Buyers return with a second day of gains

Market outlook for October 7th

The opportunity in the bounce followed through with a second day of gains as the buyers returned. The jobs report was just enough to bring some optimism to the markets adding 136k jobs just below the 140k estimate. This kept the hope alive of another rate cut from the Fed in October’s FOMC meeting. I am not of the opinion that they will cut, but we can all hope. Unemployment now stands at 3.5% which is the lowest since 1969. The trade deficit remains at $55B which still is surprising when to consider all the tariffs in place. Despite the bounce the last two days the markets still closed lower for the week. Watching how the new week unfolds with earnings reports on the horizon.

The S&P 500 index closed up 41.3 points to 2952 as the index finds support and buyers continue the bounce. The economic data showed just enough from the jobs report to keep investors engaged. Eleven of the eleven sectors closed higher on the day with technology and financials leading the move. The downside was led by precious metals and agriculture. Plenty of questions remain relative to how the downside unfolds with the sellers still present. The long-term trend remains sideways and steady.

The NASDAQ index closed up 110.2 points at 7982. The index tested the 200 DMA and bounced to close back above the 7850 level. The head and shoulder pattern is something to watch on the chart. Questions remain relative to growth stocks and large caps despite the bounce at support. QQQ posted a solid bounce as well with the large cap index pushing back to the $189 resistance.

Small-Cap Index (IWM) The sector led the charge back to the July highs and then led the downside move to the August lows. Lack of belief in the outlook for economic growth remains a cloud over the sector. Sold the balance of our short side position with nice gain and watching how the bounce unfolds in the coming week.

Transports (IYT) The sector like small caps moved to the July highs and back to the August lows. The bounce off support is a positive as watch to see how this unfolds. Plane deliveries and tariffs have been a headwind to the sector and we expect more challenges going forward. Short side entry at $185.45. Tested $176 support… watching and adjusted stop to $180. Sold 1/3 of position on morning decline and bounce Thursday. Stop remains on balance.

The dollar (UUP) The dollar holding steady near the current highs as the analyst debate the prospects of further rate cuts from the Fed. 20 DMA is setting the trendline.

The Volatility Index (VIX) closed at 17.4 as the bounce settles some of the recent anxieties. There is still plenty of issue in the news and the economic data. Hit stop on the balance of our UVXY trade and closed with a nice gain.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector moved to the July highs and back to the August lows. $190.45 level to clear near term as we watch how this unfolds.

Biotech (IBB) Tested support at $96 bounced and I moving back to the $101 resistance level. The downtrend remains in play. We hit our stop on our short side trade and watching how this unfolds.

Semiconductors (SOXX) The sector bounced, cleared $210.92 resistance and moving back toward the July highs. The last two weeks has tested the move and broke support at $210.92 and bounced. The sector look solid compared to other on the chart.

Software (IGV) The sector bounced back in the previous trading range and showing some signs of hope from the buyers. Watching how this unfolds near term.

REITs (IYR) The upside trend remains on the long-term chart with some a trading range near the highs. Patience with our long term positions and short term watching how interest rate market unfolds.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.51% for the week as the retreat to the downside shows money rotating to safety with bonds posting a nice gain. Raised stop on TLT to $143.70.

Crude oil (USO) Watching support at $52.50 and resistance at $58.25. Tested $52.50 level of support and testing the previous lows. Economic picture weighing on the price of crude along with the supply data.

Gold (GLD) The upside in gold has been driven on speculation of the rate cuts and global weakness overall. The tug-o-war of tariffs, interest rate, and speculation are keeping gold in play and in a current trading range. Holding near the highs and watching.

Emerging Markets (EEM) Bounced from the bottoming range established in August hit resistance at $42.25 and tested the support at the $40.25 level. Too much news and worries surrounding the sector. Trading the stair stepping lower pattern.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The move lower found some support at the $39.50 mark. Watching how this unfolds and what opportunities are presented.

(The notes above are posted every weekend and updated daily Bold Italics)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scan for October 4th: The broad markets continued the bounce from Thursday as the jobs report offered just enough to keep the buyers optimistic. Watching how next week unfolds and what the storyline will be. Plenty of data reports showing weakness in the economic picture. That said, there is the optimism of rate cuts on the horizon keeping people engaged on the buy side.

  • Major indexes (QQQ, SPY, DIA) all closed lower on the week, but managed to bounce back from the early selling. Watching how they unfold in the coming week.
  • Upside positives showing in NAIL, SOXX, XLU, IYR, TLT, GLD, ICF
  • Downside in IWM, IAI, USO, IEV, HACK, IGE, XLE, KOL, UNG, EEM IBB
  • Economic data showing continued weakness in the economic outlook.
  • Commodities show near term strength in DBA, weakness in metals DBB, positive upside trend in precious metals DBP.

THURSDAY’s Scan for October 3rd: Markets tested lower as expected. The bounce materialized at the 200 DMA as it should… volume on the weaker side for the bounce… but, we will let it play out. If the bounce unfolds it will offer some short term trading opportunities, but the downside is still in play. Looking for more clarity overall, but the data continues to validate the downside worries. Took some gains on short side trades and raised the stops on the balance. Looking at how Friday unfolds with jobs report out and the bounce in play. Manage your strategy not the news.

  • Small Caps (IWM/TZA) Sold another 25% at $51.50 (1/2 total) again on the morning drop. Stop remains at $50 on balance.
  • Volatility Index (VIX/UVXY) Sold 1/2 at the opening drop at $31.20 and holding stop on remaining position.
  • Managing stops on balance of short side trades.
  • Bounce could be a relief move as we test key support at the 200 DMA and the August lows… opportunities may materialize short term, but the bias is still on the downside.
  • Revers in natural gas (UNG/UGAZ). Watching for follow through.

WEDNESDAY’s Scan for October 2nd: More negative data from the ADP report on jobs and the market added to the downside move. Too much too soon? Watching to see how deep the conviction is on the downside move. The VIX is not as elevated as you would expect on the selling. We could see some buyers step in on Thursday… but, the jobs report is on Friday and I don’t expect that to be a lifesaver for stocks. Not to mention the ISM services data is out on Thursday. Plenty of data news and not enough belief things are getting better… Sellers could gain control near term. We adjusted our stops on short side trades and looking for the next move from investors.

  • Financials (XLF) ugly is all I can say on the move the last two days. Broke $26.90 support on the close as the downside erases the move to the July highs. FAZ stop raised to $36.25.
  • Volatility Index (UVXY) added to the upside move and adjusted stop.
  • NASDAQ 100 Index (QQQ/SQQQ) entry hit at $34. Stop $32.75.
  • Dow (DIA/DXD) short side in play and adjusted the stop to $26.75.
  • Small Caps (IWM/TZA) adjusted our stop to $50 on gap higher. Sold 25% of trade at the $51.50 mark.

TUESDAY’s Scans for October 1st: Negative reaction to the ISM manufacturing data… Major indexes break the 50 DMA, look at the next level of support, but the internal numbers didn’t show excessive selling. Raises questions of emotions versus logic in the markets currently. The VIX jumped, but not to levels of fear showing up. We have to focus on what the market offers technically at this point in time and trade with a defined strategy in place. We have open short positions that benefitted from the move lower and long positions that hit stops on Tuesday. End result we have to manage the process and let this all unfold. Take what is offered, manage the risk, and don’t trade with emotions.

  • Small Caps (IWM/TZA) entry $45. stop $47.60. Added trade on Friday and managing the risk with tight stop for now.
  • Biotech (IBB/LABD) downside accelerated last week adding the short side trade $23.40… adjusted our stop $25.50. Letting this unfold.
  • Natural Gas (UNG/DGAZ) raised stop $136. Letting it run. ($105 entry have room to let this unfold.)
  • Energy (XLE/ERY) raised stop $49. Downside accelerated on Tuesday and letting this run.
  • VIX Index (VIX/UVXY) upside opportunity as money moves towards safety and anxiety rises.
  • Watching the downside opportunities unfold in QQQ, XLF, XLB, DIA, SPY, EEM, FXI, and others.

MONDAY’s Scans for September 30th: The buyers stepped in on the day, but not with great conviction as seen in the volume. The week will unfold with plenty of data. The downside is showing up in several sectors as stated above… the questions are big… and data will play a big role in the coming weeks as earnings, economic, and global data all converge. Watching and taking what the markets offer… one day at a time.

  • Crude Oil (USO/SCO) the downside in crude continues as supply data is being hit by Saudi Arabia production coming back on line faster than expected. Hit entry on SCO at $15.65.
  • Inside day for SPY, QQQ, XLK, IGV, SOXX others. Watching for follow through if the upside is to have any chance.
  • Energy (XLE/ERY) downside playing out after breaking support at $61. Raised stop to protect positions.
  • Natural Gas (UNG/DGAZ) short side trade gaining traction and raised our stop on the positions.
  • Gold Miners (GDX/DUST) short side trade added to the upside move. Managing the risk of our trade taken last week.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials broke support at the $55.95 level and reversed to end the week. Watching how it unfolds.
  • XLU – Utilities moved higher as money continue to rotate to safe havens. Support is at the $62.50 mark. Collecting the dividend and letting it play out.
  • IYZ – Telecom held support at $27.62 bounced and watching how this unfolds.
  • XLP – Consumer Staples remains in the uptrend line. Watching how this unfolds near term. Testing the current highs.
  • XLI – Industrials moved back to support in the trading range and bounced.
  • XLE – Energy broke lower on weaker oil prices and testing the lows. Watching and managing the risk of the short side trades.
  • XLV – Healthcare held support at the $86.75 level. Watching as it moves back into the trading range.
  • XLK – Technology tested lower bounced and holding steady. SOXX showing positive signs on the chart.
  • XLF – Financials have been under pressure with lower interest rates and global weakness. Plenty of volatility with the news.
  • XLY – Consumer Discretionary tested lower, but remains within the current trading range.
  • IYR – REITs held the $88 support and cleared the 90.80 resistance. Holding near the highs for now.

There are currently seven sectors are in sideways or consolidation trends. Three sectors are in confirmed uptrends. One sector is in a confirmed downtrend. The result is SPY in a confirmed sideways/consolidation trend. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

Markets found enough buyers to hold key support near the 200 DMA. The bounce off the lows was a positive as the buyers showed some resolve. Watching how this unfolds near term with earning on the horizon. The economic data took center stage and it validated the weakness in the current environment. The tariff wars expanded with the WTO giving the US a victory on EU subsidies to Airbus. This set a whole new string of events with tariffs added to more goods. I continue to manage the risk of the current environment. We traded the downside move and posted some solid gains as we hit our stops on the bounce Thursday and Friday. Some trades added with the bounce, but being cautious as I am not a big believer in the upside move. The treasury bonds rallied again as money rotated to safety and yields fell to 1.51%… adjusted our stop and watching how this movement progresses. The risk remains high for upside opportunities as the underlying data remains weak. The market remains controlled by headlines as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list. Throw in Brexit and other global issues and you get the picture. There are still too many questions unanswered and that invites speculation and volatility. We remain focused on what is working and what is failing. Therein lies the opportunities. Manage your risk accordingly and let this unfold… one day at a time.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time. 

“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.