Economic data is catalyst for a break higher

Market outlook for September 6th

The major indexes followed through on the upside and break from the trading range. Volume was average and they managed to close near the highs of the day. The gap open made entries a challenge as the risk of the trade rises. Looking for a test of the move today or Monday to provide the opportunity to put money to work. The news was on trade again, but the ADP jobs Survey showed 195k new jobs versus the 142k expected… that sparked the pre-market buying and the indexes gapped at the open. The Fed speaking also added the hope of a 25 basis point cut in rates at the meeting this month. Thus, news about the economic picture possibly improving does matter. We end the week today and watching to see how this unfolds.

The S&P 500 index closed up 38.2points to 2976 as the index breaks from the trading range on average volume. The emphasis remains on trade, but the positive economic data on Thursday helped spark stocks higher. The index broke from the range and gapped above the 2960 level of resistance. Eight of the eleven sectors closed higher on the day led by technology and financials. The downside was led by utilities and REITs as interest rates jumped higher. Plenty of questions remain relative to how this unfolds with the up and down movement, but for now, the buyers showed some moxie pushing stocks higher. The long-term trend remains in question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed up 139.9 points at 8116.83. The index breaks higher from the current trading range. Technology (XLK) stocks led the index higher… QQQ added to the upside with the large-cap stocks gaining 1.8 percent on the day. The gap above resistance at the $190.50 mark was positive as well. Watching how this unfolds moving forward and looking for the best opportunities.

Small-Cap Index (IWM) The sector is leading the downside effort but remains above the $144.65 support. The gap higher on Thursday has my attention as it cleared the $149.58 resistance. 200 DMA is the next hurdle to jump for entry opportunity.

Transports (IYT) The sector sold back to the lows and bounced off support. The $182.43 resistance was cleared and $186.70 is level to hold for trade opportunity.

The dollar (UUP) The dollar moved lower on the trade talk news. Moved back below the $26.77 breakout point. Closed at $26.77 and watching how it unfolds going forward.

The Volatility Index (VIX) closed at 16.27 falling as the tariff banter with China and the US remains in the headlines. The positive news on the economic data helped buyers step in and the volatility decline. Watching how this unfolds.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector tested the $182.55 support again. Bounced and cleared resistance at the $190.44 mark. Challenge hold and move higher.

Biotech (IBB) The sector tested support near the $102 level again. The sector has been content to trade int he $102-107 range for several weeks. Watching how it unfolds. Fell to $101 support and leading the downside move on Tuesday. No change on Wednesday as the sector remains under pressure. Thursday produced small bounce, but not convincing.

Semiconductors (SOXX) The sector shed 4.4% in reaction to the tariffs. Bounced again and remains in the trading range. Tested the $200 level of support. Bounced back to the top end of the range on Wednesday. Thursday led the upside with at 3% gain and break above the $210.92 level of resistance.

Software (IGV) The sector remains in the range established with the upside bias still in play. Patience. Tested the $213.40 support and held. Thursday cleared the $219.08 resistance. Watching for the follow-through.

REITs (IYR) The upside trend remains on the long-term chart. Patience with our long term positions and short term watching how interest rate market unfolds. Holding near the highs. Money rotates hits new highs. Higher rates on Thursday pushed the sector lower… watching how this unfolds.

Treasury Yield 10 Year Bond (TNX) fell to the 1.51% level on all the worries. Money rotated to safety and our TLT trade remains in play on the fear. Stop $142.70. Still watching the Fed talk and once again the trade war. Touches lows at 1.46% as treasury bonds rally higher. Thursday bounced to 1.56% as positive economic data sparks rally in stocks.

Crude oil (USO) Tried to bounce on rumors of supply drawdowns and remains in the current range. Bounced on the tariff talk schedule… positive for oil? Watching support at $52.50 and resistance at $58.25. Trade news sends the price of crude higher. Couldn’t hold the gains on Thursday.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Jumped higher on worries about trade and breaking from the consolidation. The stop is now at $141.10. Trade news sends gold prices higher. Economic data on Thursday sends the metal lower breaks $143.76 support… watching with stops in place.

Emerging Markets (EEM) Broke lower in the trading range as tariff threats add to the worries about an economic slowdown. China helped by announcing they would not retaliate on tariffs for now… stay tuned. Trade impacts the sector by sending prices higher as hopes springs eternal on settlement in October.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the bounce play out as Mr. Trump makes his intentions clear… as does China. Gapped higher on the tariff news. Followed through on Thursday with the second gap on comments about talks in October.

(The notes above are posted every weekend and updated daily Bold Italics)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for September 5th: The trade talk continues to help stocks, but the real catalyst on Thursday was the economic data… ADP report showed a marked improvement in jobs. If the jobs report on Friday is equally positive it could add the needed boost for stocks to reverse the current trend. Productivity data improved along with labor cost… wages are improving finally. Throw in a Fed rate cut at the FOMC meeting this month and investors will buy into the rally. Hope is present and maybe, just maybe, we get some follow through on the upside move. Taking what the market gives and managing the risk.

  • NASDAQ 100 index (QQQ) Followed upside move with a gap higher and break from the trading range. $191 entry. Watching with a stop at $188.90.
  • Semiconductors (SOXX) upside follows through with a gap higher $211 entry and stops $206.
  • Financials (XLF) gapped higher and watching for a test of the move for an entry point. Banks (KBE) and brokers (IAI) leading.
  • Emerging Markets (EEM) gapped higher for the second day led by China (FXI) and Brazil (EWZ).
  • Gold (GLD) and Silver (SLV) gap lower on the reversal of sentiment towards stocks.
  • Watching how this newfound optimism follows through on Friday and into next week.

WEDNESDAY’s Scans for September 4th: The news of talks being scheduled in October pushed the indexes back to the high end of the trading range. The news daily on the topic making people immune to listening. Wall Street takes each piece of data on the topic to trade the swings. The news pushed technology, energy, and industrials higher. The question remains relative to follow through. All the sectors remain in their respective trading ranges as we watch how this unfolds. Hong Kong ISM data fell to 40.8… That followed the US falling below 50… It’s about the economy… eventually this will show up in stock prices.

  • Technology (XLK) bounced back from the selling… something has to give… up or down. SOXX bounced back to the top as well… looking for the follow-through.
  • Energy (XLE) solid bounce after testing lower. Crude oil (USO) bounced nicely on the news. Watching for follow through here as well.
  • Natural Gas (UNG/UGAZ) continues to rally upside and we adjusted our stops accordingly. $15.80
  • Homebuilders (ITB/NAIL) upside remains in play with a solid move higher on Wednesday.
  • Emerging Markets (EEM) bounced as China (FXI) and Hong Kong (EWH) lead upside move. Brazil (EWZ/BRZU) nice bounce as well.
  • Distribution is a concern… higher volume on selling into the bounces. Eventually, this leads to a break lower. Or, it finds enough buyers to start the new trend higher… Watching how this tennis match ends.

TUESDAY’s Scans for September 3rd: Plenty of downside moves as investors react to the news on tariffs. The economic data is bigger concern, but not many headlines about how bad the news was. Contraction in the ISM data for the first time in over three years doesn’t matter? As I have learned, it doesn’t matter until it matters. Maybe since the Fed is buying bonds for the first time since QE it is holding up the markets? That is speculation on my part, but the reality is the data stinks… not a good sign for stocks. Watching how the downside unfolds and if any opportunities arise.

  • Small Caps (IWM) weakest link and short side opportunity.
  • Technology (XLK) showing some strength on the downside turn Wednesday… watching how that unfolds along with semiconductors (SOXX).
  • NASDAQ 100 index (QQQ/SQQQ) fell nearly one percent to lead the NASDAQ lower… short side setup in place.
  • Financials (XLF) short side looks attractive if rates continue lower.
  • Volatility Index (UVXY) closed above the 20 level showing some anxiety in the markets.

MONDAY – Labor Day Holiday.

FRIDAY’s Scans for August 30th: The biggest mover on the day was the volatility index. Watching how that unfolds following a long weekend. The broad markets gave up their gains from the open as money looks for where it will be treated the best. No big changes heading into the weekend and we will watch to see what happens as we begin a new month with plenty of economic data.

  • All the August economic news out with jobs report ending the week. Volatility Index (VIX/UVXY) $32.50 level to watch for upside trade.
  • Coal (KOL) bottom reversal trade opportunity clear $10.90 and followed through on Friday.
  • Brazil (EWZ/BRZU) interesting bottom reversal in play. $25.75 level to clear for the opportunity.
  • Emerging Markets (EEM/EDC) in position to break higher from the bottoming range. Trade only for now.
  • Mexico (EWW) bottom reversal follow through. Nice trade opportunity short term.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials broke support at the $55.95 level and reversed to end the week. Attempt to break from the range… needs to follow through.
  • XLU – Utilities broke from the trading range and continued higher. Collecting the dividend and letting it play out. Hit new highs Wednesday. Higher interest rate move on Thursday creates some selling.
  • IYZ – Telecom held support at $27.62. Watching for a bounce. Breaks above resistance $28.62 on Thursday… watching.
  • XLP – Consumer Staples held support and the uptrend line. Watching how this unfolds near term. Holding near the current highs. Bounced back to new highs Wednesday. Tested the move on Thursday.
  • XLI – Industrials moved back to support in the current trading range and then bounced back to the top of the range. Gapped higher from the trading range.
  • XLE – Energy broke support at $58.19. The short side is still in play. ERY. Oil caught in the crossfire with China and US. Bounced to the $58.19 resistance again and cleared on Thursday… follow through?
  • XLV – Healthcare held support… small bounce followed by modest gain… plenty of work to do.
  • XLK – Technology moves lower on comments about tariffs. Small bounce followed through at the top fo the current range. Gapped higher on positive economic data.
  • XLF – Financials under pressure moved below the 200 DMA and $26.33 support. Small bounce followed with additional gains… plenty of work left. Gapped higher on positive economic data.
  • XLY – Consumer Discretionary moving higher on earnings from the retail sector earnings… need to move above resistance if this is going anywhere. Trying to break higher on Wednesday. Followed through on Thursday.
  • IYR – REITs held $88 support and cleared the $90.80 resistance. Watching and letting it unfold. Remains near the high. Hit new highs on Wednesday. Tested on Thursday with higher interest rates.

There are currently four sectors in confirmed short term uptrend. Four sectors in consolidation or sideways trends. Two in a confirmed downtrend. The result is SPY in a confirmed sideways trend. This is a big adjustment based on the current market environment. Remember the parts make up the whole.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

Thursday: Trade is positive with talks being scheduled. The real boost came from jobs data from the ADP Survey. Any positive bump in the economic data is helpful along with the Fed FOMC meeting on deck. Taking it for what it is… one day of optimism. There will need to be follow through on the upside if the trend is to shift. I would also expect a test of the move higher. The short sellers will likely try selling into optimism. That would give better entry points. Added some positions and looking at how this all unfolds. Stops are in place and letting the markets take the lead and not emotions.

Wednesday: China blinks and says talks will resume in October. No need to rush things. Hong Kong’s ISM sinks to 40.8 this equates to a 4-5% retraction in growth… enough to get the parties to consider talking? Watching how the ups and downs play out as we remain in the current trading range awaiting the catalyst to move up or down. Economic data isn’t helping as the number continue to sag. The Fed stated they were open to cutting rates at the September FOMC meeting. No big changes only new hopes. Watch and take the opportunities presented.

Tuesday: It’s the economy STUPID! That famous line will never be forgotten… or will it. The focus on many remains on the tariff wars with China and the US. What about the contraction now official in the US economic data as ISM slips below 50. Where is the discussion about quantitative easing? Where is the Fed talking about the stimulus? All I can say is the data does matter and the challenge for investors will be how quickly everyone adjusts to the issues at hand. Manage your risk and stay focused on the objective.

Markets found enough buyers to keep them in a five-week trading range. This is currently a market controlled by headlines as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list. Interest rates and Fed banter remains high as well. Throw in Brexit and other global issues and you get the picture. This week we get economic data as we look to see the temperature of the US growth or contraction. Jobs report on Friday as well. The question remains, will the downside continue? Trade is a major issue… but, economic growth is the real issue at the end of the day. Markets fell on the worry of a recession not tariffs directly. Focus on facts like economic data, earnings, and global data reports all out this week. Watch how the hurricane impacts the southeast. Homebuilders remain a benefactor of the lower rates. We remain focused on what is working and what is failing. Therein lies the opportunities. The return to the top end of the current range is on my watch list as well moving into the new trading week. Manage your risk accordingly and let this unfold… one day at a time.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time. 

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.