Jim’s Trading Note for August 19th

MARKET OUTLOOK:

Choppy day as China sets the tone for markets. The initial selling gave way to some buying, but then the broad indexes drifted lower through the balance of the trading day. The news or worry in China was the government intervention… some worried it would not stay the course and keep putting stimulus into the markets and the economy… dumped 6.2%. FXI and GXC both dropped 2% on the day. The ripple effect into the US markets was minimal, but the worry will linger and be in the subconscious mind… which may be more dangerous going forward. Too many worries will eventually weigh down investors and it will result in panic selling if they get too heavy. Just more to add to our worry plate which is already crowded.

Commodities were a casualty to the news in China today. Base metals were down 1.5% in sympathy. Gold gapped lower and then managed to recover to even. Natural gas moved lower along with other energy related stocks. Definitely a sector to watch. I would lean to the oversold side when it comes to outlook. The sector is worth putting on the watch list and tracking how it unfolds, but a reversal at some point would not be a surprise.

Basic materials led the downside off 0.6%. Telecom digested some gains from Monday, consumer staples continue to struggle along with technology and energy. Consumer services was barely positive as the only sector to close in positive territory. No real damage to speak of and it was more or less a day of no harm, no foul… let’s see how trades on Wednesday.

Running scans at the close didn’t show much in terms of change. China, emerging markets, small caps, biotech, the euro, the yen, energy, commodities, Dow and Russia all remain in downtrend micro term. Homebuilders, coffee, healthcare providers, the dollar, REITs, and consumer services are leading the upside in a micro trend. This shows the state of disarray the markets are in currently. It remains a time to be patient and a time for allowing the trends to develop. PATIENCE… the word we hate to practice.

All of the issue remain on the table and the lack of conviction continue to rise from my view. This may be the calm before the storm? I hate speculation and I hate fighting the trend of the markets. Thus, my fingers are in my ears and my eyes are on the micro term (0-13 weeks) trend lines looking for a resolution in direction. Until then I am willing to hold cash and be content to let this all unfold in a form that has less risk for putting money to work. One day at a time is all I am interested… Anything else is trading without a cause. Not my discipline or strategy.

NOTE: The following are things to watch and evaluate as we progress forward.

  1. Biotech (IBB) broke support at $368 and testing support. Testing the uptrend and if it breaks the downside will be in play. We are looking for the downside to unfold and take the trade if develops. BIS entry is $29. Gave back half the gains from Monday? Patiently waiting the decision from investors. 
  2. China (FXI) is a mixed bag of nuts. Yuan news puts the short side on the table again, but has stalled for now. Move above $92.65 on YANG shows a breakout on the short side and continuation. The sector lost 2% and broke support. Gapped through the entry point and watching to see if we can get a reasonable entry. 
  3. Dow Jones Average (DIA) Broke support, tested lower and attempting to move back above the $175 resistance. Either side of the trade is setting up, watching to see which offers the best opportunity. Tested lower on Monday, bounced back into positive territory. $176.50 is level to clear on the bounce. Flat day Tuesday, but watching for decision? 
  4. Treasury Bonds (TLT) rally as the rates decline on more speculation with China and the Fed.¬†The resistance at the 200 DMA is overhead. The consolidation at this point is holding the upside move off the July lows. If it reverses on belief the Fed doesn’t hike rates TBT will offer a trade opportunity on the short side of the bond.¬†Yields rise and the bonds drop gains from Monday. $123 support and watching the TBT entry at $44.45.¬†
  5. Gold Miners (DUST) short miners have found support following the rally in gold last week. The move above $27.20 entry for the trade. $31 target for the trade. High volatility and risk trade near term. Not much change on the day and I am a patient trader for now. 
  6. India (INDA) bounce off support and looking for a move back near the high at $31.50. The entry is $30.65. Technical trade only.¬†Tested lower… patience.¬†
  7. Small caps (IWM) moved back above the $121.25 mark on Monday. If holds and follows through looking at the upside opportunity on follow through. This has been a sector moving lower of late. $121.75 entry.¬†Couldn’t hold the gains on Tuesday and watching to see if the sellers return to the sector.¬†
  8. Europe (IEV) sitting on support at the $43.75 level. A move lower sets up the short side trade. EPV entry at $53 if the support gives way to move lower.
  9. Stalled as the markets continue to look for direction. Patience is the key ingredient for now.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) 200 DMA and $206.10 are the support levels to watch again this week. Holding¬†above the $208 entry point to add. Stop is $204.40. The¬†triple top is still an issue relative to a ceiling on the index. No direction to speak of and content to see how this unfolds near term. Selling remains a concern¬†and we will¬†watch and manage the¬†stop and the trend.¬†Nice reversal on Monday and cleared the $209.50 mark… $213.25 test in order? Small test on Tuesday and still lacking clarity or direction.¬†

NASDAQ 100 Index (QQQ) $1o9.10 is support. Break I am interested in downside trade. Hold and we watch. Clearing the 10 DMA on the upside would be of interest near term. Need to let this define a definitive direction then we have interest in ownership. Small give back, and continue to watch how this one unfolds. Downside bias still in place. 

Russell 2000 Index (IWM)¬†Ugly is the one term that comes to mind for this sector. $118.80 support and holding for now. The downtrend remains in place off the June high. Unless the sector finds some momentum to take the trend out… the downside bias remains. Watching for now.¬†Good move higher on Monday, sold some on Tuesday, downtrend still in place off the June highs.¬†

Volatility Index (VIX) made the move to 13.3 Friday. The volatility has shown up modestly on the selling, but nothing to write home about. No acceleration on the VIX, but there is a worry in the air. More than willing to watch for now. Move higher on the day, but still below the 14.2 level to break higher. 

Transportation (IYT) Moved back to¬†the¬†$148.50 level¬†on sector¬†earnings and testing and holding and testing…¬†. ABCD pattern uptrending channel in place. $150 may be of interest for upside trade, but watching to see how this unfolds near term.¬†Nice upside move and back to $150.55 resistance. $153.50 level to watch.¬†Tested on Tuesday.

Dollar (UUP) The dollar tested back to support at $25.10 and moving sideways in a defined range. The issues with China had some impact on the movement short term, but the dollar is still holding the upside. The dollar index DXY is sporting a double top and support at the 50 DMA. Strength holding up near term.

Crude Oil (OIL) Crude continues to be downside bias commodity. Broke below $43 level of support on the week and holding near the $42 mark for now. Plenty of anxiety over this move lower, but not much you can say once the speculation trade takes over the directional move. Not interested at this point in time. Open lowered with small recovery but still below the $43 level. 

SECTOR STORIES: 

Russia (RUSS) short side trade is consolidating and in position to break higher. $42.10 is the entry if the breakout occurs near term. Hit the entry with the move higher in the short ETF. Oil prices continuing to weigh on the country and currency currently. Nice gain on Tuesday and stop at $41.50. 

Semiconductors (SOXX) broke $87.20 support again and looking for a base to build if this is going to bounce. If the downside accelerates the short entry is $84.70. SOXS $57 entry. HIT entry on Tuesday and we will manage this as it unfolds. Stop is $55 for now. 

Telecom (IYZ) break above $29.50 hit entry point. Watching for the follow through and upside to remain short term.¬†Added position on Friday. Stop is $29.50. Defensive money rotating into the sector… manage the stop as this tends to shift quickly if the growth side kicks in.¬†Tested the move higher from Monday… let it unfold and adjust stop.¬†

Housing (ITB) Nice break from the consolidation on the upside. Investor stuck their noses up at the worries over the Fed hiking interest rates. Test of the $28.35 level would offer a reasonable entry point if it continues to gain momentum.  $28.50 entry. Stop $28.50. Uptrend breakout. Nice follow through on the upside in the sector Tuesday. Data was positive helping the move. Back to back data points pushing the sector higher. Raise your stops. 

Gold (GLD) the metal has been pushing higher as the uncertainty surrounding the yuan and China’s actions. Take it for what it is… a trade opportunity going forward. Hit the entry at $105.65 and that would now be the stop on the trade. Resistance at the $108.40 level ahead. Testing the big move higher to end the week. Break even stop and watching.¬†Needs follow through on the upside break.¬†

Crude Oil (OIL) Short trade remains¬†on with the downside in place. SCO at 88.90 entry on renewed selling.¬†Sellers remain in control of the commodity with break below the $45 mark. Stop $104.¬†¬†Selling back… still holding the short trade… I was looking to lock in gains if we held support at the $43 level… that didn’t happen with the move to $42.17 on Friday.¬†¬†Started lower on China, but buyers stepped in for nice gain on the day. Watching the short trade and managing the stop.¬†

Utilities (XLU) Not an exciting sector, but one that is paying a 3.7% dividend and offers some upside as all the noise around the dividend stocks subsides. Entry $43.50. Stop $45. Trending higher and we will watch the outcome. Raised stop on the move higher Monday. Digested on Tuesday. 

Real Estate (IYR) REITs moved off the low in June. Hit resistance has inched through the various levels. Still looking for a catalyst to break through the resistance. Entry $74.75. Stop $75 for now. Let this unfold and if the rate hike rumors return the downside may return. In need of some upside momentum. Raised the stop on the move higher Monday. Holding the move higher. 

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