Early selling equals late buying

OUTLOOK: August 10th

The sellers once again attempted to take control of the market direction, but the buyer stepped in to push the indexes back near even on the day. Volatility again moved higher on the uncertainty hitting 12.6 in early trading and closed at 11.1 up slightly versus Tuesday’s close. What is the cause of the volatility? North Korea bantering with Trump over missiles. The worries pushed money to other sectors and the sidelines. Gold enjoyed the banter by pushing the price higher on the day. There is plenty to watch, evaluate and adjust to going forward and if the volatility continues to rise for these reasons stocks will react negatively short term. Validation and risk management are the buzzes is the key for now.

Five sectors ended Wednesday on the upside with consumer staples (XLP) and healthcare (XLV) leading the upside. Both rallied off the lows of the day to end in positive territory. The downside was led by telecom (IYZ) and consumer discretionary (XLY). The reversal in telecom is challenging the bounce off the low in July. The S&P 500 index closed flat on the day as the early selling was met with some buying and the close was 2474 and still near the highs and a consolidation wedge is present on the chart. The biggest movers in the index on Wednesday were XEC (bottom reversal and solid move higher), DXC (gap higher and break from the trading range), IFF (double bottom move higher), IRM (continuation move with a break from flag pattern), and MKC (bottoming attempt to move higher). The downside leadership came from XRAY, PCLN, DIS, GPS and DISCA. Each confirmed downside break in patterns and some short opportunities. Gold (GLD) moved through the $120.45 resistance but tested lower only to move higher again. Positive day for gold, but looking for how this unfolds near term. The dollar (UDN) continues to struggle with the dovish outlook from the Fed and their shift to liquidate their balance sheet and held Monday. The emerging markets (EEM) gapped higher from the trading range to new high and tested on Wednesday the move. The Volatility Index (VIX) closed at 11.1 with intraday activity getting investors attention. Watching how it unfolds and what opportunities it presents if it continues higher. Manage your risk and stay focused on the horizon, not the rear-view mirror.

The scans for Wednesday were unchanged for the most part with the Volatility Index (VXX) again raising plenty of questions. The shift in attitude is worth watching in the trading today as Trump and North Korea create some worries. The Utilities and defensive stocks are the leadership. Country ETFs continue to show positive trends. Watching how the downside unfolds today. Natural gas (UNG) made an upside move with a bottom reversal. Gold miners (GDX) made a positive move along with gold (GLD). Silver (SLV) tagged along for the ride with gold. China (FXI) erased the gains from Tuesday keeping the index alive for now. Small caps (IWM) continues to look weak as the selling continued today. Crude oil (USO) made a positive move following the inventory data and attempting to break higher from the flag pattern on the chart. Treasury bonds (TLT) pushed higher as money continued to rotate towards safety. Taking what the market gives and watching for trends, reversals, support, and volume… they will lead you to what is moving and the best opportunities for trades currently.

The was jobs report put a positive end to an otherwise negative week. The shift on the charts is to a sideways movement of consolidation with value or safety driving the direction. What does all of that mean? Simply put nerves are rising about the seven-year uptrend for the markets. Data isn’t supporting the moves as the economy shows modest to no growth overall. The unemployment data on the surface looks great, but income and amounts of people leaving the job force raise plenty of questions. Two charts that validate the rotation last week are IWM -1.3% and DIA +1.2%. This movement is worth our attention as the new week unfolds. Crude oil remains the leader, but energy (XLE) has not followed the lead. The move in IEO and XOP on Friday got my attention, but they will need to follow through to gain any traction. The undercurrent of worry remains along with some speculation on where the markets go near term. The VIX index moved off the lowest point reacting to the chatter about Fed activity impacting stocks looking forward. The move lower on Friday reflects the lack of anxiety present in the markets currently. There is plenty to ponder both positive and negative going forward. Earnings are helping with individual stocks, but not the sectors. As seen in tracking the S&P 500 leadership the biggest moves have come from positive earnings. Volume was weak for the week as investor enthusiasm for risk fades. Data is still not driving… news and speculation are. The key word remains to be PATIENCE. Not something many traders like. We all want to believe we can see forward, but the reality is we can only see today. Thus, we must do what our strategy tells us to do today and tomorrow will take care of itself. Hard lessons to learn as our analytical brain wants us to believe we have the solution and can predict the future. Keep your stops in place and your eyes focused on the horizon taking what the market gives.

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 is back with traders exiting the sector and looking for more interesting ground. The Senate failed to pass healthcare reform and can see the impact. No positions as our stops were hit and we watch to see how the current test lower sets up… short trades are starting to look attractive. Large caps look more attractive currently with XBI attempting a bottom reversal from the recent selling. 

REITs (IYR) had been lagging in response to interest rate worries related to the Fed promise to hike rates multiple times this year. The sector tested the $76 level of support and bounced back to resistance and tested, and bounced… The shift in outlook for the Fed holding rates steady for now has shifted money back to the REITs. We continue to focus on managing our risk and collecting our dividend as this all unfolds. This is a growth and dividend holding with a 4.2% dividend currently. Entry at $75.75. Stop $76.25 (adjusted).

Treasury yields (TNX) moved back to the 2.4% level as the Fed talked of raising interest rates. The move to 2.2% came on the comments from Ms. Yellen and the Fed taking on a more dovish role towards rates. Just when you thought it was safe to go back into the water… the Fed changes its mind. TLT rallied on the comments and watching for the opportunity to unfold on a follow through. $124.10 entry, stop $122. TLT moved back to the July highs and tested to end the week… positive for now. Yields continue to deline helping the upside for bonds for the week. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility within the trend is speculation and news driving money. The selling was more of the speculation, just as the current buying is on speculation the dollar and the Fed will remain neutral. Bounced off support at the $114 level, cleared resistance at the $117.38 mark (entry) and heading towards the $120 target (hit last week). Stop $117. Negative move on the positive jobs reports Friday… watching this week. Break higher continues the uptrend. 

Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but the weaker dollar is having some influence near term. The move above $48 this week brought plenty of speculation and the bottom reversal on the double bottom pattern is in full bloom. Entry hit at $47.50, stop $44.35. Taking what the commodity gives and not asking any questions… purely managed as a technical trade. Positive news on the supply data helping the short term outlook. 

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices. The move lower and test of the $63.70 level kept the downside in question… but, the bounce on the rise in crude only adds to the confusion. $66.25 level to watch for opportunity. Close above it and looking for follow through and entry at $67. Need some volume and conviction from investors.

Volatility Index (VIX) This week was more interesting for the index closing at 10 showing some activity, but not enough to rock stocks. The Fed comments following the FOMC meeting brings some anxiety and with it, we will watch what transpires short term. Movement in the index reflects investors nerves over North Korea. 

The sectors were rotating again last week as money moves towards value stocks and bonds. We have to take it one day at a time and see how it all unfolds. The S&P 500 and Dow indexes are testing the moves to new highs and the NASDAQ is a cause for concern following its positive move higher. Our job is to let the opportunities develop… have a strategy for trading or investing in them… and then managing the process based on our belief and disciplined approach. Sounds simple? It is except for the six inches between our ears that process what we hear as it impacts our beliefs. Have a strategy for every position and trade/invest according to the strategy… don’t let the news or others sway you from the task at hand.

Daily Scan Results:

WEDNESDAY’s Scans 8/10: Attempt to establish downside activity but the buyers stepped in to keep the indexes at par on the day.

  • Natural Gas (UNG) positive on the supply data. An attempt on the bottom reversal in place. Watching for follow through and entry at the $6.60 mark.
  • Gold Miners (GDX/NUGT) bounced with the price of gold following through on a break above the $120 level.
  • Small Caps (IWM/TZA) downside made move and looking for it to hold support near at $139 and broke on the close Wednesday. Short trade setup.
  • S&P 500 index (SPY) topping pattern in play. NASDAQ (QQQ) topping pattern in play. Dow (DIA) Testing the new highs. The parts make up the whole, but the whole determines the direction. Watching how all three unfold near term.
  • Watching how the leadership unfolds… rotation? hot money? trends? All offer opportunities and we have to be patient in letting them develop.

TUESDAY’s Scans 8/9: downside day, but not dominate relative to the selling.

  • Utilities (XLU/UPW) leading the upside move with a solid trend back towards the June highs.
  • Volatility Index (VXX/UVXY) anxiety begins! The jump in nerves showed in the index and stocks. Move above $11 worth our attention and trading opportunity at $11.70 entry.
  • Biotech (IBB/LABD) watching how the downside unfolds… or bounce off support? Plenty of attention still in the sector short term.
  • China (GXC/YINN) the upside gap is a continuation of the uptrend. Positive run for the country ETF and the individual stocks… see Monday notes.
  • Base Metals (DBB) vertical move upside as the metals move with copper, aluminum and other gaining on the day.

Some other moves to watch TZA, SLV, TMV, UGAZ, SCO, and SRS.

MONDAY’s Scans (8/8): a positive day for the indexes and the leadership, but no real shifts in the overall trend. Looking for some leadership in the data, but that continues to be lackluster as the economy drags forward. Despite all the whining and complaining the market continues to inch higher and we progress with it albeit with our stops in place.

  • Semiconductors (SOXX/SOXL) bounce from the recent test and remain challenged on the upside… individual opportunities look better, but the risk is also higher in the current environment. ON, LRCX, NVDA, TSM, and MCHP offer positive looks.
  • Brazil (EWZ/BRZU) showing positive upside again in the current uptrend.
  • Energy (XLE/ERY) downside weakness showing again as the oil services (OIH) stocks show more weakness.
  • China (GXC) holding the uptrend with KWEB, SINA, BABA, HTHT, BZUN and other pushing higher in the current uptrend.
  • Technology (XLK/TECL) upside in play with a move to the top of the consolidation pattern. Worth digging into the sector for the leaders versus the whole. AAPL, NVDA and MCHP are few on the move.

Still proceeding with caution as this current environment unfolds. LBJ, DBB, EDC, TAN and KOL all in positive uptrends as well.

FRIDAY’s Scans (8/4): A positive day with the jobs report helping push stocks to the upside. We will take it in stride and see how the upside unfolds to start the new week. Taking it one day at a time as the future unfolds.

  • Biotech (IBB/LABU) bounced off support and watching for a follow through to the move and possible bottom reversal short term.
  • Gold Miners (GDX/DUST) negative response to the economic data and sold lower… watching how this unfolds relative to a short trade.
  • Homebuilders (ITB/NAIL0 showing positive signs again with a new high in the current uptrend. BLDR, IBP and BLD show positive breaks upside in the scan of the sector.
  • Crude Oil (USO/UCO) positive move testing with a wedge pattern at the top of the current uptrend. Watching how this unfolds in the coming week. FCG, IEO, XOP all showed possible bottom reversals?
  • Financials (XLF/FAS) upside break and continuation of the uptrend in play. Large banks (KBE) and insurance leading the sector higher (KIE).

Positive end to a lazy week for stocks… need the follow through on Monday if we are to see improvements above and across the sectors.

THURSDAY’s Scans (8/3): Not the best of days for the broad markets. The downside was modest, but the internals are a concern. Small and mid caps are showing weakness near term with a test of support. The most common pattern in the scans are topping patterns as we test the first levels of support.

  • Semiconductors (SOXX/SOXS) confirmed the move below the 50 DMA and setting up a downside opportunity.
  • Treasury Bonds (TLT/TMF) solid upside move as yields test support at 2.2%. Break higher positive for our position in the bond.
  • Biotech (IBB/LABD) downside looking positive as the bottom reversal in the short ETF shows a positive pattern.
  • Volatility Index (VXX/UVXY) upside possibility as the nervous talk rises.
  • Solar (TAN) upside still in play as buyers continue to like the sector. Leadership worth digging into.

Movement is still slow and questionable as it relates to the broad markets. Watching how this all unfolds near term. Patience is key.

 

Sector Rotation:

  • XLB – Materials moved higher pushing above the $50 level and moving toward 2015 high. Hit the entry at $48, Stop $54.50 (STOP HIT). Moved to a new high clearing the $54 mark. Still testing support at $54 and watching how it unfolds.
  • XLU – Utilities bounce off support at the $50.88 level and have followed through nicely the last month. Entry $52.25, Stop $51. upside continues. 
  • 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. Watching for now how this unfolds as sector moved back above the $31.35 mark. Entry $31.60, Stop $30.90. Some buying? Watching the $32.65 mark for the upside continuation.
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The Fed talks last week to stand still on rates put a positive reversal in play. Watching for a move above $55 to get my interest near term. Some help in the upside bounce off the low as earnings help the sector.
  • XLI – Industrials – remains in a positive uptrend since the break higher in November. Entry $67, Stop $66. The positive trend was questioned with the downside move. An uptrend in place as the money flow remains positive but watching how it starts the week.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. There is still the issue of uncertainty towards the stocks. Held $63.70 support and bounced as the dollar weakness helps the price of crude. To many question marks for now to take any positions. Scanning the sector is the only way to trade currently up or down. NFX, DVN, MRO, HES, and APA post positive moves to end the week.
  • XLV – Healthcare hit the low and established a pivot reversal relative to rumors around the election… then the election… attempted upside move and trend reversal… but, failed to hold the move. The second attempt with double bottom worked itself into a break above the $71.78 resistance level. Entry at $70 as cleared resistance. Stop at $78.50 (adjusted). Patience is key as this unfolds. Stops in place with the run higher and test. Trading in a range for now. 
  • XLK – Technology made the move back near the highs as the semiconductors bounce off support. Uptrend breaks short term and test of support at the $54.75 mark in play. Entry $48.50. Stop $56 (adjusted). Semiconductor weakness is the key to how this unfolds near term… they bounced and so did the sector. Give room for this trade to work upside. 
  • XLF – Financials pushed lower on earnings and Fed talk on interest rates. Earnings were good… not great, but worrisome in light of the Fed. That failed to impact the stocks and thus, the downside was in play. Entry $23.85, Stop $24.50 (adjusted). The break above that range was positive as the upside showed some strength, but still cautious as seen in the stalled move. Patient for now. Money rotation as investors look for value trades versus growth.
  • XLY – Discretionary Consumer broke above resistance with a positive trek higher. Entry $83.50. Stop $88.50 (adjusted). Had a positive break to new highs and some leadership from the sector to boot… testing that move at support as the topping pattern unfolds. Cleared $90 resistance and watching. break from consolidation on the downside… watching. 
  • RWR – REITs reacting to the current uncertainty around the Fed and positive attitude towards risk as money made some rotation. 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. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Tested the bottom end of the range and bounced on the Fed comments and now has room to breathe again… patience is key. Traded sideways for the week.

Rotation is back as the Fed talk on interest rates, a weaker dollar, weaker economic picture, and earnings are all pushing money around. I am cautious and optimistic on some sectors and avoiding other. Interesting rumblings about the FOMC meeting as money rotates in response to the action taken. The weaker dollar favors the multinationals and commodities… watching how this will unfold near term. The negative movement in technology, biotech, and semiconductors got the attention of traders… watching how the week unfolds with the rise in volatility in play.

FINAL NOTES:

Investors are nervous plain and simple. Volume is lagging. Data is positive overall for earnings and the winners are being rewarded. Money is rotating to value versus growth. This remains a market in transition and with that comes opportunities. Those are outlined above in the scans and sector notes. 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 for your overall portfolio and manage the risk of your short term trades accordingly. See you next week.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.