Jim’s Trading Notes for August 25th

MARKET OUTLOOK:

Don’t worry, be happy… that song was ringing in my head all day. Monday was a continuation of the downside and the sellers showed up in response to China’s decline overnight. As we have discussed, rational reasons don’t exist when the VIX index hits 48. The irrational response is in play and the best place to be is in cash. If you are willing to accept the risk of the short side then you would be making money in those trades on the move lower. But, the reality is if you time horizon is short to intermediate term you should be in cash. In some instances today the long term positions should have hit stop or exit levels. This is where discipline rules and emotions suck.

The S&P 500 index lost 3.9% on the day (9.6% over last five days). The Dow was down 3.5% (9% over the last five days). NASDAQ off 3.8% on the day (10.6% over the last five days). Russell 2000 lost 3.9% on the day. (8.9% over last five days). Put this in perspective to the analyst comments last week that the market would not see a 10% correction in 2015.¬†It isn’t easy when you are wrong just a week later than your comment made. Oh well… there is always tomorrow.

I thought I was doing good with the 1973 target on the downside last week. 1893 on the close today for the S&P 500 index. The intraday bounce or recovery from the open to down just 1% on the day gave some hope, but then reality set in and the index closed back near the low on the day. UGLY is all I have to say… looking to see if a bounce materializes this week, but I am not overly optimistic.

I like to measure the market by tallying the trends of the ten sectors for S&P 500 index. The shift was more to the downside as we now have nine downside, zero upside and one sideways trend. This clearly puts the downtrend in play short term or the sellers have control of the direction. After Monday it would take a significant sentiment shift or catalyst to reverse the course of action the last five days. Patience is a good term to practice currently.

Europe (IEV) sold lower 2.9% on Monday following the US markets. China (FXI) fell 6.3%. Emerging Markets (EEM) fell 4.3%. Japan (EWJ) was off 3.5%. 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 5.1% hitting near term low and in position to test the 2009 lows, base metals (DBB) fell 2.2%, and gold (GLD) tested off 0.5%, Silver (SLV) fell 3.3%. The precious metals may attempt to take on a role of alternative asset. DBA slipped lower as well on Monday.

Running the scans shows¬†the acceleration in the short side trades with the inverse ETFs dominating the results for Monday¬†and the trailing ten trading days. The results¬†shift to the downside and put the sellers in control… for now.¬†Now we watch how the balance of the week plays out.

We are heavily allocated in cash with the moves lower hitting stops. We posted short opportunities in the trading notes for those willing to accept the higher level of risk. The key is having a disciplined approach as it takes the guessing out of the equation and allows you to implement based on what is happening and managing the risk of the markets currently.

Being in cash is not a bad thing! Holding cash as this unfolds is not a bad thing. Staying focused and disciplined is the key going forward. Patience please.

Monday did set the tone for the trading week and it was not pretty. Watching for a bounce soon in the markets response to the strong selling.

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

  1. Markets dump lower to start the week. We added the short trades last week and they continue to play out well. Adjusted the stops below. Do the buyers step back in or has fear taken control? Based on the VIX sellers rule for now. Still expecting some buying at one point. What showed up on Monday gave way to more selling to end the day as the VIX jumped to 40. Fear creates selling and that was in play on Monday.
  2. Treasury Bonds (TLT) rally as the rates decline on more speculation with China and the Fed.¬†The resistance at the 200 DMA cleared with the help of the selling last week. 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¬†could rally further for now. Watch and be patient.¬†Gave up the big gains from early trading? Sign of what’s next… watch the TBT trade if the opportunity arises.¬†
  3. VIX index (VIX) hit the highs from January. I would expect some relief soon and a move low in the anxiety. SVXY offers the trade against the move lower in volatility. Trade setup would be test of the $48 support and reversal. Entry would be $58. Be patient and look for event to create tradablity of the VIX.
  4. Natural Gas (DGAZ) short natural gas is setup to break higher from the consolidation pattern. $6.20 entry for the trade. Trading in sympathy with the other energy commodities. HIT the entry for the the trade upside. Took and watching how it plays out with stop at the $6 mark. 
  5. REITs (SRS) short REITs ETF made a reversal as the selling accelerated in the sector. Entry would be move through $50.85 level.¬†Gapped through the entry on open… passed for now.¬†
  6. Municipal bonds (MUB) at breakout level of cup and handle pattern. Watch $109.30 entry mark.¬†didn’t hold the opening move and passed. Still watching today.¬†
  7. Homebuilders (ITB) it is of interest on the test of support at the $28.35 mark. Sold in sympathy with the broad market indexes. Watching to see if the upside returns or more selling? Willing to add on the test of support. $27 support tested intraday and now watching the outcome with $28.05 as entry.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) Broke below 200 DMA$206,¬†$204.40 and $198.50 support levels. The¬†triple top and wedge consolidation technically showed the downside break then acceleration confirming the move lower. The close on Friday brings the $190.25 level of support into play? It ain’t pretty, but sell offs like this never are. Watching and managing the short side trades.¬†Need to find a support level if the selling is going to take a break near term. Don’t attempt to catch a falling knife and don’t assume anything… let it unfold.¬†

NASDAQ 100 Index (QQQ) Equally ugly broke 200 DMA, uptrend line and $106 support. The next level is $100.50. This is not a pretty picture technically and it will take some hard work for the downside to stop at this point. Manage the short positions and look for a catalyst or reversal moving forward. Bounced off the intraday low, but selling was still in place on the day. Patience as it unfolds and where is the best opportunity relative to the outlook. 

Russell 2000 Index (IWM)¬†Ugly is the one term that comes to mind for this sector. $118.80 support, 200 DMA and confirmation of the downtrend line short term. The downtrend line remains in place off the June high.¬†$113.50 is the target or support level now. Manage short positions if you added and let this unfold for now.¬†No rest for the weary. Selling accelerated and too much work in front of us to worry… taking it one day at a time.¬†

Volatility Index (VIX)¬†Thursday I stated it could challenge the 23.5 level from January… close at 28. That should put the fear escalation in perspective as well as the power of fear in the markets. I would expect some easing on the climax run higher Friday. SVXY could offer trade for those willing to take the risk.¬†spiked 53 at the open and settled at 40… I will go out on a limb and say that fear is officially in play. Watching how this unfolds.¬†

Transportation (IYT) So much for the bounce off support! Sold back below the $143 support and $137.70 next level to watch. Downtrend still in play. Oil, global economics and the dollar are playing hell with the sector outlook. Broke the bottom end of the range and reestablished the downtrend again. 

Dollar (UUP) Broke support at the $24.80 mark. Remains in the sideways trend, but trading near the low end of that range and testing. Closed below the 200 DMA and I am  sure major corporations and export related businesses are happy. The dollar index fell below 96 and near the 200 DMA. Watching how this unfolds in light off everything that transpired last week. Broke lower and opened the short trade with UDN as the dollar declines in response to China.

Crude Oil (OIL) Crude continues to be downside bias commodity. Closed Friday at the $40.29 mark and could test the 2009 lows. Still no signs of recovery in the technical or fundamental data. Watch for a base to be built first and then any trade resulting. Short trade remains in place. Down to $38 and in position to test the 2009 lows. 

SECTOR STORIES: 

Biotech (IBB) broke support at $368 and testing $339.50 support. Broke the short term uptrend and the 200 DMA. Can if bounce back? Possibly, but we took the downside trade last week and we will manage the outcome going forward. We are looking for the downside to unfold and take the trade if develops. BIS entry is $29 (Hit on Thursday). Stop $34 currently. More downside helping the short trade and raised our stop. 

S&P 500 index (SPY) short side trade set up. $206.50 entry point for the short side. SPXS $18.25 entry. Added on Thursday and stop is $23.10. Raised the stop and watching how this unfolds. More upside for the short trade and adjusted the stop on the move. 

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 as well as currency currently. Stop at $56. Raised stop and watching how it unfolds.  

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 $58.65. Raised the stop and watching how it 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 $72 for now. Raised the stop and managing the risk. 

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. Resistance at the $108.40 level ahead cleared. Testing the big move higher could happen this¬†week. Raise stop to $$108.50. Manage the risk of the trade short term¬†

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 $43 mark on crude. Stop $127 adjusted. Watching how moves from here. raised stop. 

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