Weekly Notes & Research, June 9th

More changes on the way for the website!¬†Starting today the¬†, will be updated weekly. ¬†That will make this Jim’s Weekly Notes & Research Post. Why? For the simple reason I want to spend more time over the weekend putting together the trading plan for the upcoming week. The Daily Trading Notes published each morning will give you daily updates from the weekly notes. We will begin each week with an overall plan based on the seven asset classes outlined below, and then the daily trading notes each morning will put them into action with the Watch Lists and Models.

The nightly video will focus on the Models, Trading Notes, Updates to the Weekly Notes and new ideas developing as a result of current market conditions. It will take on more of an educational, explanation, and action tone. That will make it specific relative to trades (watch list and others), ideas and opportunities in the market as they unfold.

The goal is to make the research simple to use and easy to follow. Over the weekend you will be able to review the written update and video relative to the coming week. Daily you can review the trading notes in the morning for specific actions and ideas. Nightly watch the video update to gain insight into the actions taken and explanations of each posted opportunity on the Watch list or Notes. The models will be updated each morning in conjunction with the Trading Notes for ease of following. I am looking forward to the new format! Any feedback is always appreciated.

Sector Moves of Note:

  1. The S&P 500 index tested the 1597 support and produced a bounce back to 1640. This puts the index at the first resistance on the attempted bounce back towards the 1670 high. That puts SPY in play this week if the upside continues to find buyers. S&P 500 Model
  2. The NASDAQ 100 index tested 2910 support and bounced back to 2980. The first resistance is 2984 and a move above this level would put QQQ back into play if the upside continues short term. Sector Rotation Model
  3. Gold failed to breakout on Friday as a follow through to the attempt on Thursday. It also broke the micro uptrend line off the May 19th low. The failed move leaves gold in a downtrend and a possible test of the $131 low in store. We continue to track the opportunity in gold going forward. Likewise silver (SLV) fell 3.7% and is testing the lows again. The short play ZSL broke above the $83.12 resistance.
  4. The bounce on Friday has set up some potential plays in the S&P 500 Model. SPY, SVXY, XLE, XLF and XLK have been updated for plays if the upside continues. The short play on SH will hit the stop if the upside gains momentum into the trading week. Be patient and let the upside play out if the buyers follow through.
  5. VIX index spiked up to 18.50 early in the week, but closed at 15.3 following the buy on the dip rally. Looking for trade on the upside momentum if it follows through on Monday. SVXY is the short volatility play. The fund swings aggressively, play according to your risk tolerance.  S&P 500 Model
  6. The commodities are all over. The lack of a trend in the sector makes it a dangerous place to play. Natural gas and oil continue to trade opposite of each other. UNG broke support and moved lower, oil found support and bounced higher. Base metals attempted to break higher and reversed on Friday. Agriculture (DBA) is moving higher, but the agribusiness (MOO) sold off with a positive bounce on Friday. We continue to watch, but not much here that I am willing to play for now.
  7. Don’t assume the downside is over based on the trading from Thursday and Friday. The buyers were willing to step into the trading opportunity, but how much conviction do they have relative to the potential Fed activities?

Economic Data & Outlook:

Jobs Report on Friday gets credit for the rally as the 175,000 new jobs added and unemployment rates climbing to 7.6% showing more people attempting to join the workforce. The jump puts the economic data going forward in play again. Next week will have business inventories, import prices, retail sales, PPI, industrial production, capacity utilization and consumer sentiment. It is time for growth in the economy if the next leg higher in the markets is going to materialize.

Economic Events & Calendar

1) US Equities:

Major market indexes bounced off support on Thursday and the reversal was put into play. The uptrend remains in play following the test. Is there enough left in the tank to push the index higher? That is what we have to watch this week. With the low established we now have to set our sights on the May 21st closing high of 1669 on the S&P 500 index. Financials, Energy and Technology are where the leadership should come from to start the week.

The April 18th chart below is the last pivot point higher and it is still in play currently. Added line on the high for May 21st to track as the current high or pivot point. The second chart below shows the May 21st pivot point chart and the leadership on the downside. It gives some clarity to what you are seeing on the April 18th chart. Friday we added a vertical line on the June 5th low and the 6th bounce off the low intraday reversal.

The bounce off the low is still in play heading into the trading week. Financials, Consumer Discretionary, Industrial and Healthcare were the leaders. There is plenty of work to do if the bounce is going to re-establish the uptrend.

April 18th Pivot Point:

Scatter 418

May 21st Pivot Point:

Scatter 521

The current trend started on November 15th and has been tested by the the ‘fiscal cliff” issue bottoming on December 28th, The February 25th low pivot point was prompted by FOMC rumor of withdrawing stimulus, Cyprus on March 14th and the April test on economic worries. The current shift off the May 21st high is a result of ¬†the Fed’s potential withdrawal of stimulus going forward. The¬†original¬†target for the move was 1550-1575 which has been obtained and exceeded by nearly 100 points, is now being tested on the downside. Watch and don’t be fooled by the analyst… charts don’t lie. 1597 is the key support (HIT Thursday and bounced) and brings the trend line into play for the intermediate term trend. Uptrend line is holding thus far.

SP500Scatter

Sector Rotation of Interest:

Downside Rotation: Utilities (XLU) and Telecom (IYZ) have been leading the downside, but both managed to bounce on Thursday. They are on my list of opportunities if this bounce gains any momentum.

Consumer Discretionary (XLY), Energy (XLE) and Basic Materials (XLB) are attempting to reverse their micro trend of selling. They have out performed the S&P 500 index overall since the April 18th pivot point. Watching to see if they assert themselves this week.

Real Estate REITs (IYR) has shifted to a negative trend with heavy selling related to rising interest rates. Attempting to hold support at the 200 DMA for now. Watching for a short term trend reversal.

Other asset classes downtrends are addressed below.

Sideways Trend: Healthcare (XLV), Consumer Staples (XLP) and Technology (XLK) have been moving sideways will no real signs of leadership since the May 14th timeline. All had positive day on Thursday and Friday. Looking for confirmation of a restart of the previous uptrend short term.

Upside Rotation: Financials (XLF) and Industrials (XLI) want to take on some leadership on the upside, but keep getting derailed by the negative sentiment building towards stocks overall.

2) Currency:

From the May 17th high (pivot point) we have seen the dollar gradually decline. The downside has accelerated and we added UDN (Two Egg Model) as a position and it has done well. The bad news for the dollar is the strength of the other currencies of late and pressure is mounting.

Currency

Sector Watch:

  • UDN¬†–¬† The dollar has been trading sideways and has now move lower breaking the uptrend. Added UDN as the down dollar play for now. Two EGG Model. Stop adjusted on the play to protect the gain.
  • FXE¬†– Added a play on the currency against the dollar at $128.50. Sector Rotation Model. Raised the stop on the play in the euro to protect the gain.
  • FXC – The Canadian dollar bounced on dollar weakness. $97.60 trade entry if you would like to add the currency. Stop at $97 and $99.25 target for the trade. I did not add to the models.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

  • 30 Year Yield = 3.32% – up 9 basis points —¬† TLT = $113.16 down $2.06.
  • 10 Year Yield = 2.16% –¬† up 9 basis point ¬†— IEF = $104.88 down 82 cents.

Treasury Bonds РThe bond is testing the lows or support on TLT and IEF. The yields are testing the highs on both the 10 year and 30 year bond. The complete reversal of the yield moving higher has pushed the bond lower. Not a place to be other than short the bond. TBT. Hitting against March highs again at $69. Look for break higher as a trade opportunity on the upside short term.

Jim’s Notes Article on Bond Yields rising.

High Yield Bonds РHYG = 6.5% yield. Added to ONLY ETF Watch List. Equity play on the potential bounce.

Corporate Bonds РLQD = 3.6% yield. No positions currently. Downside risk in play.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Downside risk in play.

Convertible Bonds РCWB = 3.6% yield. Bounce on recovery in stocks. Look for the upside to continue if stocks move higher. Trade opportunity short term.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – Developed into a trading range and just need to practice patience short term. Oil is driving this sector ETF for now. We own UCO in the ONLY ETF model.
  • Natural Gas¬†– (UNG) Broke support and short play is on. Watching for some support, but if none, the short play will continue to gain momentum.
  • Crude Oil¬†– (OIL) ¬†At the $96 level with $97.25 resistance just overhead. As stated we own the leveraged oil trade with UCO. Manage the risk and watch the resistance/target and take the gains if hit.
  • Gasoline – (UGA) made a solid move higher. Watch for a move above the $57.62 level for trade. ONLY ETF Model Watch List.
  • Gold –¬†(GLD) Cooked in a squat. Can make up its mind up or down. It was ready to break above the $137 level of resistance, but reversed on Friday. $131 support now in play? Watch to see how it unfolds.
  • Palladium¬†– PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $77 target. Patience for the metal to break higher. Still in play, but watch to see if the pressure from gold impact the metal moving forward.

Commodities Rotation Chart:

I have moved the starting point forward on the chart to May 1st as a potential uptrend. As you can see that didn’t happen and DBC has moved sideways since the start point. PALL is moving higher and leading the metals. Base metals (DBB) made a near term move back to the upside, but failed again to maintain any upside momentum. Gasoline (UGA) is making a move along with oil on the upside. Corn is bouncing again after some selling and testing of the move higher.

The balance of the sector is vertically challenged. Copper, natural gas, gold and base metals all rolled over to move lower last week. Watch the downside acceleration for short opportunities if they continue.

Commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

Global markets have shifted to the downside over global economic slowing. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles starting in the US markets. Thursday and Friday reversal in the US did help stem the downside in EFA.

The Asian connection is hurting the overall index. China (FXI) has not been attractive relative to the economic data and other admissions by the government on false reports. Japan (EWJ) was selling off as well, but did manage a solid bounce on Friday. Europe (IEV) has held up better, but is still a big question mark. There is a possible trade on the upside if the US markets continue to rally. ONLY ETF Model Watch List

The chart below shows the shift over the last week plus on the downside and the modest bounce to end the week. We don’t own any long positions in the global markets, but have added a couple of trades to the Watch List. ¬†Adjust your stops on the short China play going forward.

Global Mkt

EFA –¬†iShares EAFE Index ETF¬†(click to view) 10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

Country Watch:

  • FXP– Added short play on China as the downside has been the leader. Sector Rotation Model.
  • EWJ¬†– Leading lower as fast as it did to the upside. Still looking for an upside move from the country. Watch for bounce play to follow through as this unfolds. Got bounce on Friday.
  • IEV – posted possible upside play to the ONLY ETF Watch List.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke the uptrend and signaled exits. The interest rate rise is playing havoc on the sector. As this unfolds there will be plenty of opportunities to play the bounce. Watch, be patient and disciplined.

Sector Summary:

  • IYR – Looking for support at the 200 DMA – trade opportunity on a bounce if it materializes.
  • RWO –¬†SPDR Global Real Estate ETF¬†– Still upside opportunity once support is established.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Downside looking for support and resulting opportunity as it plays out.

7) Global Fixed Income:

Sector Summary: Downtrend in play and uninterested in the sector currently. Some basing starting to show in the charts. We will continue to watch for the next opportunity, but for now no positions.

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside.
  • PICB – 3.1% dividend. No reason to own currently.
  • EMB – 4.3% dividend yield. No reason to own currently.
  • PCY – current dividend yield is 4.8%. No reason to own currently.

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 losses.¬†