Jim’s Trading Notes for August 26th

MARKET OUTLOOK:

The bounce off the lows started on Tuesday, but as the¬†headlines focused on, the rally sputtering from the intraday highs and closed in negative territory on the day. We can all spend time speculating on what we believe to be true going forward, but at times like this it is best to be quiet, observe what is taking place with the direction, volume and sentiment. The technical data is broken short term and it will take some time to put Humpty-Dumpty back together again. Patience is becoming my middle name these days and it isn’t such a bad place to be… cash is a sector remember.

On Tuesday the S&P 500 index gained more than 2.7% close down 1.3%. The Dow was up 2.7% closed down 1.3%. NASDAQ rose 2.7% intraday and closed down 0.4%. Russell 2000 was up 2.2%, but closed off 0.6%. Put this in perspective and move forward understanding that the sellers are still in control. This move shows that sell the rallies versus buy the dips is the new mode of managing money. Need to see how today unfolds relative to where we are and where we are going.

Gold (GLD) fell 1.3%, silver (SLV) also fell 1%, crude oil (USO) rose 2.8%, agriculture (DBA) was flat after a 2% jump early, base metals (DBB) gained 2.1%, and the dollar jumped 1.2% after breaking lower on Monday.

The market tallying by sector for the current trends for the ten sectors for S&P 500 index. No change to the downside momentum with the bounce on Tuesday. The tally stands at 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. Watching how this all plays out, but still plenty of issues manage as we go forward.

Global markets followed the US with a bounce. Europe (IEV) was higher by 2%. China (FXI) gained 4.4% as the rate cuts and lower reserves restored some confidence. Emerging Markets (EEM) were up 3.5%. Japan (EWJ) was up 1.7%. The global markets continue to show downside pressure similar to the US markets as the outlook remains weak economically around the world.

Running the scans shows¬†the daily leaders as short gold miners, China internet, short treasury bonds, Europe, technology, Hong Kong and solar energy. Not exactly the leadership you want, but there were some bounce attempts in¬†social media, semiconductors, biotech, energy, and healthcare. It will take more than what transpired on Tuesday¬†to change the outlook near term… patience as we let this all unfold.

We remain mostly in cash with the cliff dive lower hitting stops. We posted short opportunities in the trading notes for those willing to accept the higher level of risk which have played out well. They remain in place with the intraday reversal lower keeps the downside a priority. 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! In fact, around the half way market Tuesday when the reversal intraday started and the markets erased solid gains and ended in the red… cash looked even better. Holding cash as this unfolds is not a bad thing, less brain damage attempting to deal with the volatility and lack of a trend. Staying focused and disciplined is the key going forward. Patience please today definitely was not an all clear signal.

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

  1. Markets dumped lower to start the week. Bounce on Tuesday as follow up… but, fail to really follow through on the bounce as the indexes ended in the red. 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 fear is still in place… less than Monday, but in place none the same. Still expecting some buying at one point. What showed up on Tuesday gave way to more selling to end the day as the¬†VIX remained at 37 and elevated.¬†Fear¬†creates selling and that is in play for now.
  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.¬†The 10 year bond gained 13 basis points to 2.13%? Hope of the Fed springs eternal. Watching still.¬†
  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. VXX looks better still as the lack of buying is keeping the volatility index elevated. Patience as it unfolds. 
  4. 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 Monday… passed for now, but watching.¬†

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.¬†Intraday reversal was a big negative from my view. The give back demoralizes the buyers and emboldens the sellers.¬†

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. Erased a good rally to open and left more questions than answers. 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. Gave up the gains on the day and still shows negative activity near term.

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.¬†Fell to 28 intraday and then moved back to 37.7 as the sellers stepped back into the market the last hour.¬†

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. Sold all the gains on the day and closed in the red.  

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.¬†Rallied back on the day as the bonds fell, dollar rose and gold subsided… still work to do.¬†

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.¬†Attempted to rally on the day… watching.¬†¬†

SECTOR STORIES: 

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. Holding steady for now. 

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. Stop $34 currently.¬†Gapped below the stop and our discipline says take off the stop and let it trade out the day… closed above the stop and held the position.¬†

S&P 500 index (SPY) short side trade set up. $206.50 entry point for the short side. SPXS $18.25 entry. Added and stop is $23.10. Raised the stop and watching how this unfolds. Gapped below the stop and our discipline says take off the stop and let it trade out the day… closed above the stop and held the position.¬†

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. Gapped below the stop and our discipline says take off the stop and let it trade out the day… closed above the stop and held the position.

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. Gapped below the stop and our discipline says take off the stop and let it trade out the day… closed above the stop and held the position.

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. Gapped below the stop and our discipline says take off the stop and let it trade out the day… closed above the stop and held the position.

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