Buy the dip keeps market near highs

By December 3, 2017Jims Notes, Research Post

OUTLOOK:  Week of December 4th

The broad indexes ended the week with a big drop that was bought to keep the indexes near the current highs. The opening bell rang on Friday and the indexes fell more than 1.5% in the first hour of trading. The buyers saw it as an opportunity to put money to work and the rest is history. The VIX index jumped above 14 as the anxiety levels spiked and the trading followed… the index ended the day at the 11.4 mark as the buyers calmed the nervous market. The question is why? NEWS! remember that the power of the media is not dead. An ABC reporter stated that Trump had ordered Michael Flynn to contact Russia when a candidate for President and the proverbial shit storm that was followed. In the end, the story was wrong, thus the rally. The sad part is no accountability to the talking heads that do this… stops were hit by investors and program trading kicked in to cause the exacerbated situation. During all this media mishap the Senate voted for tax reform passing a bill that will now make it’s way to the House. All in well on Wall Street and confusion reigns in Washington…

Five sectors moved higher with the S&P 500 index recovering the majority of it’s losses to close slightly lower. Energy (XLE), consumer staples (XLP) and financials (XLF) led the upside again. The day was more about the bottom to top recovery following the early selling. Anxiety over news that was false reporting than overvaluation of stocks. The downside was led by industrials (XLI), basic materials (XLB) and technology (XLK). The charts show some damage technically, but we will see how they unfold in the coming week. Interest rates remain a hot potato with the up and down tug-o-war over the Fed making a decision on raising rates prior to year-end. Yields settled at 2.36% after dropping earlier on the “news”. Plenty of question marks still remain relative to the overall direction and we will let this all unfold moving forward.

The S&P 500 index closed downs 5.3 points at 2642 and closing near the recent high. The uptrend remains in control of the index with an above average volume on the move. All the moving averages are pointing higher. The biggest movers in the index were APA (gap higher in the bottoming pattern), MYL (move higher in range), HPE (break higher from the consolidation pattern), REGN (bottom reversal attempt), and NAVI (moved higher in the bottoming pattern). The downside leadership came from MAT, ULTA, EVHC, VMC, and ALK. Mixed activity leading the downside as investors work to overcome news. The broad index moved to a new high and the leadership for the last thirty days has come from REITs, consumer discretionary, and consumer staples… getting some rotation of late with financials, industrials, and telecom leading over the last ten days.

Gold (GLD) tested lower again after an attempted to break through resistance at the $123.05 mark. The $120.45 support is still in play as we trade within the range. The dollar (UUP) can’t find direction as worries abound relative to the Fed, taxes, and geopolitics. The emerging markets (EEM) moved to new highs near $48 and tested the move all week falling to the 50 DMA and testing the $45.52 support level. The Volatility Index (VIX) closed at 11.4 after a spike higher on news. Watching how this unfolds moving forward with the last month of trading started and some jockeying for the year-end ensue. There is plenty on the table relative to dynamics and agendas from traders and investors alike. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your mind. Manage your risk and stay focused on the horizon, not the rear-view mirror.

(The notes above are posted daily based on the activity of the previous days trading)

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. There is no clear resolution to that issue and that has now led to money rotating to where is it has better opportunities and clarity. The downside broke support at the $103.65 level only to recover as the challenges remain with a lack of clarity about Washington more than anything at this point. Bottom reversal started? Watching how this one unfolds. Made move to resistance on Friday at $105.70 and watching if the upside resumes this week. 

REITs (IYR) The sector tested the $76 level of support and bounced back to resistance and tested, and bounced, cleared the $81 resistance… only to test lower again… and bounce again. We continue to focus on managing our risk and collecting our dividend versus the near-term volatility and uncertainty. This is a growth and dividend holding with a 4.2% dividend from our entry point in April. Entry at $75.75. Stop $76.25 (adjusted). Ended the week above $81 and letting this play out as a long-term position. Consolidation pattern at the highs. 

Treasury yields (TNX) moved to 2.42% last week as talk of the Fed hiking interest rates renews despite the talk of tax-cuts stalling in Washington. We still have the price of crude climbing and a stronger dollar impacting the rates as well. Willing to let this unfold for now as the rumors and speculation create a lack of clarity for bonds. One big consolidation pattern as this unfolds and the Fed decides what action to take. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility of the trend is speculation and news driving money. The selling speculation on the rumors of the Fed hiking interest rates tested the $120.45 support. The bounce back to resistance at $123.05 failed again and tested $120.45 support… watching how it unfolds. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue. The last seven weeks the commodity has managed to fight its way back above the $50, $52.50, and $57.50 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $55 (adjusted). The price continues to climb despite some worries about the supply. Patience remains the key as this plays out. 

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production had not resulted in any real measurable cut that would impact prices. The double bottom pattern clears $63.22 for entry and a stop at $66 (adjusted). Investors reacted to the decline in price and found support at the $67 mark. With the bounce in price the stocks are again responding on the upside… still plenty of work to do going forward relative to the belief factor. Moved back near the November highs on optimism… patience required. 

Volatility Index (VIX) The positive week for stocks ended the jump higher in volatility amid false news. The close at 11.4 is elevated and we will watch to see how it unfolds this week. The news is bad enough, but when it is false it only makes things less predictable. 

The S&P 500 index closes at new highs Thursday… false news pushed the index around to end the week, but the uptrend remains in place. All the moving averages are positive and volume is running near average to elevated volumes. The willingness of the buyers to keep stepping in at each attempt by the sellers to push the index lower shows some resolve. I remain cautious overall. The rotation of money is showing financials, telecom, and industrials leading the week. Patience is required with the markets overall with news leading the parade and the data points not offering enough to keep the long-term money engaged. 

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

Daily Scan Results:

FRIDAY’s Scans 12/1: A day of news drives the indexes crazy along with investors. The trading frenzy over misleading reporting led to a big drop and buyers coming to the aide as the reports were corrected. The Senate passed a tax cut that will now find its way to the House and we will see how well that unfolds. News stepping back into the picture and we have to be aware of the drivers as they validate or invalidate any beliefs that drive the trends.

VIX index (VXX/UVXY) led the trading day, but in the end was up slightly and watching. Interest rates (TNX) were equally volatile on the news closing lower on the day after spiking higher during the week on the belief the Fed will hike rates at the final FOMC meeting. Crude oil (USO/UCO) continued higher as the commodity continues the positive trend. Technology (XLK) continues to struggle, giving some on the downside Friday. Emerging markets (EEM) continue to struggle with China (FXI) leading the downside movement. Greece (GREK) continues the bottom reversal and resistance at $9.45 next to clear.

  • Semiconductors (SOXX/SOXS) the downside is gaining some momentum. Worth our attention if the short side of the sector if it builds. Watching $16.50 level for entry on short trade if we follow through to start the week.
  • Oil Services (IEZ) upside resumes following test of support and cleared the $33 level of resistance and entry last week. $35.50 target short term.
  • Russia (RSX/RUSS) short side starting again as trade breaks from the bottoming range. Clearing $24.92 on Friday as an entry with the stop at the $23 mark.
  • China (FXI/YANG) short side playing out as well in the country ETF. Follow through on entry Thursday and $6.74 is the level to clear.
  • Energy (XLE/ERX) cleared resistance at the $30.30 level and in position to head higher. Worth adding to our existing position to trade on the upside move.

Plenty of questions to be answered moving forward, but as will any market environment there is always something to trade. Strategy, discipline, and patience are the key to managing money and the risk of the markets.

THURSDAY’s Scans 11/30: Final trading day for November was positive and the upside continues with the technology sector joining on the day with a reversal from Wednesday… plenty to watch with the catalyst coming from the rumors of a tax bill vote heading towards the Senate. Overnight, however, some interesting developments could change that action today. Stocks could very well respond to the news with futures flat to lower currently.

  • Biotech (IBB/LABU) break to the upside from the bottoming range is a positive… now need a follow through an entry at $75.30. Watching how it unfolds today.
  • Energy (XLE/ERX) Cleared the $68 entry level on Wednesday… added and got the follow through Thursday. $69 level is key to hold the move higher and watching how this unfolds near term with crude oil stalled.
  • Healthcare (XLV/CURE) follow through on the break above $45.20… raise stop to $46 and let this unfolds. Target $49.
  • China (FXI/YANG) downside move above the $6.25 mark hit entry and stop at $5.90. Patience required along with following through on the selling.
  • Oil Services (IEZ) cleared $33 on reversal of test lower. Looking for the follow through on the move and crude to move higher. Entry$33.50 and stop at $31.70.

The move on Thursday came from the rumors of a tax cut vote… after hours the Senate was finding ways not to vote. Watching how that unfolds today… other moves to watch from Thursday’s scans… FCG, IYT, IEO, IHF, FAS, RUSS, XLI, ZSL, DIA, ITA, MVV, and KOL.

WEDNESDAY’s Scans 11/29: the tale of two cities. NASDAQ fall hard and the S&P holds steady thanks to financials gapping higher. The semiconductors (SOXX) drop 4.4% to set the downside pace for the index. This breaks the uptrend off the August low and the 50 DMA is in play now. Stops were hit on trading positions at the $175.50 mark and our longer-term positions remain with stops at $164. Software (IGV) joined the selling hitting stops at $155. SOCL fell as well with Facebook leading the downside. Technology (XLK/TECS) tumble to support near the $62.50 mark. Not pretty, but we watch to see how it unfolds going forward… opportunities arise from these type of moves. Financials (XLK/FAS) followed through on the upside move Tuesday with a solid gain. Industrials (XLI) and telecom (IYZ) each added to their respective upside moves. There were plenty of interesting moves on the day and that means today and tomorrow and the next week will have to validate the activity.

  • China (FXI/YANG) back on the downside move we discussed Monday. $6.25 is of interest for short trade if the negative continues in the country ETF ($46.50 level breaks short trade is attractive).
  •  NASDAQ 100 (QQQ/SQQQ) looking at the short side trade if this follows through. You have to trade with logic versus emotions and this setup is not one I can ignore despite my emotional beliefs.
  • Emerging Markets (EEM/EDZ) downside setting up as well in this sector. Watching how it unfolds with support at $45.52.
  • Natural Gas (UNG/UGAZ) Followed through on the entry level from Tuesday. $11.04 is the target and we will see how it unfolds with a stop at the $9.15 mark.
  • Transports (IYT) I discussed these on Monday as key to watch for the economic outlook of the market as they had moved to support in at the $170 level and bounced… since they have now climbed to the October highs and cleared $180 on Wednesday… positive sign and trade with the move above $174.

This market is one that keeps you on your toes. It also defines my belief that there is always something to trade somewhere. The NASDAQ downside move opens the door to the short side traders and if they follow through will make it interesting for the balance of the markets. The move higher in financials is equally interesting as the Fed remains in limbo about interest rates. We will take what the market gives with a disciplined approach to each position. Stay focused and trade your strategy not your emotions.

TUESDAY’s Scans 11/28: another day for the buyers as ten of the sectors in the S&P 500 index move higher with financials (XLF/FAS) leading the upside move. Banks (KRE/KBE) both posted positive upside to new highs. Natural gas (UNG/UGAZ) hit the entry for trade at $9.45. Watching how today unfolds and what opportunities this brings. Homebuilders (ITB/NAIL) gap higher in the vertical move. Dollar (UUP) made upside move last two days and watching. Midcap (MDY) hit a new high in the uptrend. Broker-Dealers (IAI) leading upside for financials. Transports (IYT) push higher in bottom reversal. Industrials (XLI) solid move through resistance at $71.42. Dividend (DVY) large caps made break higher and hit the entry at $95.85 on move higher. Overall positive day with little worry to speak of.

  • Small Caps (IWM/TNA) Break above the resistance and hit the entry for a trade at $68.50. This is a trade to add to our longer-term position and stop at $66.
  • Regional Banks (KRE) hit entry at $57.50 level on a break to a new high. Watching how this unfolds on the day and stop at $56.30.
  • Brazil (EWZ/BRZU) upside move in bottom reversal to resistance. Break above the $42.50 level is of interest to me for a trading opportunity short term. Patience as this unfolds.
  • Retail (XRT) cleared resistance and entry point at $42. Stop $41.25 and letting this unfold into the holiday season as investors like the results from the weekend retail data.
  • Healthcare (XLV/CURE) made move above the $45.20 level resistance offering entry and stop at $44. The sector has struggled with Washington failing to make any reform efforts creating uncertainty. IHF and IHI leading the upside move. XPH is doing well but lagging.

Overall the buyers are keeping the upside trend alive with optimism about the future economic picture. True or not it is a belief that is driving. Without worries holding the markets back, the uptrend is alive and well.

MONDAY’s Scans 11/27: a day of moves higher to start that failed to hold. This is nothing major overall, but it does show some worries in the market. We will let this play out and take what the market gives following the upside move last week. Utilities (XLU/UPW) added to the upside move following the test and remains in a positive uptrend. Telecom (IYZ) remains positive in the move higher from the low two weeks ago. Healthcare (XLV/CURE) attempting to move above resistance at $81.81. Energy (XLE) tested support at $67 again.

  • Natural Gas (UNG/UGAZ) finally bounced off the lows and now we look for follow through and a possible reversal in the commodity.
  • China (FXI/YANG) sold lower for the second day leading the downside for the emerging markets (EEM). Watching.
  • Energy (XLE/ERY) downside in position with reverse head and shoulder pattern in place. Watching the $11.55 level.
  • Gold Miners (GDX/NUGT) attempting to break resistance at the $331.03 level and follow through along with gold (GLD/UGLD) on the upside.
  • Dividend Select (DVY) moved to new highs as the large-cap sector shows leadership short term.

Markets spent the day digesting the moves higher from last week. They could not hold the upside moves to start the day and flounder into the close. Watching how the week unfolds with some moves of interest going forward.

Sector Rotation: 

 

  • XLB – Materials continue the wave type pattern of rolling up and rolling down in an uptrend. The upside resumed in August and the positive wave has ensued. Cleared $58 and continues to hold near highs. Entry $54.75, Stop $56.50 (adjusted). Broke the first level of support at $58.44, but found buyers to move back to $58.45. Watching how the new week unfolds.  
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed, but they have attracted buyers the last four weeks. A nice move above resistance at $53.65 and solid move to confirm entry at $53.80. Stop $55.24 (adjusted). Testing the move higher with support at the $55.25 mark.
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Retested the lows as the downside took root and broke support at $30.40. The bounce was positive and we added a position on the upside… $28.55 entry. Stop break even $28.55. A positive move above $29.50 resistance last week. 
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The break of the $54.50 support put the downtrend is in play again. The buyers returned to recapture the upside momentum. A continued move higher from the low last week hitting resistance at the $54.76 mark.  Nice upside follow-through move above $54.76.
  • XLI – Industrials moved sideways for two months and then back to the previous highs breaking out stalling at the $73 level. The long-term uptrend remains in play and the move sideways broke support and hit stop. Moved back above the $71.43 level and moved vertically until the news on Friday… watching for more upside.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. Entry $65.20 with a stop at $66.50. Watching as this unfolds short term with the move back to $67 support unfolds. Positive bounce to end the week and looking for follow through. $68 entry to add to the position if we can gain any momentum in the sector. Moved back above the $67 level and back near the previous highs.
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 back in play as the uncertainty returns. Watch the parts as well as the whole here… IHF, IHI, XBI, XPH. Positive moves in the parts give hope to the whole. Breakthrough resistance and entry at $82. Stop $81. Letting this play out.
  • XLK – Technology uptrend remains in place with more new highs. Entry $48.50. Stop $60.50 (adjusted). Semiconductors hitting new highs. SOXX leading in the bounce off support. The new high test proves positive for the resumption of the move.  Gap lower on the selling in semiconductors. Support $63 holding for now. 
  • XLF – Financials pushed lower on worries about interest rates, the Fed, and no tax cuts. The retest of support at the $25.82 level was a concern for the short-term uptrend. Moved back above the $26.40 level adding our position back and watching how it unfolds. Stop $26. IAI and KRE also worth trading as they lead the sector higher. 
  • XLY – Consumer Discretionary moved back near the previous highs and remains in a sideways trend. Entry $83.50. Stop $90.50 (adjusted). The clarity about the consumer is a challenge for investors, but the sector did manage to clear $90.70 resistance and the previous highs. The uptrend is in play. Santa rally on – watching how the retail (XRT) continues to add to the move.
  • RWR – REITs reacting to the current uncertainty around the Fed potential increase of rates. The longer-term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Big triangle pattern still in play (weekly chart). Watch how the week unfolds. Testing of the move higher as interest rate worries rise and trading at the ranges high.

Solid trading week as uptrend remains with the leaders and the laggards are still in play as the indecision overall remains. This is a market driven by sector and not an overall belief despite the move to new highs for the major indexes. Taking what the market offers and nothing more. Four sectors are trending higher, two trending lower, and five moving sideways… about what you would expect in the current environment. We have to remain disciplined in our approach to investing our money. The goal is risk management as the storylines continue to unfold.

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

FINAL NOTES:

Investors are happy with the upside activity as it relates to the current trends. Traders are driving the short term swings and opportunities. Friday’s disruption of misreported news leaves a bad taste heading into the new week of trading, but we will watch how it unfolds. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. The rationale for the current trading environment is more speculation than fact. The economic data remains mixed and earnings have the same theme of some good, some bad, but enough to keep the buyers engaged. The political belief is there will be tax cuts on the horizon as the Senate finally votes and approves its version… the bill heads to the House and we will see what happens. No movement relative to reforming healthcare and the geopolitics remains in play as well. Since the market trades looking forward and evaluates based on past data investors have been buying in advance of the reality and hoping the data will confirm the belief. The challenge is the rumors becoming truth. The outlook for the economy is cloudy at best, the past data is not helping as it remains mixed with some good and some bad. Patience is the key for now. There are plenty of short-term trading opportunities, but the long-term remains less confident but has produced equal opportunities for those willing to be patient. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly. 

“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.