Jim’s Trading Notes for August 18th

MARKET OUTLOOK:

The markets started on the downside find buyers and rally to positive territory on Monday. The Empire State index was ugly at -14.9 since it was expected to be +4.5. That led to the early selling, but the homebuilders index was better than expected and the buyers came back to the table. The S&P 500 index close up 0.5% and all is well… right? Monday was just more of what investors have been battling for months. News driving direction day to day. Sometime hour to hour. With today’s activity I am of the opinion that the market has a reasonable chance of running back to the triple top resistance points near the 2135 level.

Sectors on the move were telecom, consumer services, and healthcare were the leaders. This is some old some new with telecom adding to the upside. The laggards were financials, energy and consumer staples. All were positive on the day, but they failed to impress at all. The move in financials continues to frustrate as the Fed outlook remains for the them to hike interest rates. That said, the ten-year bond yield drop four basis points back to 2.15%… they are not convinced the rates are moving higher. Divergence in believe and activity in the bonds. Overall it was a modest day that quite overall and plodded forward.

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. Nice 2% gain on IBB after a start on the downside. Still watching how this unfolds near term.
  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 was flat Monday and we punt to see how it unfolds today. 
  3. 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.  Tested the lows and reversed early with the broad markets today. Short side still of interest, but a move above the $87.20 mark is worth watching as upside possibility. 
  4. Dow Jones Average (DIA) Broke support, tested lower and attempting to move back above the $175 resistance. Either side a 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. 
  5. 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.¬†Another rally in bonds with yeilds creeping lower. Not over convincing and if a rally breaks out in stocks not likely to continue higher.¬†
  6. 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. 
  7. 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. Gold moved higher short side moved lower. Testing? Watching how it unfolds. 
  8. 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 on Monday… patience.¬†
  9. 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.

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? No trades on this, but likely to follow though based on the current outlook.¬†

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. Back above the $111 mark and possible upside in place. Watching to see how it trades today. 

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.¬†I liked the move on Monday. Back above the $121.25 mark. See above for trade.

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. Jumped at the open and disappeared throughout the trading day. Still not real volatility currently. 

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.¬†

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: 

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 $29.20. Defensive money rotating into the sector… manage the stop as this tends to shift quickly if the growth side kicks in.¬†

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 $27.70. Uptrend breakout. Nice follow through on the upside in the sector Monday. Data was positive helping the move. 

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.¬†

Small Caps (TZA) short side of this trade is setting up to be traded again based on the activity the last few days. Entry at the $10.45 level is attractive for the short side trade. HIT entry $10.45. Stop $10.40. Followed through on Friday and looking at how this unfolds to start the week. Rally on for the short side again as the sector cannot find direction. Hold and manage the stops at $10.40 for now. Hit stop on the reversal Monday.

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.¬† Raised stop on move higher Monday.¬†

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.

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. 

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