Earnings Prompt a Shift In Direction

Friday, October 19th

No question about direction in Trading as stocks sold  from the beginning of trading to the end. As we stated in our notes on Thursday, the shift in earnings momentum with Google, Microsoft, Chipotle and others was enough to shake confidence that had been building on a positive start to earnings. The move on Friday opens the speculation door for the sellers even wider and they may be willing to see how far they can push in the coming week of trading. The key is to never assume anything, but be prepared for a shift in direction if the sellers get the upper hand.

Technology has been a train wreck relative to earnings. The revenue has been the key data point relative to the earnings. The numbers from Microsoft missed as a result of PC sales as expected, but they also stated that business enterprise sales were down. That points to what many analyst have been warning about… businesses aren’t buying. Business consumption is one of the key drivers to revenue. IBM showed similar results earlier in the week in their earnings. Oracle announced four weeks ago and they referred to the same challenge. Thus, technology stocks have been under pressure all week and have been in a downtrend the last four weeks. A look at the chart of XLK shows the long term trend is still up, but the move on Thursday and Friday is now bringing the 200 day moving average into play.

The big heavy weight in the technology sector continues to Apple. Friday the drop below $623 was a big negative not only for the stock, but the NASDAQ 100 index, which closed below support of 2723. The uptrend line for Apple off the May low was broken and brings $583 into play as the next support. As goes Apple… you can fill in the blank with plenty of impact stocks, sectors and markets. The move lower was one of the bigger data points on Friday, Google just added fuel to the fire.

The long banks and short tech play has been the winner over the last month. Banks have held up well and Friday they even managed to fall less than the averages with KBE dropping only 0.6% or half of the S&P 500 index. Despite some revenue misses the earnings have been positive for the sector. The benefactor has been an improving housing market and an accommodating Fed.

Economic news was better, but lost in the earnings data. The Philly Fed report improved for the first time since April. The positive 5.7 reading versus a negative 1.9 for September is a positive for the manufacturing sector. The Leading Economic Indicators rose 0.6% versus the 0.1% expected. Retail sales were up 1.1% and the core data was good at a gain of 0.9%. Inflation on core products was still low, but gasoline and food remain a problem for the average consumer. Overall positive news from the economic reports, but the emphasis this week was on earnings.

It is definitely time to play defense and shift our mindset and outlook short term. When volatility rises the timeline of our holdings have to contract and we will be make those adjustments in our models and holding going forward.

What am I watching?

NASDAQ 100 Index on the downside break of support at 2723. How far does this go and what cost to the overall market? QID is in play for a trade.

Semiconductors bounced 3.7% to start the week… we questioned the move with the selling on Thursday? If the downside gains momentum watch for short play on Technology sector. Thus, the play in TECS – 3X leverage short (high risk)¬†trade for those who are disciplined played out on Friday with¬†a move of 6.7% on Friday. The downside is still in play.

Natural Gas fell 4.2% and then bounced 4%. The trade in natural gas is on the upside short term. Watch for a move to $24 on UNG if the market volatility remains.

Gold fell to support near $1730. Watch for short short term selling to kick in and a shor play in GLL. $60 entry and $64.10 target. Silver is in a similar state with ZSL the short play.

China continues to move higher as investors warm to the change in data. Buyers are putting money to work. FXI cleared $35.70 for entry on confirmation of the break higher. Watch for a pullback test if the rest of the world shifts in sentiment. Add to plays if the test develops in the coming week of trading.

KIE leading the financials. Big test of the breakout on Friday. Watch for upside play or short if we break lower.

Gasoline РUGA РHit against resistance again $61.40 and tested $58.75 is support. The commodity failed to hold support and offered the short play based on our post Wednesday. Short play if we break support, entry of short near the $56.50 level. Still room on the downside play.

Apple Р(AAPL) Failed to hold support at the $623 level?  Short play still a possibility into earnings on Thursday.

Watch for more posts to the Watch List on Sunday…. This is getting interesting.

Below we address the sectors looking forward:

1) US Equities:

S&P 500 Index / Sectors-to-Watch РThe index moved back near the 1430 support after approaching the top end of the trading range on Thursday. The chart of the index below shows the trading range we have been in for the last four weeks. The momentum shifted to the downside on Friday and we have to be watch next week to see how this plays out. The key is a shift in belief that has built over the last two weeks. The downside is gaining  traction as investor worry about the US economic picture worsening not improving. The chatter is growing and it has the making of a pullback or test of the long term uptrend. Watch 1430, then 1420 as support next week. A break lower could allow the sellers to test further.

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. It also reflects the trading range of the index during this period as well. The leadership has been Healthcare, Consumer Staples and Utilities. Not exactly the sector you want to see on top if the index is going to make a move higher. The most glaring shift in the chart has been in the technology sector at the bottom the last couple of trading days. The lack of growth in the economic picture is reflected in the leadership and the losers.

Financials – Tested the previous high at $16.40, but followed the downside on Friday. Still in an uptrend, but watch how the week unfolds relative to selling. We have tightened the stop to protect the downside. The sector remains one of stronger fundamentally, but you never fight the tape. Remember, you can always buy positions back when the negative sentiment is done.

WATCH: XLF – Entry $16.10 Hit entry on Wednesday – Stop $15.85

Energy – The sector made a big reversal on Friday giving up more than half of the gains on the week. $72.50 is still the support level to watch. This has become a trading sector short term as the volatility has picked up. Watch how this unfolds on Monday.

WATCH: XLE – Broke support and hit stop at $74.50.

Telecom – Weakness in the big cap stocks continues to drag the sector lower. Despite the positive earnings the brea of previous low and the 50 day moving average puts the downtrend in play again. We hit our stop at $25 and now watch to see how this plays out short term. VZ and T reversed in trading on Friday, but they are still worth watching going forward.

WATCH: IYZ – $25.75 Entry Added – Stop $25 (HIT STOP FRIDAY)

Healthcare – Back to the bottom end of the trading range in one day! That is not the action we were looking for from the sector. We hit our stop on IHE after the breakout on Wednesday. Time to be patient and let the noise settle for now.

WATCH – IHE – HIT STOP on Reversal

NASDAQ Index РThe index has been under pressure from the large cap technology stocks selling, and that expanded with Google and Microsoft earnings. The big gap lower on the news pushed the index lower by 3.5% on Thursday and Friday, giving back all he gains on the week and then some. The shift lower brought the QID trade back into the picture on Friday at break of $66.60 on QQQ.

WATCH: – QID hit entry point at $28.90 on Friday. $31.05 target. Watch for a test of the move early in the week. $29.20 test would off a point to add to the position.

Transportation Index РThe transports bounced off support last week at the $86.75 mark on IYT. They were chugging along nicely, but were hit by the negative sentiment on Friday. Hit the stop and closed near support at $90. Back to the drawing board as the sector remaining in a broad trading range.

WATCH: IYT – Entry $90 – retest of support. Added at $90 on Tuesday. Stop – $90 break even (HIT STOP FRIDAY)

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 abated as fear crept back into the markets. Watch the bounce in play on the buck.

WATCH: Trading range $27.15 – 27.60.

3) Fixed Income:

Treasury Bonds – Bond outlook shifted to volatility along with stocks. Yields move above 3% on the thirty year bond only to move lower on Friday. The volatility isn’t worth trading at this point and we will watch for the next opportunity.

WATCH: TLT – Downtrend line off the July high.

High Yield Bonds – We questioned the downside risk over the last month, but we have now bounced as risk trade is on again. Watching the upside test near the $93.90 level. The bonds reversed course with the selling on Friday. Watch the downside risk. As stocks go, so will the bonds.

WATCH: HYG – Stop at $92.75 (no positions currently)

4) Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. Watch for shift in direction short term. Mixed bag of volatility based on the data and speculation.

WATCH: GLD – $167 support in play… Watch for short plays to pick up. GLL breakout.

WATCH: SLV – Broke lower took out support and open the short play. ZSL breakout.

WATCH: DBB – Tested lower and the selling is back. No support yet — $18.20 – SLX jumped higher and cleared $46.50 resistance… reversed on Friday and could follow the overall sector lower. JJC broke lower from consolidation pattern and is going down. (BOM is short, but no volume)

WATCH: OIL – up/down??? Down is the current move in reaction to the economic and growth outlook. Friday’s negative impact from stocks shows in the chart. Watch the $87.50 level on crude as a short term target. DTO or other short oil plays picking up momentum.

WATCH: UNG – Fell 4.2% and then bounce 4%??? Volatility is alive and well. Broke above key resistance at $22.60 and looking for a move to $24. Trading sector for now.

5) Global Markets: The global markets bounced have bounced off the test last week, moved back towards the high in September, but now are testing in sympathy with the US markets. Watch and let this play out short term.

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

WATCH: EEM – Entry $42.10 — Stop $41.60 –¬† (HIT STOP FRIDAY) – Watch this sector is still a benefactor of the stimulus globally. Will play out in time.

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. Broke higher Thursday and tested back on Friday – watch the downside risk of the Fed in the sector.

WATCH: IYR – Entry $64.10 — Stop $64.50 (RAISED STOP)

WATCH: REM – Shift in sentiment and broke support at $15 as the downside gained momentum. Watch a move above $14.50 as possible entry.

WATCH – 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) Рthey continue to move steadily higher. Testing the highs with some selling.

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

Watch: International High Yield Bonds (IHY) РTesting, but big break higher, pulled back and watching for entry near $26.38.

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!