Early Rally Gives Way to Sellers

Tuesday, August 21st

So much for being bored today, the markets start higher on the ECB outlook for stimulus in Europe. However, stocks spent the balance of the day selling and moving back below yesterday’s close. Not wanting to speculate on the movement today, but you have to protect against the downside should investors elect to take money off the table short term. Prudence is the best course of action moving forward.

Euro optimism was in full bloom today as investors look to put money to work in Europe. The charts reflect the move in FXE, IEV, EFA, and others as they held the early gains today.

The S&P 500 index however failed to hold the break above the 1420 level and actually closed lower on the day and left some scratching their collective heads. Watch to see how this plays out short term. Review the Model Tables for adjusted stops based on today’s activity.

Commodities continue to be the primary driver of activity this week with agriculture, metals and mining stocks leading the way.

Sectors below are updated based forward looking opportunities.

1)  US Equities:

S&P 500 Sectors-to-Watch – The S&P 500 index moved above the March highs hitting 1426 intraday. The move higher was on the ECB stimulus talk and the move lower was on the lack of action. In other words, investors remembered that all we have done is talk and not actions have been taken. Thus, we watch to see how this plays out looking forward.

The leadership remains in technology, consumer services and the energy sectors. Financials did make a break higher and managed to hold on to some of the upside on the day. Watch the banks (KBE) to lead the way higher. The materials and industrial stocks have started to move higher again with utilities, staples and healthcare lagging. The volatility did pick up on the day and is worthy of our attention looking forward.

Telecom – The sector moved higher and is consolidating near the highs. Watch for support at $24.10 and then $23.60. The uptrend remains in play of the June 4th low, but we still need to manage our downside risk.

WATCH: IYZ – Entry – 22.40 – Stop – 23.95

Energy – Uptrend remains in play off the June lows and resistance is in play at $73 on XLE.  Oil services (OIH) is moved above short term resistance at $41.15. Production and exploration (XOP) is testing the support of the 10 day moving average. Watch for the upside to continue, but protect against the downside risk. Crude moved above $97 and hit resistance on Tuesday at $97.80, watch to see if the resistance will stall the advance in oil prices. UGA is at resistance of the March highs near $59. Watch for a continuation or the exit if we break support short term.

WATCH: XLE – Entry @ 69.25. Stop 70.40 —– OIH – Entry $41.50 Stop – $40.20

Financials – The sector hit against resistance at $15 and then made move higher. Still looking for some upside leadership from the sector going forward. Raised stop to break even on the trade. KBE, KRE moved above resistance and looking for more upside. Starting to be a stocks picking sector with BAC and C both breaking above resistance.

WATCH – XLF – Entry @ 14.55 – Stop 14.60

Healthcare – The sector continues to trade sideways. Friday we dropped to support at $38.40 and held today. Hold positions and manage the risk. 50 day moving average is stop. IHF and IHI are moving up nicely off the lows, but XPH is a drag on the progress.

WATCH – XLV – Entry @ 38.10. Stop 50 DMA ($38.20)

Consumer Staples – The sector continues to bump against the high and looking for a follow through on the upside. $35.95 move is the key short term. Large cap dividend stocks are driving the sector higher.

WATCH – XLP – Entry 35.31 – Stop 35.31

Consumer Services – The consumer services stocks have been fragmented to winners and losers. Dig into the ETF for the leaders. The gaming stocks have started to move higher with WYNN, LVS and others making a move. The retail stocks remains a stock picking sector as seen by URBN earnings after hours.

WATCH: XLY – Entry 44.50 – Stop 44.25

Basic Materials – broke above $35.75 resistance to continue the uptrend off the June bottom. Watch the miners as the unrest in South Africa may impact the progress. The metals prices on the other hand have moved higher. Watch and manage the trade short term.

WATCH: XLB – Entry 35.80 – Stop 35.45

NASDAQ Index – Broke through the 3025 mark and the 3065 level last Friday. The upside momentum has been as a result of the technology stocks. The NASDAQ 100 index broke above resistance at the 2660 mark and found the upside move easy with 2785 the next level to clear. The play continues to pan out for now – manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 67.40

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we have now spent the last week trading sideways and testing the move. Took the entry on the move above $79.20 and through the downtrend line. Got the continued move higher above the $80.50 level. Still have to manage the risk of the position.

WATCH: IWM -Entry 79.60 – Stop – 80.10

Volatility Index – The index hit new low at 13.46 on Friday, but jumped to 15 on selling today. The lower volatility has been a question mark looking forward. Watch for ECB or the Fed to be the tie breaker for the VIX.

WATCH: SVXY – Continues higher on low volatility.  VXX – $11.80 Entry if rally continues in the VIX.

2)  Currency:

Dollar – The dollar got thumped today on the positive news for Europe. The risk for the dollar has been stimulus from the Fed and the ECB. The lack of activity from the central banks has been better for the dollar. However, now we have to watch the downside and mange our position in UDN.

WATCH: UDN – Entry $26.40. – Stop $26.10

3)  Fixed Income:

Treasury Bonds – The bond selling has stalled on the uncertainty relative to the Fed or the ECB short term. The yield has moved to 2.9%  and the thirty year bond is flat. The move to 1.8% on the ten year pushed prices lower, but stable now on IEF. TLT moved lower breaking support at $124.60, but finding some support near the $121 level.

WATCH: TBT – $14.80 entry. Stop $16

4)  Commodities:

Agriculture – DBA broke support at $29.70, but bounced back to move back towards the previous highs. The soft commodities are on the rise again as we watch CORN, SOYB, WEAT, etc. are all bouncing higher again.

Crude Oil – Moved higher slowly, but is taking out the short term resistance and attempting to move higher short term. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.85 raise stop (stop on the close)

Gasoline – Solid move off the test the last few weeks. The upside is still in play, but watch oil prices and the stall at resistance. Watching for a test short term on the steep move higher. Don’t be afraid to take some profit off the table short term.

WATCH: UGA – Entry at 52.75 – Stop 57.80

Natural Gas –  There short term support held at $18.30 on UNG. Analyst have turned negative on the commodity bringing the downside in play short term.  Manage risk of the short play.

WATCH: KOLD – Entry 27.15   Raise stop to 27.80

Coal – Started to benefit from the selling in natural gas, but has been testing the move of late. Watch the $24 level as near term support. Watch to add a position on the test of the move if we find support at reasonable level.

WATCH: KOL – Entry $25.20 – Stop $23

Resources and Commodities Strategy (BCX) breaking above resistance to continue higher at $13.92.

WATCH: BCX – Entery $13.95   Stop $13.95. Manage the risk

5)  Global Markets: The global markets responded to the ECB stimulus anticipation. The EAFE index has moved higher this week on the positive outlook for free money. Watch and manage any opportunities short term. If there is no activity near term from the ECB the downside risk will grow for the market.

WATCH: EFA – Entry $50.50 – Stop $51.50

Sweden – Making a break from consolidation and worth watching on the upside. Move above $28.35 positive and looking for a follow through on the country ETF EWD.

WATCH: EWD – $28.35 entry.

China -Broke above short term resistance, stalled and is testing support near $34.25. I expected volatility along the way as China decides to push stimulus at the economic picture. Disappointing data is impacting the outlook short term. Manage the stops. Broke back below the downtrend line on Thursday? Honor the stop at break even.

WATCH: FXI – Entry $34.20 – Stop $34.20

Mexico – Moved against resistance again and still looking for a break out move on the index. Watch the volatility and manage the position.

WATCH: EWW – Entry $62.25 Friday. Stop $61.50

Singapore – moving back above the high at $13. I still like the country looking forward, but the near term weakness isn’t a positive. Manage the risk of the trade short term.

WATCH: EWS – Entry $12.70, Stop $13.10

Brazil Small Cap (BRF) channel top $37.50 with potential move higher. Posted on Wednesday for the opportunity in the global markets moving higher. Solid move higher on Thursday to follow through on the upside breakout. The entry was at $37.60. Manage the trade and Raise Stop to $37.20.

6)  Real Estate (REITS) – The sector remains near the near term highs. Double top (IYR) set up on the downside short term. I like the outlook long term, but short term we remain on hold. Still scanning and looking for the best opportunities.

WATCH: IYR test of support at $63.60 to hold and then bounce.

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) are overbought and we have put this on a wait and see list short term as the bonds have pulled back to support at $118 short term. Watching for the opportunity. The downside may pick up – look for a confirmation either way.


Moves from our Watch List:  1) The miners (XME) are gaining momentum. Worth watching for a move through resistance$42.50 or test of support at $40.50 and bounce higher. Look for play on break higher. Got that on Tuesday – look for entry at $43 on confirmation of the move higher. 2)  Silver Miners (SIL) broke above $19.50 resistance on Monday hitting the entry at $19.75, set stop at breakeven now.  3) GDXJ – Junior Gold Minders ETF breaking above the $20.25 resistance. Follow through on Monday with entry at $20.50. Stop breakeven.   4)  JJG – Grains Total Return ETF is in a flag pattern on the move higher. Hit entry Monday at $63, stop breakeven.   5)  KRE – Regional banks in position to break from the consolidation pattern and resume the uptrend. Watch for entry at $27.90. Hit on Tuesday and set stop at $27.25.

What am I watching:   1) Mortgage REITs (REM) bounced off the selling and headed back towards the previous high and remain in an uptrend test of the move.  2) Downside risk in the broad indexes. SH, Proshares short S&P 500 index ETF is holding lows near $34.75, and entry would be a move above $35 at $35.15.

How major indexes act as they challenge the March highs? More buyers or do the sellers step up? Sellers took the upper hand on Tuesday and worth watching for trade opportunity.

Small cap accelerated on Friday to play catch up? Does it have what it takes to sustain the move higher? NO! The volatility of the sector is like a day trading dream.

VIX moved above 15 on Tuesd – do the sellers step in o

Watch and play according to your risk tolerance. 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.