Hope of a deal leads markets higher

Monday – Notes & Research

Did someone say compromise? Missing the deadline the Senate approved a stop gap tax-increase and a two month delay on spending cuts. All I can say is… what a mess. The markets liked the thought of getting something passed and rallied on Monday. All of the major indexes passed solid gains on the day with the NASDAQ leading the way up 2%. Does this really change anything going into Wednesday’s trading for the new year? Congress is meeting today to determine if they will approve the bill… if so, we will likely see some kind of delayed rally in the broad indexes, but nothing substantially changes as the deficit ceiling is the next debate. As I stated in my notes on Monday, expect a year of volatility and news driven trends.

The bounce on Monday gave some room back to the trend lines, but we will have to see how the week finishes out. The VIX index fell back to 18 after closing at 22.6 on Friday. The belief was for good news and it is still in the making based on the current developments.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved near the 1400 level on Friday holding support on the downside move. Monday the index bounces back to the 1426. The move negates the break of the uptrend following a lower-low that took out the 1413 low on 12/14. Now comes the proof of direction as we finish out the week and the response to the deal being sought by Congress on the fiscal budget. We still have to watch the 12/18 high as the pivot point for the downside currently and we have to track the previous uptrend as it could still be in play. The news is creating the swings, but in the end the trend will emerge.

The top chart below has a starting point of 11/15 which was the pivot point for the uptrend. The vertical line drawn on the chart shows the bounce on Friday which could be the pivot point for the current trend to resume? The second graph is the new pivot point on 12/28 showing the upside move off the recent low? You can see that financials and basic materials in the lead. On Friday the leaders were energy, consumers services and basic materials. This is all still up in the air to start Wednesday’s trading.

Manage the risk short term.

The VIX index jumped above 22.7 as expected on Friday, but fell to 18 as the fear factor subsided on Monday in hopes of a deal from Washington. The rally may have been presumptive and we will know soon enough as Congress makes a decision.

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. The index closed right on 2960 at the bottom of the current range and support on Friday. Bounced on Monday to close at  3019. Similar to the S&P 500 index as both hold key support levels. The immediate direction comes down to the vote by Congress.

Dow Jones 30 Index – The support of 13,080 short term was broken Friday showing the worst results for the major indexes. The bounce on Monday put it back above that level for now. Again, wait and see how this plays out.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Patience as this plays out on Wednesday.

Financials – XLF continues to struggle in the face of the broad markets selling. The pullback test near the $16 mark is worthy of our attention, and equally the upside is being tested. Watching for a play on the resolution to the fiscal cliff. closed at $16.39 on Monday and well above support.

Basic Materials – XLB made a move back to the $36.80 support. The outlook is positive, but the risk is high overall. Watch for some clearly defined direction short term on the cliff. This is another sector to like on the upside if the resolution is found (showed on the move Monday).

The key for now is patience as a resolution on the cliff is negotiated over the holiday. Wednesday will define more of the sentiment currently being played in Washington.

2) Currency:

Dollar – Downtrend remains in play, but a bounce off the low has my attention short term. Needs to make a definitive move to the upside in order to 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 jumped to 1.75% and the 30 year to 2.95%. The downside risk in Treasury bonds remains, but you have to respect the current fear factor was my comment on Friday… And the yield jumped again on assumption the cliff would be resolved. We will see how this plays out on Wednesday.

High Yield Bonds – Testing the highs and resistance near $94 on HYG, but the selling started along with stocks. Look for support holding at $92.75 for now.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. They have bounced off the December lows, but lack much in terms of upside conviction. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. The bounce off the lows near $18.70 didn’t hold short term based on Monday’s activity? Watch for the trading range to remain in play.

OIL – Oil has been stuck in trading range, but on Monday moved above the top end of the range to $91 again. Still looking for clarity in trading relative to the price of crude. The upside is in play,  but is there enough conviction to take it higher? The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70.

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. The test on Friday of $58 is worth watching relative to the upside trade. UGA at $58.50? Watching to see how it unfolds.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We are in the midst of a test of $161 on GLD and break below is a clear short signal for the metal. Bounce continued on Monday and worthy of attention.

Silver – Short play continues to do well with ZSL. The downside momentum has stalled and the support at $29 is holding on SLV. Raise stop and manage the exit.

DBB – Base Metals failed to hold support at $19.10 last week, but resumed the move on Monday. The sector has struggled to hold the upside. Watching for opportunity on upside to continue.

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. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain. However, I would expect the upside to falter if the US doesn’t get a solution to the fiscal cliff.

WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now as it holds support. The move lower of 1% on Friday is the warning if the US doesn’t find and answer. Rally of 1.5% on Monday shows the upside if they do find a solution.

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 was a positive trade entry at $33.25. Manage your risk and raise stop to $35.75. Falling yen is driving the stocks higher. Some topping in play – manage your risk.

WATCH: FXI – China has firmly established the uptrend off the November low. Clearing the $38.10 resistance on FXI was a plus as the upside continued. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage the resistance at $39.50 – 40.50 near term.

WATCH: IEV – Europe continues to rally despite all the negative reports and sovereign debt issues. 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 for IEV. Upside target is $45.50 going forward.

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:

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. High yield bonds and corporate bonds are gaining momentum short term.

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 and trading higher for now. 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.