Congress Agrees and Rally Spreads

Wednesday – Notes & Research

The compromise continues with Congress approving the watered down version of the fiscal budget without any cost reductions. As they return to deal with the debt ceiling and spending cuts I would expect more of what we experienced in December. While hope springs eternal there are always issues on the horizon.

The broad indexes responded today with gains of more than 1.5% across the board. The move puts the uptrend back into play and clears the next resistance level. Do we move to the September highs? Or, do we test the support levels again? Money wants into the market and two day gains of more than 3% are evidence to the buying pressure short term. Expect volatility to remain as the meetings in Washington resume.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved near the 1400 level last Friday and held a key level of support. Monday the index bounced back to the 1426 and Wednesday closed at 1451. The move negates the break of the trendline following a lower-low that took out the 1413 low on 12/14. Now comes the proof of direction as we finish out the week and the response to the deal over the fiscal budget by Congress. We still have to watch the 12/18 high as the pivot point for the downside currently and we have to track the previous uptrend as it could still be in play. The news is creating the swings, but in the end the trend will emerge.

The chart below has a starting point of 11/15 which was the pivot point for the uptrend. The first vertical line drawn on the chart shows the starting point of the drop relative to the fiscal cliff issues. The second is the rebound start on Monday. Thus, you can see the drop of 3.2% was met with a bounce of 3.5% or we have erased the downside movement between the vertical lines. We remain cautious, but optimistic that the Santa Rally may yet be positive. Tomorrow is the deciding factor.

Manage the risk short term the party is far from over.

 

The VIX index jumped above 22.7 as expected on Friday, but fell to 15 as the fear factor subsided the last two trading days. The deal on the cliff issues are the reason for the rally thus far. The uncertainty from the 18th through the 28th of December pushed the fear factor up… and the confidence of the deal pulled the fear out of the markets over the last two days. SVXY rallied 9.7% today as volatility evaporated.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РStalled in a trading range of 3030 on the upside and 2960 on the downside. The index closed right on 2960 at the bottom of the current range and support on Friday. Bounced on Monday to close at  3019. Wednesday the index closed above the range at 3090 on positive trading. 3107 is the next level to clear on the upside and would be our entry point based on the confirmation of the move higher.

Dow Jones 30 Index РThe support of 13,080 short term was broken Friday showing the worst results for the major indexes. The bounce on Monday and Wednesday put it back above that level for now. Again, wait and see how this plays out. Two day bounce back to the December high. Move above the next resistance level is key for the broad index.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Small caps are testing the previous highs already? Investors looking to take no risk again?

Financials РXLF was one of the stronger sectors during the selling and has moved to a new high at $16.80. Look for a test near the $16.40 level and entry point if it holds the test. The gap open negated the ability to buy at $16.40 today.

Basic Materials РXLB made a move back to the $36.80 support. The outlook is positive, but the risk is high overall. The move to a new high was similar to the financials with a gap higher and close at the new high. This is another sector to like on the upside as we look for a test of the move on Wednesday.

The gap on Wednesday left many of the play opportunities well above our entry levels. Thus, we wait to see how the market and investors react to the fiscal deal. This is no time for assumptions as we move forward with a cautious outlook.

2) Currency:

Dollar РStarted out lower on Wednesday, but turned to close higher. Watch as the move sideways gather attention relative to direction. Needs to make a definitive move to the upside in order to play.

 

Euro РThe euro breaking above the $130 resistance mark on FXE. Testing the $130 breakout.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped to 1.84% and the 30 year to 3.05%. The downside risk in Treasury bonds remains, and has accelerated on the cliff negotiations. We will see how this plays out on Wednesday. TBT could still have some upside in it if the rally in the markets continue.

High Yield Bonds РTesting the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. They have bounced off the December lows, but lack much in terms of upside conviction. Even the breakout move on Wednesday seems lackluster. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. The bounce off the lows didn’t hold short term and the new low today was not pretty. Short natural gas seems to be the better opportunity.

OIL РOil has been stuck in trading range, but on Monday moved above the top end of the range and today continued higher towards $93. Still looking for clarity in trading relative to the price of crude. The upside is in play, and the breakout on Monday is confirmed to the upside.  The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70. (STOP $21.45)

UGA РGasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. Manage risk if you take any trades here. UGA at $58.50 Entry? Watch move higher today to confirm it holds.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We are in the midst of a test of $161 on GLD. The bounce back to $163.50 on Wednesday showed there are still interested buyers. $164.80 is the entry point.

Silver – SLV gapped higher and is holding above $30. Watch for upside trade to $31.60.

DBB – Base Metals failed to hold support at $19.10 last week, but resumed the move on Monday. The sector has struggled to hold the upside. Watching for opportunity on upside to continue. gapped higher on Wednesday. Watch to see if there is a pullback opportunity.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain. Resumed higher today on the cliff resolution.

WATCH: EFA – Moved above $56.80 resistance and the uptrend short term continues. Stick with the uptrend play for now as it holds support.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range was a positive trade entry at $33.25. Manage your risk and raise stop to $36.75. Falling yen is driving the stocks higher. Some topping in play – manage your risk.

WATCH: FXI – China has firmly established the uptrend off the November low. Clearing the $38.10 resistance on FXI was a plus as the upside continued. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Cleared the resistance at $39.50 – 40.50 on the gap higher Wednesday.

WATCH: IEV – Europe continues to rally despite all the negative reports and sovereign debt issues. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently for IEV. Upside target is $45.50 going forward.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90 Gapped open on Wednesday, but still of interest on test of the move.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range and trading higher for now. HOLD.

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.