Jim’s Trading Notes for August 21st

MARKET OUTLOOK:

In my notes on Wednesday I stated the markets looked weaker relative to sentiment, and if possible, less conviction. And if I were a gambler I would short the markets. I am not a gambler as ¬†you know, I hate speculation, but I do respect the trend. The move below 2042 on the S&P 500 index was the point to watch and we closed at 2036… confirmation here puts the short side in play. There were no good hiding spots today except for cash.

Was it the worries about the global markets? Was it the FOMC minutes worrying investors? Was it earnings? Was it the economy? Was it the lack of buyers on the last two attempted bounces? Yes to all and to all a good night.

The question now is how low do we go? 1973 is logical from my view. The truth will be in what investors believe now? Do they believe things are getting worse? Is this just a temporary move based on mounting fear and the buyers step back in? All good questions, but I am voting on the downside and have been since the test of the 2042 level in late June. It takes time for the trend to shift when you have the Fed on one side and the facts on the other. Easier to believe the Fed. Downside is in play.

From Wednesday’s post:¬†That said, I do believe there is a level I would be willing to implement the downside trade on the index.¬† 2042 is the level to watch on the S&P 500 index. (HIT IT) Technically speaking there is plenty to be aware of should the markets move through this level of support. 4992 then 4910 on the NASDAQ index is a level of concern. (HIT IT)¬†Small cap index was ugly again today as well. The Russell 200o index is testing the 1200 level of support. Break that and it isn’t pretty ugly (HIT IT) with 1153 next. The downtrend in the index remains in place and the support is weakening. Short side remains in play. Watch how this trades today.

The ten sectors of the S&P 500 index we track are shifting again. Five downside, one upside, four sideways shifts the tally in favor of the downside as three sectors shift to sideways and one more push lower and that will shift the scales even further on the downside. That serves to reinforce the comments above.

Europe (IEV) sold lower 2.1% on the Wednesday. China (FXI) fell 2.5%. Emerging Markets (EEM) fell 1.6% and continues to accelerate lower. Japan (EWJ) was off 2.8%. The global markets continue to put pressure on the US markets as the outlook remains weak economically around the world.

Commodities are challenges by all of this as seen with crude oil (OIL) down 0.5%, base metals bounced 1.4%, and accelerated gold (GLD) rallied 1.7%, Silver (SLV) up 1.4%. Speculation on alternative asset of choice.

Running the scans shows¬†the acceleration in the short side trades with the ETFs dominating the results for¬†Thursday and the trailing ten trading days. The results¬†shift to the downside and put the sellers in control… for now. Watching to see if it will¬†follow through…

We are heavily allocated in cash with the moves. That is the key to having a disciplined approach… takes the guessing out of the equation and allows you to implement a discipline approach to managing your risk.

Friday? Sellers in control? How does this unfold? Wouldn’t be surprised to see some buying early… but, not willing to bite just yet… let this play out. Plenty of opportunity based on what takes place now.

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

  1. Markets dump lower on Thursday. Now we added the short trades and we watch to see how this starts to unfold moving forward. Today is a key day. expecting some buying at some point in the day… open, midday, into the close… VIX at 19.1 and shows the big jump in anxiety bordering on fear… Fear will lead to more selling… thus, we watch.
  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.  Gapped through the entry point and watching to see if we can get a reasonable entry. Short side playing out well if you added. adjust your stop accordingly. 
  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.¬†Short Dow (SDOW) back on the table if it continues to move lower. $20.15 entry. Gapped above the entry Thursday and never looked back… still opportunity on test.¬†
  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.¬†No rate hike is the speculation, markets reacting on the downside, VIX jumps higher and bonds rally on lower yields. Rally on 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…¬†So much for the upside as the sellers step in and take the index back to the 200 DMA.¬†Downside acceleration confirmed relative to the move on Wednesday and Thursday confirmed the move lower.¬†

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. $109 level gave way to the sellers and tumbled 2.7%. Sellers in control. Watch the 200 DMA and $106. 

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.¬†$118.80 mark gave way and the $114.50 mark is next. Downtrend continues to for the sector currently.¬†

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 higher hitting 19.1 and pushing towards the previous high from late June. Could see a move to 23 if the selling accelerates. 

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.¬†UGLY! Look for retest of the lows ate he $143 mark.¬†

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.¬†Reversed lower on Wednesday with the FOMC minutes as catalyst. Followed with move lower again on Thursday… test the 200 DMA next.¬†

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.¬†Flat day following the big move lower. Still watching for reversal… patiently. Downside still in play.¬†

SECTOR STORIES: 

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 (Hit on Thursday). Stop $27.65. Broke lower losing 4% on Thursday. 

S&P 500 index (SPY) short side trade setting up. $206.50 entry point for the short side. SPXS $18.25 entry. this is trade entry. if it move through the $18.65 level willing to add to the position. Added on Thursday and stop is $18.25. 

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 again on Thursday and stop at $42.65. 

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. Stop $52.50. Sellers keep piling on. Raise stop and watch how this plays out. 

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. Stop is $64.15 for now. Big push lower on Thursday raise your stops. 

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.¬†Fell on the move in the broad markets… keeping stop at breakeven.¬†

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. Raise stop to $$108.50.¬†Continued higher as markets dissolve. Raised the stop and watching… let it run.

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 $110.20 adjusted.¬†¬†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.¬†¬†Slightly lower on Thursday and downtrend remains in place.¬†

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. Still holding move higher.  

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 with small test again on Thursday.  

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