China denies and markets move higher

OUTLOOK: January 13th

What rattled investors on Tuesday inspired them on Wednesday… you have to love news. China denied stating they would halt buying US Treasury bonds and equities headed higher. Bond yields moved lower with bonds moving higher. As I stated in the update… news has to become belief in order to establish a new trend. The news was just that news and today’s rebuttal was just news, but enough to shift the tide from overwhelming investors to sell bonds. Interest sensitive assets were still under pressure with both utilities and REITs losing ground again on the day. The challenge from my view, overbought conditions remain and that leaves the market subject to all and any news that would prompt profit taking and testing the current highs. It was just another day in market volleyball as everyone decides what they believe to be true and what belief will drive markets near term. Patience and flexibility remain the theme.

The upside was led by energy (XLE), consumer discretionary (XLY), and basic materials (XLB) on the day. The jump in energy stocks was a delayed reaction to the move higher on Tuesday in crude. Retail (XRT/XLY) continues to impress with holiday sales ahead of expectations. The upside is alive and well with the exception of semiconductors (SOXX). Small caps (IWM) broke higher from the trading range adding to the upside continuing the uptrend. The downside was led by REITs (RWR) and utilities (XLU) as interest still wary of the interest rate situation. Interest rates have been trending higher putting downside pressure on the bonds and the dollar.  How this unfolds will be of interest across the board. The broad indexes showed some weakness, but not much in terms of the news and anxiety reported. News is reactionary, beliefs are trend building… watching what belief rises out of the news.

The S&P 500 index closed up 19.3 points at 2767 and closed at new highs again. The uptrend remains in control of the index on average buying volume for the day. The index started erased the negative news on Tuesday and headed higher with investors ready to buy. All the moving averages are pointing higher with plenty of questions on the table. The biggest movers in the index were VIAB (test bottom reversal upside), APC (breaking higher clearing resistance), DISCA (testing the uptrend and bounced back to previous highs), MYL (Uptrend continuation breaks higher), and XRX (bottoming pattern gaps upside). The downside came from INCY, HRL, SBAC, KMB, and MAA. Mixed activity on the downside as selling is mixed on the day. Watching how the news merry-go-round unfolds. The leadership for the last thirty days has come from industrials, consumer discretionary, and energy… getting some rotation of late with energy, industrials, and basic materials leading over the last ten days.

Gold (GLD) tested lower at the $117.38 support and bounced on the Fed hiking interest rates. The metal cleared the $123.05 resistance mark breaking higher and has come to rest at the $125 mark… watching with stops in place on the vertical move short-term stalls in a flag pattern. The dollar (UUP) worries abound relative to the Fed, taxes, and geopolitics. Now it has China to worry about? The downside broke below the November lows showing more weakness bounced and was weaker on Thursday. The emerging markets (EEM) has gone vertical on the weaker dollar and talk of resurgence globally in the economics. The last three days have tested and bounced. I am watching the reaction to the news and what belief arises from the ashes. The Volatility Index (VIX) surged higher on the news and calmed closing at 9.8 and watching how this unfolds going forward. 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? Made move to resistance at $107 level and broke higher last week. Entry $107, Stop $105.50. Sellers step in to test the break higher on Monday, the buyers were back on Tuesday and Wednesday. Attempting to make move higher and follow through on the upside move. 

REITs (IYR) The sector tested the $79 level of support and bounced back to resistance and tested, and bounced, cleared the $81 resistance… only to test lower 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). SRS hedge entry $30.25. Stop $29.20. Rates are creating the uncertainty short term… patience. breaks lower breaking current support as yields rise again on China news. Watching and letting this play out short term as China denies the comment. 

Treasury yields (TNX) moved to 2.47% last week as the worries return on the weaker dollar. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping. Watching how this unfolds, but for now, rates remain in a trading range and we remain out of treasury bonds for now. Yields look to move higher again breaking resistance at the 2.5% mark and adding to the move on Wednesday with worries over China. The denial from China on Thursday sent rates back to the 2.53% mark and watching. 

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 broke the $120.45 support. On the decision prices moved higher???? Yes, higher. The “worries” about the dollar and the outlook for growth has money rotating on speculation… regardless taking what the market offers. Entry $120.70, Stop $123. flag pattern on the chart the and bounce to the previous highs. Looking for confirmation and direction.  

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $57 (adjusted). The price accelerated on a weaker dollar this week and remains in the uptrend… let it unfold. Moved above the $61.60 resistance and upside resume… move near the $64 level and watching. 

Energy stocks (XLE) Continue to climb off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $70.50 (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… A nice break above $72 as money flow shows faith in price. Broke to new highs currently. This gave the opportunity to add to positions or trade the move with ERX $32.30 entry, $34.50 stop (adjusted). Uptrend remains with nice gap higher on Thursday. Crude moving higher helps money flow. 

Volatility Index (VIX) The positive week for stocks keeps volatility in check. The close at 9.2 is a move back near the lows. Watching to see how it unfolds this week as we investors continue to have faith in the upside move. Some anxiety on the day with bump higher early and closed lower. Watching how investors respond.  9.8 and holding. 

The S&P 500 index closed the week at new highs and posted a positive return for the week gaining 2.6%. The drivers last week technology and healthcare which bounced back from selling into year-end. All the moving averages are positive and volume was average with the traders returning from the holidays. There is plenty to ponder as we start the new year… not the least of which is the rotation to commodities of late on the weaker dollar along with emerging markets. The question to ask, how low will the dollar fall? The rattling over bitcoin hasn’t helped nor will it going forward. We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Watching how small caps perform (sluggish) to start the year along with semiconductors (positive upside last week). Patience is required with this market overall as news leads the parade. The data points are not offering enough to help my outlook… ISM manufacturing numbers were higher and positive… ISM services numbers were lower and negative. The balance of data is mixed and that doesn’t boost confidence in growth. We watch as the market and investors settle into the new year.  

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

Daily Scan Results: 

THURSDAY’s Scans 1/11: China denies bond comments and stocks rally on the day. The moves put the S&P 500 index back at new highs and money flow remains positive bias near term. Energy rallies on speculation, industrials and basic materials move higher on commodities, and the consumer is a leader based on the news from retail sales. Plenty of positives on the day as the scans shift gears back to the upside.

  • Commodities remain a positive upside influence of late. The rise in natural gas (UNG), crude oil (USO), and gold (GLD) have been the drivers, but the overall view is positive for the near term. UNG hit entry at $23.76 on the day.
  • Energy (XLE/ERX) test and go higher was the theme this week as the upside showed up in Thursday. Upside opportunity at the $40 mark if you don’t already have a position.
  • Homebuilders (ITB/NAIL) bounce back on the denial of the claims China was not buying any more bonds. The rally on Thursday was speculation based.
  • Brazil (EWZ/BRZU) upside with a positive test and go.
  • Small Caps (IWM/TNA) upside resumes finally as the January effect remains a big question for the sector. $73.75 entry hit.

Other moves on the day MVV, IEZ, XME, GREK, XRT, TAN, FCG, IYT, IEO.

WEDNESDAY’s Scans 1/10: China sets the tone for the day as interest sensitive stocks move lower with REITs, utilities, bonds, and telecom lead the downside trek. They broke key support levels and put the short side plays in acceleration mode. Adjust stops and manage the risk of the news causing the move. Today will be of interest to the storyline and the belief factor of investors unfolds.

  • Semiconductors (SOXX/SOXS) downside selling in the sector… reacting to the previous highs resistance? Profit taking? Watching how this unfolds. Stop $166 on positions.
  • REITs (IYR/SRS) short side trade has developed in the recent movement on interest rate worries. Hedge position added at $30.25… move above $31.55 is negative for the sector and could trigger stops for IYR. We would then hold the net short position and watch how it unfolds.
  • Metals and Mining (XME) remains in an uptrend and breaking from the flag pattern at the top of the trend. Commodities are still driving the move in the sector. Stops at $36.
  • Crude Oil (USO/UCO) upside makes move and clears resistance. Buyers are engaged and the speculation remains on the upside… not driven by supply and demand.
  • Banks (KBE/KRE) upside breakout from the trading range as the sector is seen as a benefactor to rising rates. A new entry to add a position or add to positions at $48.75. Stops remain at the $46.30 mark.

Biotech (IBB) still attempting to solidify move higher… we have discussed this and hold a position with a move above the $75.30 mark. Natural gas (UNG) stalls again and test the bottoming pattern. Gold miners (GDX) bounced off support of the test and watching how it unfolds.

Watching how the trends unfold with this development around China. News is news and markets react… belief is an entirely different issue as you can see in the price of crude over the last few months. Despite the lack of demand prices are rising. Belief is key to how trends develop.

TUESDAY’s Scans 1/9: Another day of upside for the broad indexes, but the challenge remains a lack of clarity with the dollar and interest rates. Yields moved higher along with the dollar on the day causing some angst among investors. Still taking it one day at a time with overbought talk in the headlines… it is important to remember the market can remains irrational longer than you can remain solvent betting against the trend.

  • Natural Gas (UNG/UGAZ) the upside is taking the volatile route of progression on the upside. Watching how this unfolds near term and what opportunities it will create. Up or Down?
  • Biotech (IBB/LABU) upside returns after one day of selling… still need validation on the upside move following the break above the $75.30 mark.
  • Treasury Bonds (TLT/TMV) the short side trade is in play and it will be a challenge to change the direction as rates moved above the 2.5% mark on the ten-year bond… short is short for now. $19 entry point to add to short side trades on the bond.
  • Gold Miners (GDX/DUST) follow through to the reversal on Monday… $24.10 entry point for short trade on follow through.
  • Healthcare (XLV/CURE) confirmed break above the resistance at the $49 mark. adjust stops accordingly and let it run for now. biotech (IBB) and medical devices (IHI) breaking higher.

Plenty to watch and scan as this unfolds.

MONDAY’s Scans 1/8: An interesting day with some weakness to start and finishes on the upside. Technology and the NASDAQ still leading the movement with the Dow, S&P500, and NYSE showing some consolidation in volume, breadth, and movement. Take what is there without over analyzing the situation… stops in place.

  • Interesting reversals of leaders from last week… Biotech (IBB/LABD) and gold miners (GDX/DUST). Watching how this rotation unfolds near term.
  • Semiconductors (SOXX/SOXL) upside leader remains on upside move. Watching as it approaches the previous highs. NVDA, AMAT, ENTG, and TER leading the upside move. Networking (IGN) gapped higher as well from the consolidation pattern adding to the upside in technology.
  • Coal (KOL) we discussed this move several weeks ago with the opportunity clearing the $15.40 resistance… it has gone vertical in the move adding to the commodity run.
  • Oil Services (OIH) adding to the move above $26.17 resistance. The sector remains positive with the move in crude above $61. Another part of the commodity storyline. XLE, IEZ, and XOP.
  • China (YINN/FXI) continues to lead the upside charge for the emerging markets (EEM). The solid upside move continues as money looks for opportunities in the sector. KWEB leader in the move higher.

Overall moves are in line with the bounce off the December test to end the year and the last five trading days have been impressive on the upside. Proceed with caution and stops in place as this all unfolds.

FRIDAY’s Scans 1/5: Positive trading day to end a positive week for stocks. Despite the data points on the economy money and speculation continue to drive the direction. Technology resumed the role of leadership and commodities continue their trek higher. We will follow the golden rule of following the leaders as the new year swings into full trading mode next week. The scans reflect the upside optimism currently with the downside reactions coming from interest-sensitive stocks.

  • The NASDAQ (QQQ/TQQQ) fell to the 20 DMA to end the year and rose to a new high to start the year. Hit entry at $147 with a stop at $140 for the upside trade. Longer term positions we raise our stop to $140 as well.
  • Crude Oil (USO/UCO) upside in play on a weaker dollar. The demand side is higher, but not enough to warrant the higher move. We added to our position at the $21.80 level, stop $$22 (adjusted) and will manage our risk accordingly.
  • Technology (XLK/TECL) upside moves to reverse the near-term direction. Positive move overall and looking for the leadership to remain. SOXX helped the upside move with a positive reversal.
  • Gold Miners (GDX/NUGT) upside trade saw some buying on FOMC… cleared $31 resistance and offered another entry point for the miners. $28.67 stop still in place on other positions ($28.67 entry). Gold (GLD/UGL) is the reason for the rise! Breaking above the $123.05 mark. UGL offered another entry point on the break above resistance $40.50 (stop $40).
  • Semiconductors (SOXX/SOXL) bounced at support $166.10… tested… and showed positive upside to start the year. Entry $175, stop $170. Need the leadership for the NASDAQ and technology to rise further.
  • Commodities are moving… thanks to the dollar. USO, XME, GLD, SLV, BAL, DBB, etc. all showing rotation… and opportunity.

The market is poised for more upside near term as money rotates based on the current outlook. Watching the data points for the economy as well as the global picture. The key is patience and observation are how the belief factor unfolds moving forward.

The upside leadership:

  • Crude Oil (USO/UCO) positive moves to clear near-term high.
  • Gold (GLD/UGL) positive upside moves setting the pace.
  • Homebuilders (ITB/NAIL) upside remains after a test with flag pattern in place. Looking for the resumption of the uptrend in the leader. $43.25 entry point if upside break.
  • Natural Gas (UNG/UGAZ) break upside is worth attention.
  • Brazil (EWZ/BRZU) upside break and positive move on a weaker dollar.

Risk management of positions and a disciplined strategy for any and all trades.

Watching:

  • Homebuilders (ITB/NAIL) upside is back on the upswing and watching how it unfolds relative to the move in interest rates and tax cuts.
  • Latin America (LBJ) – double bottom reversal. $32 level of entry confirmed nicely on upside move.
  • Emerging Markets (EEM/EDC) – clear previous highs of interest. $121 entry, stop $130). The dollar is helping the upside move.
  • Technology (XLK/TECL) upside move clears resistance at the previous high ($119.11) offering an opportunity to add a position. Stop $115.20.
  • Healthcare (XLV/CURE) upside move clears resistance at the previous high ($48.95) offering an opportunity to add a position. Stop $47.50.

Other moves of interest: KOL, BRZU, EURL, KWEB, FAS… for the week… YINN, DGAZ, OIH, TQQQ… plenty of positives leads to cautious outlook as well.

FRIDAY’s Scans 12/29: No big changes as money juggled for the new year. The week was down then ended lower with some rotation to commodities on a weaker dollar. Below is what we are watching to start the new year…

  • The NASDAQ fell to the 20 DMA which is worth watching. $152.10 is support for QQQ currently as let the pressure unfold on stocks.
  • The dollar (UUP) continues the decline breaking below the November lows. This is good for commodities and not so great for stocks short term.
  • Crude Oil (USO/UCO) upside in play on a weaker dollar. The demand side is higher, but not enough to warrant the higher move. We added to our position at the $21.80 level and will manage our risk accordingly.
  • Treasury Bonds (TLT/TMF) bonds rallied this week on lower interest rates. Still in range, but watching how they unfold moving forward with the Fed and the dollar.
  • Natural Gas (UNG/NUGT) upside continues and the vertical move the last three days is impressive. $5.67 entry, Stop at $5.35.
  • Gold Miners (GDX/NUGT) upside trade saw some buying on FOMC… cleared $31 resistance and offered another entry point for the miners. $28.67 stop still in place on other positions. Gold (GLD/UGL) is the reason for the rise! Breaking above the $123.05 mark. UGL offered another entry point on the break above resistance $40.50.
  • Semiconductors (SOXX/SOXS) bounced at support $166.10… no conviction in the buying and a break of support would be a big negative overall.
  • Commodities are moving… thanks to the dollar. JJC, USO, XME, UNG, GLD, SLV, BAL, etc. all showing rotation… and opportunity.

The market is poised for more rotation of money as this unfolds near term. The key is patience and observation are how the belief factor unfolds moving forward.

The upside leadership:

  • Crude Oil (USO/UCO) positive moves to clear near-term high.
  • Gold (GLD/UGL) positive upside moves setting the pace.
  • Homebuilders (ITB/NAIL) upside remains after a test with flag pattern in place. Looking for the resumption of the uptrend in the leader. $43.25 entry point if upside break.
  • Natural Gas (UNG/UGAZ) break upside is worth attention.
  • Brazil (EWZ/BRZU) upside break and positive move on a weaker dollar.

Risk management of positions and a disciplined strategy for any and all trades.

Watching:

  • UVXY – volatility picked up to end the week. $10.50 level to watch.
  • TZA – small caps showing some weakness. $12.50 level to watch.
  • LBJ – double bottom reversal. $32 level of entry needs to confirm.
  • EDC – clear previous highs of interest. $127.50.
  • SQQQ – clears $21.55 could offer upside trade with the index moving lower below the 20 DMA as indicator short-term trade.

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

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 $57.60 (adjusted). Moved to new highs and climbing adding to the upside.
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed, but they have attracted buyers the news of rates moving higher erased the gains and more. Looking for support and the next opportunity as the fear evaporates and reality settles in. Bounced off support and watching to clear $52.70 with follow through.  Break $51.10 support on China news. Downside remains in play. 
  • 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 move… $28.55 entry. Stop break even $28.55. Stalled at the $29.50 level of resistance.  Breaks back below the $29.50 level as China news rattles investors. Watching and waiting for this one. 
  • XLP – Consumer Staples remains in an uptrend and is stalled in a consolidation pattern. Need to confirm the move above the $57 level. Entry $54.80, Stop $56.25. Trading range remains with some downside pressure. 
  • XLI – Industrials moved sideways for two months and then back to the previous highs breaking out to new. The long-term uptrend remains in play. Upside in play and watching the stop at $75.50 (adjusted). Continues to trek higher with a vertical movement of late.  Continues the vertical move higher. 
  • 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 $69 (adjusted). Positive bounce and break above the $70.50 resistance. A nice move above $72 as the sector gain on crude advance. Upside continuation
  • 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 bounced. Testing again last week as indecision remains a challenge. Biotech large caps (XBI) positive upside helping the sector. Watch the parts as well as the whole here… IHF, IHI, XBI, XPH. Watching the break above $84.25 and follow through higher.
  • XLK – Technology uptrend remains in place with some testing. Entry $48.50. Stop $63.75 (adjusted). Semiconductors (SOXX) are creating the move higher with positive gains towards the previous highs. Watching how the parts unfold near term. SOXX, FDN, HACK, IGN, IGV, and SOCL. Nice upside move for the sector with some testing on Wednesday. 
  • XLF – Financials pushed lower on worries. Moved back above the $26.40 level adding upside. Entry $26.40, Stop $27. IAI and KRE also worth trading as they lead the sector higher. Sideways as everyone decides on direction near term. Moved higher on interest rates for now. Earnings on the table as well.  
  • XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $98 (adjusted). The clarity about the consumer is a challenge for investors, but the positive earnings and outlook are leading the stocks. The uptrend is in play. Watching how the retail (XRT) continues to add to the move. Raised stop and watching how the sector reacts to the preliminary sales data for December. Upside remains in place with gap higher move on Thursday. 
  • RWR – REITs reacting to the current uncertainty around the Fed’s hike in interest 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. Tax cut worries added to the downside move and now comes decision time for investors. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. Moved back to the previous lows and breaks support on higher interest rates worries around the China news. Stops in place and watching for the opportunity. SRS position in play as a hedge. 

Finished the first week of the year with the S&P 500 and NASDAQ indexes at new highs. The current market environment is being driven by sectors and not an overall belief despite the move to new highs for the major indexes. We continue to take what the market offers and nothing more. Some rotation into technology, healthcare, and energy sectors as investors look for the best opportunity near term. Energy pushed to new highs this week on a positive breakout. Six sectors are trending higher, two trending lower, and three 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. Last week of trading for the year watch for position jockeying.

(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. The week was filled with optimism about the new year. The focus remains on the impact of the tax cuts and which sectors win… there are political and geopolitical issues in the headlines, but the worry factor has not escalated enough to warrant any downside. I expect more of the same as we towards a full week of trading and business back to normal. 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. As we start a new year there will be plenty of statistics and data put forth to help decision making about the outlook. As seen with the economic reports it remains mixed and allows speculation to remain in control. Earnings and retail sales for December will all be reviewed in light of expectations in 2018 as we move forward. 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. That is why we manage positions with stops daily. There is still plenty of work to be done in order for the rumors becoming truth. The outlook for the economy is partly cloudy at best, the dollar is not helping as commodities will impact the consumer spending if gas prices continue to rise. Patience is the key for now. There are plenty of short-term trading opportunities and the long-term remains in an uptrend overall. 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.