Dow & NASDAQ Deal with Earnings Short Fall

Wednesday, October 17th

Another up day for the broad indexes, but we remain in the trading range on the S&P 500 Index. 1465 is the previous high and the buyers have been willing to push the index back towards that level. The primary question seems to be focused more on the worries in the market than if the current momentum will break to a new high? Intel held the NASDAQ down and IBM held the Dow down as earnings were a disappoint for both stocks.

The current driver remains earnings. The news has been positive for the most part with some negative data on revenue. The top line numbers continue to come in weaker. However, the companies have done a solid job of cutting costs and keeping the profits moving. Unfortunately some of that has been a reduction in wages by not hiring additional staff. IBM was a drag on the Dow today as their earnings disappointed on the revenue side. Intel beat expectation, but the losses still added up and the two stocks together hit the technology sector which closed lower on the day. Technology remains a weak link overall for the broad market indexes.

Banks struggled on Tuesday to move higher, but managed to bounce back some on Wednesday. KBE was up 1.6% and holding above support. Bank of America announced earnings prior to the open today and beat expectations. After a early move to the upside the stocks closed flat on the day. I am still positive on the sector and today’s bounce off support keeps it in play short term.¬†KRE, regional banks bounced 1.6% as well to stop of the decline in the sector short term. KIE continued higher as the insurance stocks have upside momentum for now. XLF was up 1.3% as the broader sector overall has a positive day.

Semiconductors fell 0.6% on the day following some upside off the lows, but the sector remains under pressure on the downside. Look for SMH to move above $31.65 for positive short term. AMD was one of the few stocks higher in the sector on the day.

Economic news was positive with the housing starts climbing 15% in September. Tomorrow we will get the jobless claims, leading economic indicators and Philly Fed. Each will be watched for improvements.

Utilities broke higher again today after consolidating near support. The move above $36.80 on XLU today was on three times higher volume. Watch the upside going forward for the sector and the stocks.

What am I watching?

Semiconductors bounced 3.7% to start the week… can they follow through and provide a trade opportunity? Some selling on Wednesday, but the upside is still¬†a possibility.

Treasury Bonds РTLT pushed towards resistance at $124.50 on the worries building last week. Now it has pulled back again and $120.85 close and $120.50 is support to watch on the downside. We are establishing a trading range short term.  The downside move is a follow through to the three day sell off in bonds.

Natural Gas fell 4.2% last two days. The test of support is the next course of action at $21.40 on UNG. Held support on Wednesday and FCG moved above $17.95 as a trade opportunity also.

China broke out despite all the talk. Buyers are putting money to work. FXI cleared $35.70for entry on confirmation of the break higher. Manage your downside risk on the trade. $36.85 stop works here.

Banks continue with volatility and today they bounced off support. KBE above $23.90 gets interesting again.

NASDAQ 100 index – break back above the 2783 level is key.

Gasoline – UGA – Hit against resistance again $61.40 and is testing lower. $58.75 is support. Watch to see if it holds going forwards? Short play if we break lower. Broke lower today inviting the short plays.

Apple – (AAPL) Can the stock hold support at the $623 level? Yes, is the answer for now. The 2.3% gain on Tuesday puts the upside opportunity in play along with the test of the move today. Earnings are next week on the 24th.

Telecom has selling from the large cap stocks. This is pushing the index lower overall, but the Verizon and AT&T charts reflect the primary weakness in the sector. Monitor the opportunities as both have established a support mark. If they head higher look for positions in both.

Housing (XHB) bounced off support at the $24.50 mark and moved back towards the high. Downgrades in the sector have not helped, but the upside is still well within grasp for those showing improving earnings. Still strong outlook if we can find some financing for interested and qualified buyers.

Below we address the sectors looking forward:

1) US Equities:

S&P 500 Sectors-to-Watch РThe index bounced back above the 1430 support on the close hitting 1460 on the day. 1420 is the key level for the index to hold support and we now bring the 1465 high back into play for the index. The challenge or test of support last week has held and we are in the process of establishing another pivot point for the index. Basic Materials, Healthcare, Financials and Energy are the leaders off the 10/12 low.

The Scatter Graph below is run from a starting point off the high on 9/14 following the FOMC meeting rally and the current high. As you can see we drifted lower and tested support again. The leaders turned lower last week, but as seen on the chart they have turned up again. Utilities, Healthcare and Consumer Staples are moving higher. Financials have now come back into the picture on the upside.

The next pivot point we are watching is the high on October 4th and that is showing Basic Materials, Energy, Financials and Industrials as the leaders. Technology is the laggard which failed to hold the bounce higher today.

Financials –¬† We want to watch this during the current rally and let the leadership be defined. KIE, SPDR Insurance ETF is taking the lead within the sector as it hits a new high on Tuesday. Banks have struggled and we have to watch the volatility in the stocks.

WATCH: XLF – Entry $16.10 Hit entry on Wednesday

Energy РThe sector has been churning on the up and down movement in crude. Moved through the top end of the range on Wednesday for the entry.  Stocks ar e moving short term.

WATCH: XLE – Trading range $72.50 – 74.50 for now. $74.50 Entry Wednesday.

Telecom – Weakness in the big cap stocks continues to drag the sector lower. Looking for a bounce off support near term.

WATCH: IYZ – $25.75 Entry Added – Stop $25 / WATCH: VZ & T weakness as a buying opportunity. Both found support watching for entry points. T- $36.21 Entry / VZ – $45 Entry.

Healthcare – Big day for the sector as it moves back to the previous high. Looking for some new leadership in the sector. The pharma companies were the leader Tuesday and followed through on Wednesday.

WATCH – IHE – Leadership? Breakout and play opportunity at $91.70. ENTRY $91.70 Wednesday.

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling. The positive bounce on Tuesday is worth tracking, but we have to aware of the overhead resistance.

WATCH: – QQQ – Entry $68.40

Transportation Index – The transports bounced off support last week at the $86.75 mark on IYT. They were chugging along nicely, but hit some resistance as the broad indexes have been selling. Still looking for this to be an indicator on the upside or downside for the economic picture short term.

WATCH: IYT – Entry $90 – retest of support near the $86.80 mark and bounce. Added at $90 on Tuesday.

2) Currency:

Dollar – The dollar, like stocks, is being pushed up and down based on the daily sentiment towards Europe and the global economic picture. The downside pressure on the dollar has met support currently and bounced. Looking for a clear direction on the buck.

WATCH: UDN – Entry: $27.40 Added on Tuesday. Stop – $27.35

3) Fixed Income:

Treasury Bonds – Bond outlook shifted lower again on the buying in stocks. Be patient here and let the trade set up short term. $65.35 entry for TBT.

WATCH: TLT – Moving lower again TBF opportunity? Short play is on again with the break above resistance on TBT. $65.35 Entry…

High Yield Bonds – Question: Is there are bubble in the High Yield Bond Sector? HYG recently tumbled from $94 to support at $91.60. While the decline was only 2.5%, the show of volatility and risk relative to the price of these bonds was made abundantly clear. Is the party over in the sector or is this a buying opportunity? A break of the near term support would be a exit now and ask questions later event. We have bounced, but there is still a concern for the bond class. $91 Stop is good.

Looks like another run to the upside is developing. The break above $92.70 was a positive for the bonds.

WATCH: HYG breaking higher as investors put the risk trade on again.

4) Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. Watch for shift in direction short term. Small bounce on Tuesday – watch to see how the price moves.

WATCH: GLD РBroke support and bounced slightly. $170.50 entry? / SLV РBroke lower, but found some support? Entry $32.30.

WATCH: DBB – Tested lower again as the selling accelerated. No support yet — $18.20 – Held? SLX¬†jumped higher and cleared $46.50 resistance. JJC was higher as well and FCX broke above resistance at $41.60

WATCH: OIL – up/down??? Watch to see if we gain any short term clarity. Stocks are moving despite the lack of enthusiasm for oil. XLE moved back above the $74.50 mark.

WATCH: UNG – Fell 4.2% last two days – but bounced today. Watch the test of support near $21.50. FCG broke out as well above $17.95. Hit entry point today.

5) Global Markets: The global markets bounced last week off the low at $53 on EFA. It has been testing the support level again along with the 50 day moving average. Bounced off support and followed through higher on the news from Spain on Tuesday. 4.7% gain in two days and it looks ready to follow through.

WATCH: EFA – Moving higher again. $54.75 Entry — Stop $$53.80

WATCH: EEM – Entry $42.10 — Stop $41.60 – Break higher on Wednesday

6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). Watch your downside risk if you still own this sector. We are looking for upside play if support holds, watch the $64.80 level for entry on upside. Testing without any conviction for now.

WATCH: IYR – Entry $64.10 — Stop $63.75

WATCH: REM РShift in sentiment and broke support at $15 as the downside gained momentum. Watch a move above $14.50 as possible entry. Hit today РWatch at $14.75 entry.  NLY is acting the same short term as money rotates from the sector. Watch for support?$16.25 entry possible.

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80 which it hit today for an entry. $11.81 Entry – Stop $11.74

WATCH: Emerging market bonds (EMB) – they continue to move steadily higher. Testing the highs.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing, but big break higher on the day up 1.6%.

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 downside risk determines your long term results. Trade Smart!