Jim’s Trading Notes for August 27th

MARKET OUTLOOK:

Wednesday the bounce held into the close and some relief from the selling. Gap open, drift lower and then the gradual buying started at 1 pm and followed through the balance of the day. We managed to close at the high from Tuesday. We establish 1867 as the near term low for the S&P 500 index. The oversold bounce produced a 3.95% gain on the day and all is well… until tomorrow.

On Wednesday the S&P 500 index gained¬†more than 3.9%. The Dow was up 3.9% as well. NASDAQ rose 4.2%. Russell 2000 was up 2.4%.¬†Bounce or reversal? I say let it play out and the patterns develop near term. The inside trading on most of the indexes sets the market up for a decision day potentially today. We will see how this unfolds and we will remain patient for now. There is no need to feel like you have to capture the low on a reversal and there is no reason to believe the selling is done… thus the need for patience.

Gold (GLD) fell 1.3% again on Wednesday, silver (SLV) also fell 3.1% and broke support at $13.80 (it did leave a doji candle on the day?), crude oil (USO) rose 0.3%, agriculture (DBA) was down 0.4%, base metals (DBB) fell 1.5%, and the dollar jumped 1.2% after a similar gain on Tuesday.

The market tallying by sector for the current trends for the ten sectors for S&P 500 index. No change to the upside bounce on Wednesday. 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 despite the Wednesday bounce. 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 1.6%. China (FXI) gained 2.2% as follow up to the rate cuts restored some confidence. Emerging Markets (EEM) were up 3.3% with an inside day. Japan (EWJ) was up 3.9%. The global markets did show some positive moves off the lows, but this is where most of the concern is going forward relative to the economic picture. Watching.

Running the scans shows¬†the daily leaders were semiconductors, technology, short gold miners, financials, small caps, emerging markets, short treasury bonds, and biotech. Much better leadership on Wednesday and if it can find some footing to follow through this would get interesting short term. It will take more than what transpired Wednesday¬†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 played out well. Hit against some stops on the Wednesday, but we will monitor how the direction plays out near term. Remain focused with 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.

Thursday is a day for follow through or resumption of the selling. Thus, we will call it transition day. There are no guarantees on the direction either way. Patience and strategy are key on how you approach the markets going forward. Trends are not apparent yet and that is the reason for the short term view of the any trades for now. Taking it one day at a time.

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

  1. Markets recover from the selling that started the week, at least it bounced off the lows with solid gains on the day. Today we watch to see how this unfolds and what if anything is worthy of putting money to work
  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 17¬†basis points the last two days to 2.17%? Hope of the Fed springs eternal. Short side of the trade with TBT hit entry point today with move through the $44.37 mark.
  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. Nice bounce on Wednesday and SVXY moved to $56. Watching for the follow through today. 

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.¬†Found support at the $187.20 mark and produced a second bounce. Inside trading day for the sector and watching for follow through today. If we consolidate and then make a move higher it sets up the entry trade with more confidence… run higher not likely to play the game.¬†

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. Nice bounce and move above $102.25. Watching for the follow through move on the day $104.50 would be of interest on a move higher. 

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. bounced and held the move on Wednesday. consolidation pattern developing and looking for this to develop 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 closed at 30.3 as the anxiety seems to subside from panic to modest fear.¬†Setting up trade opportunity in SVXY on follow through today.¬†

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. Inside day on the bounce. The pattern of consolidation may be developing and worth watching near  term.  

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 continued to fall, dollar rose and gold dropped… 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. Demand is the challenge near term.

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. Hit stop on the rally in the sector. Looking for follow through in IBB for opportunity. 

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. Stop hit on the rally and looking for the follow through on SPY for opportunity. 

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 $53. Hit Stop and looking for next opportunity in the country movement. 

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. Hit stops and looking for the next opportunity in Europe. 

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. Hit Stop and watching how this unfolds. 

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.¬†Hit stops.¬†

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. Raised stop $$124.80. No big moves. Crude back above $40 would take us out of our short trade.  

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