Gap Lower on Cliff, But A Late Bounce?

Friday – Notes & Research

Are the talks falling apart in Washington? Seems that way based on all the news today. I have done my best to ignore the blather and focus on what matters… my money. The gap lower on Friday is a result of the indecision by Congress to deal with the issue at hand. Where this goes from here is anyone’s guess and the key is to protect ourselves from the downside.

We sold some positions today, worked out of others and we now head into the final trading week of the year. I would like to say I am optimistic about the new year, but in reality I am concerned for everyone investing money into the uncertainty of it all. In my comments this morning I warned about the uncertainty and the impact it has on markets. Today (Friday) was the initial reaction… the longer the unknown goes, the greater the reaction will be on the downside. That is why we worked out  of some positions today. We can buy anything we want back going forward if the tide shifts and we gain clarity.

We reviews all the sector and indexes below and where we stand currently. Where we go now is up to the those in Washington to decide… at least in the short term. Discipline is the key!

Watch List Updates will be posted by 6pm Sunday Evening. 

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The irony on the week comes in the fact that Monday the S&P 500 index gained 17 points to move back to the resistance point of 1430. On Friday the index lost 15 points to close at the support of 1430! Life is interesting sometimes and the 1430 level for the index is once again in play. The outcome still hinges on the resolution on the fiscal budget.  To say we are cautious at this point is an understatement. We exited some sectors today and held just two. Still requires patience here on the upside and the downside.

The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. The leaders have been financials, consumer discretionary, energy and technology. Today Financials consumer staples, basic materials and consumer services were the downside leaders. The downside has to be monitored at this point as the uncertainty is playing with investors minds.

The VIX index jumped above 19.50 on Friday and closed near the top of the current trading range. VXX was up more than 6% again today. The clear break higher is a negative sign for stocks and something we have to watch looking forward.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index – Stalled in a trading range of 3030 on the upside and 2960 on the downside, but managed to break above the top end of the range on Tuesday only to move back there on Friday. Still not certain about the near term direction on the index.

Dow Jones 30 Index – Similar to the NASDAQ the index tested the top end of the trading range at 13,300. The support is 13,080 short term. Watch to hold support or break above the top side resistance. Selling on Friday didn’t help the upside.

WATCH: DIA – Exited Position on Friday.

S&P 400 Midcap Index -The break above the 1000 mark on the index was a positive and a opportunity to trade or add the sector. Manage the short term volatility relative to the objective. Hit stop and took the exit. The upside opportunity is still in play, but we have to be cautious on the trade.

WATCH: IJH – Exited position on Friday.

S&P 600 Small Cap Index – Stalled near resistance at the $77.60 level on IJR. Hit exit point on the trade, but the uptrend is still in play. We continue to watch for clarity.

WATCH: IJR – Exited position on Friday.

Telecom – IYZ broke through the short term resistance $23.90. Support on the move is $24.20 and then $23.90. Sold position on Friday as result of the early selling. The trend is still positive, but cautious about the downside risk overall for now.

WATCH: IYZ – Sold position on Friday.

Financials – XLF made a solid move higher support at $16. The upside remains in play as we attempt to move above the September high. Banks (KBE) are key to the catalyst and held most of the gains from Tuesday. Exited to protect gains on Friday, but the upside is still in play.

WATCH: KBE – Hit exit point on Friday.

Basic Materials – XLB made a solid move back to the $36.85 resistance. Solid follow through on Tuesday to the upside trade, held on Wednesday and resumed higher on Thursday. Sold on Friday. The outlook is positive, but the risk is high overall.

WATCH: XLB – S&P 500 Model

2) Currency:

Dollar – Downtrend remains in play, but a bounce on Friday has my attention short term.

WATCH – UDN downside still in play.

 

Euro – The euro breaking above the $130 resistance mark on FXE. Testing the $130 breakout on Friday.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds – The yield on the 10 year fell to 1.75% and the 30 year to 2.92%. The downside risk in Treasury bonds remains, but you have to respect the current fear factor. TLT broke support on the downside, but bounced back to the $122.50 level.

WATCH: TBT – Exited position on Friday.

High Yield Bonds – Testing the highs and resistance near $94 on HYG. Break higher would positive for the bonds as well as stocks.

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. Look for a bounce off the lows near $18.70 short term? We did get a small reversal, but it is now set up to rise higher. Watch for upside play on a move above $19.75.

OIL – Oil is stuck in trading range too narrow to even trade short term. Testing the upside of the current trend and needs to determine clearly the path… patience as a play develops. Selling on Friday’s uncertainty.

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level? Watch for entry point if we continue higher for trade.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months. Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds. All of this is finally setting up on the down side for gold. GLL moved above the $62 entry point and holding. Got the break lower Thursday and set up a possible short play in the metal. Watch for confirmation on the downside short term.

Silver – Short play continues to do well with ZSL. The downside momentum has been picking up and we now have to shift to protecting our gains and managing our stops.

DBB – Base Metals failed to hold support at $19.10 after a positive move on the upside. This is an interesting development after the move in Steel. SLX has been the trade on the upside along with the mining stocks in XME. Watch the overall move in the based metals, but take the play in the leaders. Friday’s bounce keeps this interesting for now. Watching for plays in the sector.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. Setting up to break higher today.

WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now. ONLY ETF Model.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range is a positive with a trade entry at $33.25. Manage your risk and raise stop to $35.40. Falling yen is driving the stocks higher.

WATCH: FXI – China gapped higher followed through on the upside. Clearing the $38.10 resistance on FXI. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage your downside risk.

WATCH: IEV – Europe continues to rally despite all the negative economic reports and sovereign debt issues looming. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently and putting a target of $45.60 on IEV.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.

WATCH: IYR – Look for reasonable entry. $64.90

7) Global Fixed Income:

Uncertainty about the sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range. HOLD.

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 risk will limit the downside losses.