Bounce continues with some volatility

OUTLOOK: December 28th to year-end

The bounce continued with some added volatility on Thursday. The indexes were down 2.7% at two o’clock and then closed up with a two-hour buying spree that gained 3.5% off the lows. That is volatility. That does not necessarily constitute a bottom. In fact, it makes me more cautious than not. The upside prevailed with some interesting leadership… basic materials and industrials. Not what I was looking for following the advances made on Wednesday, but we will take what is offered. The key is to let it unfold and not force trades. Watching the markets unfold yesterday was an interesting study in investor psychology. The emotions kick in as you watch the NASDAQ fall 212 points erasing more than half the gains from Wednesday and then reverse to gain 242 points into the close. The question is why… the answer is no one really knows… the speculation is pension funds are buying to position for the year-end and 2019. Makes sense, but the volatility isn’t helping the cause. We remain on the watch for opportunities and taking it with stops in place and a defined strategy. 

The S&P 500 index closed up 21.1 points at 2488 and adding to the bounce from the downside. All eleven sectors closed in positive territory for the second day. Basic materials and industrials led the upside with the financials posting a positive move on the day as well. The third leg lower in the current trend is still underway and we have to manage the outcome near term. The long-term trendlines are broken as we moved below the October lows and set up another downside leg to the current trend. We will watch how the current activity unfolds and the impact on the trends longer term. 

The NASDAQ index closed up 25.13 points to close at 6579. The index moved below the 6793 support and finally found some support. The sellers have had their way on the downside moves with above-average volume. The bounce Wednesday is good for the markets and the added move on Thursday brings some life to the sector. QQQ is our indicator near term. The bounce produced some opportunities to buy an upside position as a trade only at this point. TQQQ entry $34.17. Stop $32.15. 

Small Cap index moved lower to take out the $133.78 support and closed at the August 2017 lows. The sector remains a laggard and not looking good on the charts. The bounce helped the near term on Wednesday and the follow through on Thursday is worth watching. Looking for a move above the $133.78 mark. 

Transports (IYT) moved below support at $172.33 and found support at the $155 mark. The sector established a new low for the year… watching how it unfolds and how the bounce proceeds. $164.73 level to clear near-term. 

The dollar (UUP) Fell on Monday’s worries about trade. Rallied on Wednesday with stocks bouncing. Closed Thursday at $25.57 testing support at the $25.53 level again. The fear of the global weakness, inverted yield curve, and the tariffs are weighing in and the dollar is coming into question. 

Gold (GLD) moved above the $115.86 resistance digested it an moved higher. The dollar and geopolitics have been the catalyst for the metal… both up and down. The move in the dollar lower helped the upside on Monday. The inverted yield curve is drawing some interest to the metal short term on the upside. Tested on Wednesday closed at $119.66. Entry $116.50. Stop $118.11 (adjusted). The gold miners (GDX) equally respond to gold moving. Watching how this unfolds near term with the metals and the miners moving together again… Entry $19.70. Stop $20.25 (adjusted). Reverse head-and-shoulder pattern in play… need to clear $20.50 again to hold the upside trend.

Crude oil (USO) remains in a well-defined downtrend breaking the bottoming pattern with a move lower. OPEC  is unable to decrease production along with other countries producing as well. The current downside from the October 3rd high is about the speculation of higher demand being driven by Iran sanctions not panning out in the supply data. The commodity closed at $44.61 on Thursday. $43.06 is the key support level for crude near term. Sold short side position… but, watching how this unfolds. 

Emerging Markets (EEM) break from the bottoming pattern at $40.88 only to turn lower on worries about trade… Watching what happens as we are back in the bottoming pattern. Rumors of trade resolutions and talks with China helped the index but the economic data last week reversed the course. There are too many questions and rumors currently and letting it unfold. Wednesday move down towards the bottom of the current range… $37.88 level to hold. 

The Volatility Index (VIX) closed at 29.9 on Thursday with anxiety high early in the day and falling as the buyers show up in the last two hours. Watching how this unfolds with anxiety levels up on the charts. VXX stop $43.48. entry $39. Hit stop. 

Investors gave up hope and let the sellers dictate the course for the second week. It is simple to understand… investors don’t like uncertainty and the Fed, the Senate, the White House, tariffs, interest rates, budgets, spending, and all the other things that impact the economic outlook, foreign trade, jobs, opportunities… need clarity. Without clarity, money exits the markets and looks for less risky positions to reside. The result was adding to the decline of more than four percent across the major indexes last week and breaking to near-term new lows. Technically the charts accelerated in the third leg lower of the trend off the September high. There are questions to be answered… how low do we go? Do we bounce for a year-end rally? Fourth quarter earnings? The FED meeting getting clarified? China trade agreement? New Budget from the Senate, etc. Time will tell what the answer to these questions are and we will follow the trend and act accordingly. The Small Cap, financials, Nasdaq 100 and other indexes showed negative opportunities on the charts. Others are heading in that direction and we have to take what is offered up or down. None of the eleven sectors closed the week in positive territory as consumer discretionary and technology lead the downside. There are plenty of dynamics working in the markets overall and we will take it one day at a time. 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 broke below $101 and has not looked back since. Looking for some support at $89 or we continue lower. LABD entry $36.05. stop $46.90. Solid bounce… need follow through. Thursday’s volatility not convincing. 

Semiconductors (SOXX) Broke support at the $153 level… still looks better some of the other cliff dives on the chart. Looking for some opportunity here if a bounce occurs. Solid bounce… need follow through. $153.13 level to hold. Moved through and added trading position… entry $78. stop $75.30. SOXL

Software (IGV) Broke $167.88 and looking for support. Still not in horrible shape and the sector is oversold. Solid bounce… need follow through. $167 level to hold. Moved through $167 and added a trading position. entry $$167.90. stop $165. 

REITs (IYR) Tanked on uncertainty from the Fed and the economic outlook. Broke $75.21 and watching. Solid bounce… need follow through. Thursday’s volatility not convincing. 

Treasury Yield 10 Year Bond (TNX) closed the week at 2.79% as yields once again move below support and the long bond rallies. TLT entry $115.25. Stop $119.50 (Adjusted). Thursday yields fell to 2.74%. 

Energy stocks (XLE) The stocks move lower and sold more as crude oil prices remain challenged. Broke support at the $58.20 level. Crude fell 11% on the week and stocks are following the move lower. Solid bounce… need follow through. Thursday’s volatility not convincing. 

(The notes above are posted every weekend and updated daily in red)

THURSDAY’s Scans 12/27: Volatility is the keyword to define the trading. While we were looking for some follow through we got some speculation to go with a higher close. Some trades offered and taken above. Some still trying and we will watch today. History tells us this is a bear market, it is showing bear market activity, and our goal is to not get sucked into a bear trap. Proceeding with caution and letting it all unfold. Cash remains a sector and we posted some solid gains on the downside… thus, letting things unfold is fine with me for now.

  • Semiconductors (SOXX/SOXL) added upside trade.
  • NASDAQ 100 (QQQ/TQQQ) added upside trade.
  • Software (IGV) added upside trade.
  • Watching the bonds as the yields dropped again… patience
  • Financials (XLF/FAS) solid move upside and watching.

plenty of fun for all… taking it slow and one day at a time.

WEDNESDAY’s Scans 12/26: Solid bounce higher… as stated above need to follow through on many of the accelerated moves intraday. There is so much work to be done if the reversal is to hold and move higher. Hit stops on our short side positions and laddered of many based on the intraday momentum from the buyers. Letting this unfold. Areas to watch…

  • Semiconductors (SOXX) needs to hold above $153.13 mark. we will evaluate as it unfolds.
  • Software (IGV) needs to hold above the $167.88 mark. Evaluate and trade accordingly.
  • Technology (XLK) needs to follow through on the upside or at least show parts worthy of trading.
  • Treasury Bonds (TLT/TBT) short side trade if the yields move above the 2.8% mark with momentum.
  • NASDAQ 100 (QQQ) needs to move above the $152.51 mark. Watching how it unfolds.

Patience and diligence. You have to be willing to trade at the level of risk you can tolerate. Letting it all unfold one day at a time.

FRIDAY’s Scans 12/21: The damage is done. Adding issues with trade and China to the mix didn’t help. The Senate could not come to an agreement on a budget and threatening to close the government down added to the mix… all of it adds up to uncertainty. How low can we go? I have one rule… THE MARKET can remain irrational longer than I can remain solvent bucking the trend. Thus, we maintain our positions, manage our risk, and let the direction unfold along with any sanity returning to the markets.

  • Adjusted stops on all positions as we expect some kind of bounce in response to the selling… how much we will see.
  • Watching SOXX and IGV if we bounce for upside opportunities as the charts look the best.
  • Volatility Index peaked at 30.1 on Friday. Any positive news would help lower the anxiety and give room for a bounce. Adjusted stop on VXX trade.
  • Yields are falsely low on the anxiety and money running to safety. Watch the downside of the bond on any bounce in stocks. TBT would set up a trade as well.
  • Cash is a sector and one where money should reside currently.

Patience as this all unfolds.

THURSDAY’s Scans 12/20: More downside selling as investors continue to head for the exits. The Fed is going to do what they think is best despite what is in front of them. The worst leaders are those who manage the immediate crisis without looking towards the future. To drive defensively is to see what is in front of you… what is behind you is less likely to kill you. The Fed is trying to stop inflation now… not guide the economic growth. That, in turn, is stalling the growth and putting in question what is on the horizon. We are managing our downside positions. Keeping cash and bonds as rates tumble. Keeping our eyes on the horizon for the opportunities presented in this mess being created.

  • Adjusted our stops and managing the risk on short side trades.
  • Not willing to chase too many new positions here as this unfolds. The downside move has been a cliff dive this week and watching for a bounce to moderate the move and some digestion.
  • Holidays are here and that will create lower volume trading. Be aware of your surroundings.
  • Taking it one day at a time.

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:

  • XLB – New lows and looking for support… offered short side trade. Bounced and watching. Nice addition on Thursday needs to hold above the $50.35 level. 
  • XLU – The utility sector below support at $55.24… holding steady at the $53.50 support levels. Hit stop on long positions and watching how this unfolds. Bounced and watching. Nice addition on Thursday looking to clear the $52.72 mark. 
  • IYZ – Telecom moved back below $27.63 and broke the October low. The downside is in play and letting it unfold. Bounced and watching. Thursday’s volatility not convincing. 
  • XLP – Consumer Staples moves back below the $51.86 level of support. The defensive money ran as well to cash. Hit stops and watching how it unfolds. Bounced and watching. Thursday’s volatility not convincing. 
  • XLI – Industrials moved back below the $67 level and broke the October lows. Letting the downside play out. Bounced and watching. Nice gain Thursday needs more work.
  • XLE – Energy stocks fell with the market and crude prices. Broke the October low and showing more selling along with crude oil. Bounced and watching. Thursday’s volatility not convincing. 
  • XLV –  Healthcare broke $83.24 support and not looking good. Watch and let it unfold. Bounced and watching. Nice gain on Thursday looking to clear the $85.30 mark. 
  • XLK – Technology moved below $64.78. Watching how the sector moves from here. Bounced and watching. Thursday’s volatility not convincing. 
  • XLF – Financials moved lower with weakness in the sector being driven by the inverted yield curve worries. The short side trade working. FAZ – Entry $11.35. Stop $14.50 (adjusted). Sold 1/3@16, 1/3@15, and balance hit stop. Bounced and watching. Nice move on Thursday watching for an opportunity. 
  • XLY – Consumer tried to bounce… failed… moved below $102.50 level and not looking good… letting it play out. Bounced and watching. Thursday’s volatility not convincing. 
  • RWR – REITs shifted gears to move below the October lows and $86.83 up next. Bounced and watching. Thursday’s volatility not convincing.  

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

FINAL NOTES:

Markets continued selling this week and broke the October lows as the broad-based selling accelerated on the Fed, China, and Budget impasse. Throw in some economic worries and you get more selling. Lack of clarity is the death of any bull market. None of the eleven sectors managed to close the week in positive territory as money rotated yet again with most heading to cash versus other sectors. We continue to take this one day at a time. There is plenty of influencers in the markets currently and headlines are the drivers. We have discussed the tariffs, interest rates, geopolitics, the Fed, earnings, the economic picture, and many other issues over the last few months and they continue to stimulate speculation. The Fed remains the biggest influencer with a shift again on interest rates which have pushed the long end of the yield curve back below 3% to 2.79%. How this all unfolds is a matter of time and confidence. There is no reason to panic just follow your strategy… Disciplined entry and exit points allow for you to manage your risk in up or downtrends. Investing and trading 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 of issues and plenty of speculation short-term. What we need is confidence in the outlook going forward… until that happens, expect more volatility and downside. 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.