recovery in the housing market short term.  XHB is testing support near the $24.35 level. A break lower would create some potential short opportunities, but a bounce off support equally could create some upside trades.

Short opportunities have been the play the last couple of weeks, but we have to respect the surrounding conditions. If there is a bounce off support how big is it and what is the catalyst for the bounce? Currently there isn’t anything other than it is oversold. The fiscal cliff issues were discussed on Friday and it gave a positive signal until December? Downside pressure remains in play with small bounce opportunities as buyers believe the problems are resolved. Thus, we have to be cautious how we manage any short positions. As seen on Monday the spring was wound too tight on the downside and the bounce was nearly 2% to move back above the 200 day moving average. Still see the downside play as opportunity, but on hold for now.

The VIX index (S&P 500 Volatility Index) remains low and not showing any elevated fear from investors.  This remains interesting to me short term and we will continue to watch how this plays out. Moved even lower Monday on the rally.

NASDAQ Index – Have we found support? Intraday reversal on Friday gave some hope, but there is still plenty of work to do moving forward. Looking for a bounce short term as the politicians attempt to play nice and resolve the fiscal issue before year end. If we get the bounce, close out the short position and we will look to take a swing trade on the move if it develops.

The bounce on Monday puts the index above the 10 day moving average, but still a long way from shifting the current trend. 200 day moving average is the short term target on the bounce currently.

WATCH: – QID – Entry $31.45 / Stop $32.65 – (11/9) HIT STOP MONDAY

2) Currency:

Dollar – The dollar bounce continues, but is rising in volatility short term. We will take the trend as the key and hold with our stop in place.

WATCH: UUP – Entry – $22.05 – Stop $22.05

Euro – Watch for a play to develop in the euro near term as support tested and the oversold conditions bring buyers in. Big bounce on Monday. $127.30 is the entry target for now.

3) Fixed Income: Yields bounced on Monday along with stocks. The shift is welcomed for equity holders. There was a big shift on the 30 year bond down to 2.72% (2.76% on Monday) and the 10 year bond fell to 1.57% (1.61% on Monday). Tested the lows and looking for some definitve direction short term.

Treasury Bonds – Reversal short term and testing support. Watch the downside to play out short term with TBT is the yields continue to rise.

WATCH: TLT – $123.60 entry (11/7) – Stop $125.50 (HIT STOP MONDAY)

High Yield Bonds – Big bounce on Monday with stocks moving higher. That triggered the stop and now we look at how the upside works, if at all from here.

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

4) Commodities: The commodity sector continues to be a challenge without clear leadership. The attempt to bounce off support didn’t last and the only real opportunities are generated by trading. Still not interested in holding the sector. Moved higher on Monday with the broad markets Watching Oil to see if it holds the move higher.

WATCH: SLV – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance. Hasn’t materialized and looking to exit if we don’t move higher on Monday. Got themove higher and we watch to see how it progresses.

WATCH: OIL – $21 Entry – Watch for break from consolidation as trade on the Middle East issues rising. This is a trade for 3-5 percent only. Got the mov today gapped higher to $21.30 watch.

WATCH: UGA – Entry $56.25 / Stop $54.80 – Still moving higher from our entry trade. Watch and manage the volatility. Move above $57 positive. Made that move on Monday.

5) Global Markets: The NASDAQ Global Market Index (NQGM) broke below the 200 day moving average and the downside has accelerated similar to the US markets overall. The EAFE index broke support last week, but managed to bounce back on¬†Monday¬†with a¬†2% gain.¬†Solid bounce back in China (FXI) after testing support. Still no clear direction in the global markets as the risk remains high in the asset class. one day doesn’t make the trend change. Watching for follow through.

WATCH: EFA – Broke $53 support – short set up for play. EFU – Entry $19.85 / Stop $$19.70 HIT STOP MONDAY

WATCH: EEM – Broke the 200 day moving average, set up short play. EEV – Entry is $25.80 / Stop $25.50. HIT STOP MONDAY.

6) Real Estate (REITS) – The sector broke support at $64 (IYR), and took out the 200 day moving average. The downside is in play for now. Bounced off the $61 support level

WATCH: Entry (broke lower added position 11/9). SRS – Entry 26.35 / Stop 26.60 HIT STOP MONDAY

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 attempting to hold support at $121.. Broke on Friday… watch to see how it plays out early in the week.

WATCH: International Corporate Bonds (PICB) – broke below support on Thursday and confirmed Friday. Clear exit for any positions. .

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.