Late Morning Reversal By Investors Buying the Dip

Wednesday, December 5th – Notes & Research

The major indexes posted another intraday reversal off support. The chart below is the five minute chart for the S&P 500 index. You can see the low at support near the 1400 mark and then a move back to the 1415 mark. The first test was the 1386 support level intraday with a reversal. The bottom line is each reversal has brought buyers into the market. Right or wrong doesn’t matter the simple fact is traders are willing to jump in at support. This would lean towards the start of the Santa Rally.

The ADP Report was lackluster posting 118,000 new jobs versus 157,000 in October. Yes, as we predicted the reason for the lower number… Hurricane Sandy! You knew it would come into play at some point and what better place than the employment data. Productivity improved up 2.9% for third quarter.

The ISM Services number improved to 54.7% versus the 53% expected and ahead of the 54.2% in October. This shows the challenges are in the manufacturing sector of the economy. New orders were up 3.3 points to 58.1% and business activity climbed 5.8 points to 61.2%. Those were the highest numbers since February. Thus, the services sector is still improving, unlike the manufacturing sector. The only negative was the employment gauge fell 3.3 points to 50.3%, similar to manufacturing.

Factory orders climbed 0.8% versus the 0.1% decline expected. The number was positive since non-durable goods increased 1.1%, and non-defense capital goods rose 1.8% for the month. Again some positive data to help the market regain from the early selling.

Yesterday’s post: Still applies as we saw today with the reversal

The markets continue to churn in place without much downside pressure. Those looking for a test of the current move higher may have to continue to be patient as this unfolds. What’s holding the market up?

  • A deal on the fiscal cliff issues for one. Despite all the posturing and talk by those in Washington, many believe the deal will be done by Christmas. Thus, the hope of this solution is keeping money put for now. The bantering hasn’t been bad enough yet to push much money to the sidelines.
  • $40 billion per month from the Federal Reserve to keep the system drowning in money. QE3 remains in place and the Fed continues to keep rates low and attempt to push the housing market as well as the job market.
  • Employment reports due out on Friday. While not the attention grabber it was, it still demands respect from investors. The interesting issue for November is the estimate is half the number of jobs added in October. ADP is out tomorrow to start the string of reports.
Bottom line is hope! Last time I looked that isn’t a good investment strategy. Thus, we continue to look for the trading opportunities as holding assets longer term holds too many uncertainties. We have updated the tables and Watch Lists based on the move this week.
Remain disciplined and focused going forward.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index moved lower in early trading, but managed to work its way higher on the day (see chart above). When it was all said and done the index closed up 2.7 points to 1409 (Monday’s close). The Scatter Graph below has a starting point of 11/15 which¬†was the¬†pivot point for the recent uptrend. As you can see at the end of the chart the sideways movement depicts the confusion from investors. Today note the intra-market confusion. Materials and Technology down more than 1%. Financials and Industrials up more than 1%. Apple gets credit for the technology selling and Freeport-McMoran gets the credit for the materials dropping. Bank of America jumped started the financials and Cummins lead the industrials. Mixed day with sectors reacting to the negatives and the positives.

The chart is showing rotation with the materials now leading the downside. Technology moved lower on the aggressive selling in Apple and worth watching near term. Consumer Services has dropped as well and has my attention. On the upside Utilities made a move off the lows, tested for two days, and is not back on the upward trek. The market wants to move higher, but it can’t get all the parts going in the same direction.

Now we are looking for some solution to the fiscal cliff and the economy to keep the upside trend alive. We need some clarity going forward, thus be patient for now and take what the market gives short term.

VIX index is rising and worth watching as the sideways movement looks for direction up or down?

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РTested lower again as Apple becomes drag on the index. With the stock off 6.5% on the day it kept the index in negative territory versus the gains on the S&P 500 and the Dow. We hit stops today exited our positions

WATCH: QQQ Р65.10 entry Р Stop Р64.75 РHIT STOP

Dow Jones 30 Index¬†– The bounce back to the 200 day moving average is a positive, but now we need to make a move above this level short term. The selling today wasn’t got our attention early, but managed to bounce back later in the day.

WATCH: DIA – See Sector Rotation Watch List.

S&P 400 Midcap Index РThe bounce off the low has now returned to the top end of the previous trading range. A break above the 1000 mark on the index would a positive and a opportunity to trade the sector. Be patient with the entry as this unfolds. Another volatile intraday trading day. Watch and manage the risk.

WATCH: IJH – See Sector Rotation Watch List.

2) Currency:

Dollar РThe dollar sold lower and broke support at the $21.95 level on UUP. The dollar index (DXY) pulled back to support at 80 on Monday and then broke lower on Tuesday to establish the downtrend. The downside is firmly establish for now on the buck, watch the small bounce on Wednesday.

WATCH: UDN – Entry $27.25 – Stop $27.05

Euro РFXE is poised to move above the $129 mark and challenge the $130.60 mark. Got the follow through on the upside to confirm the downside play for the dollar Monday. This produced a short dollar and long euro trade opportunity for about 1.5% ROI short term. We are only short the dollar as a result of the gap higher on FXE.

Yen РFXY tested support again at $119 and bounced two days and reversed to $119 again. Not bounce for now. We will watch to see how support holds?

WATCH: FXY – entry $119.90 – patience as the bounce plays out.

3) Fixed Income: 

Treasury Bonds РReversal short term with yields up on the 10 year to 1.61% and the 30 year to 2.78%. Watch as the yields move lower and test support short term. The drop results in a push higher in the price of the bonds, and the upside trade with it. Stocks have floundered, but the bonds are reacting as if they sold off again.

WATCH: TLT – Gapped lower and then retraced it all. Wedge pattern setup. Watch for the directional break from the setup to give guidance on the trade. A break lower would set up the short play in TBT.

High Yield Bonds РBig bounce on stocks moving higher with stocks. Interesting bounce.

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

4) Commodities:

 The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows. The best course of action is to take the trading opportunities presented short term.

WATCH: SLV – Sold positions on the reversal this week. Watching to see if the downside creates a short opportunity.

WATCH: OIL – Cleared $21 again on the break higher, but failed to hold the move above $21.50. The entry was $21 for a upside trade and that is in play for now. Target is $22.50 and the stop would $20.85 on the trade.

WATCH: UGA – Entry $56.25 / Stop $56.25- Stop Hit – took exit on trade.

WATCH: GLD –¬†Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months.Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds.

5) Global Markets: 

The NASDAQ Global Market Index (NQGM) broke above the 200 day moving average and the V-bottom is still in play on the upside. 967 is the level to break above on the index currently. The move is reflective of the positive push in the US and it is nothing more than a trade short term with tight stops to protect against any reversal short term.

WATCH: EFA – Back at the highs of $55.20 and in position to break from the trading range for a trade set up. The jump back to this level has been quick and may test before continuing higher. Be patient and see how it play to start the week. ONLY ETF Model.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the 200 day moving average and has moved higher again. The break from the trading range is a positive with a trade entry at $33.25. Consolidating near the current high. Manage your risk and raise stop to $32.85.

WATCH: FXI – China is testing the gap higher and watch for the $36.65 level to hold as possible entry play short term. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. The PMI data was positive on Monday, but the move was lower? Watch for trade on the break from the consolidation. Gap higher on Wednesday as money rotates into the ETF.

WATCH: TUR – 59.20 support held and solid bounce to maintain the uptrend. Look for trade entry on test of the move near the $62.40 mark for now. Monday and Tuesday produced the move higher and looks ready for a continued move short term. Still climbing – raise your stops.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.

WATCH: IYR – moved above the 200 day moving average. Entry 63.40 (HIT ON FRIDAY) – Stop $63.25

7) Global Fixed Income:

Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector. Greece back on the table along with Europe despite the resolution to give more money. All of the charts have bounced off the low and continued their respective uptrends. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and attempting to hold support at $121.. Broke on Friday… watch to see how it plays this week.

WATCH: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

WATCH: PAFCX – bounced off support near the $11.66 mark. Held the uptrend line and held the support for now. Still looking for entry opportunity on the play at $11.74.

WATCH: PICB – International Corporate bonds are breaking above the top end of the current range. 29.15 entry point?

Watch and play according to your risk tolerance on any position taken. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside losses.