Market gains momentum from buyers

MARKET OUTLOOK FOR May 17th, 2019

A third day on the upside as the buyers to try and take control again. There were some positives like software and there were some negatives like retail and semiconductors on Thursday, but the overall momentum was better for the broad indexes. Is the selling over? Not convinced of that, but we did add some positions on the day and looking for a follow through Friday to end the week. Remember it is important to take what the market offers and manage the risk accordingly. Thinking you know more than the market ends in pain and suffering.

Some news of note premarket, Nvidia (NVDA) trading higher on solid Q1 earnings. Applied Materials (AMD) higher on Q1 earnings. Baidu (BIDU) and Pinterest (PINS) aggressively lower on missed earnings. More mixed signals from earnings.

The S&P 500 index closed up 25.3 points to 2876 moving back above the 2815 support levels with some strength. The worries about higher tariffs seemed to have vanished for now. I would throw in the towel on the sellers, but the buyers did show some conviction on Thursday. Eleven of the eleven sectors closed higher on the day with telecom and basic materials leading the rise. The downside from semiconductors was a drag, but that came mostly from the Apple-related chips. The long-term trendline comes into question as they were tested on the downside move. This puts our stops in action as we look to see how this unfolds. SPXL entry $33.50, stop $48.85 (Stop Hit). Looking for the next opportunity. Reentry $47.80. Stop $45.90.

The NASDAQ index closed up 75.90 points to close at 7898 on the follow through bounce to clear 7849 resistance. The technology stocks moved nicely despite the downside in semiconductors. The software sector continues to provide solid leadership. QQQ is our indicator as it moved back below the October highs. Monday moved below the $180.28 and Thursday advanced back near the $185 mark. Having exited our positions last week we are watching for the opportunity that will result from the selling. TQQQ entry $34.17. Stop $62.54 (STOP HIT). The long-term trendline has come into question again. Patience for now. Reentry $58.90. Stop $57.56.

Small Cap index (IWM) the sector has been in a consolidation pattern and cleared resistance last week only to forfeit the gains this week moving lower and testing at $152.28 support. Closed on the 200 DMA and showed some positive signs, but not enough to put money to work.

Transports (IYT) hit some resistance at the $200.53 level and the index reversed on some solid selling. Reversed on Monday and took out all support levels and took our exit. Entry $195.60. Stop $190 (Stop Hit). Watching how the bounce unfolds from the last three days. $192.42 level to clear on the upside.

The dollar (UUP) The reaction to the Fed comments and the China trade issues to push the dollar up and down. The jobs report confirmed the Fed action at the FOMC and the dollar moved lower. The big question mark for the buck remains the trade tariffs with China. Lack of a deal will favor the dollar short term. The ETF closed at $26.29 and remains in a positive pattern moving back to the top of the current trend… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.2 on Thursday taking a breather from selling anxiety. Solid bump higher in anxiety as the China trade agreement remains a big question mark for the markets. The tug-o-war between buyers and sellers remains as some peace enters the trading environment. UVXY move below $37.50 and watching how it unfolds.

Economic Data: April starts a new round of data for the month of March… looking for some improvement over February.

THURSDAY, MAY 16th: Jobless claims fell as a positive sign for the week. Housing starts were much better in April and shows the impact of lower interest rates. Permits were up. Philly Fed manufacturing was well ahead of expectations and shows positive signs for the northeast. An overall positive day for the economic data.

WEDNESDAY, MAY 15th: Retail sales fell 0.2% well below expectations and negative sign for the economy. Even the ex-autos sales fell 0.7% and way off the mark. Industrial production was down 0.5% and capacity utilization was lower. Inventories were flat. The homebuilder’s index rose thanks to the current decline in interest rates. Overall ugly day of data… Throw in the decline in the 10-year bond yield as the inversions with the three-month bond and it is not pretty. watching how investors digest this news.

TUESDAY, MAY 14th: The small business index rose more than expected. Import prices showed a decline despite the tariffs. Household debt rose significantly as interest rates decline. Not great news, but not bad either.

MONDAY, MAY 13th: China trade realities were all the talk. What will they do to the US economy? Therein lies the challenge for the markets currently… speculation is rampant, I am willing to wait on reality. No real data released on the day just talk of what might be.

FRIDAY, MAY 10th: Consumer Price Index (CPI) rose 0.3% and below expectations. The core CPI rose just 0.1. Year-over-year numbers now stand at the magical 2% the Fed likes to see. The biggest concern in the numbers was rising rents and gasoline prices… both cut at the core of living expenses and discretionary income for consumers. Watching what the Fed says about this as well as how the economy responds.

It is all about the progress following interest rates were hiked by the Fed… we continue for the fourth straight month to see slowing in the data. Eventually, this will show up in stock prices through earnings. Those have started and we are seeing mixed data from companies. Interpreting the data versus the emotions… following the trends.

(The notes above are posted daily based on the activity of the previous days trading. The BOLD/ITALIC comments are current day changes worth noting.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) The selling stalled and found support near the $105 mark. The break lower was the small-cap stocks struggling. Holding support is positive for now, but no indications of a reversal currently. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. Moved to $101 support and watching. Small bounce last three days.

Semiconductors (SOXX) Tested below the $210 level and watching how this unfolds with some profit taking showing on the chart along with some support at the 50 DMA. Letting the emotions and news play out near term and this looking for the next opportunity in the sector. Entry $187.50. Stop $207.50 (HIT EXIT). Bounced at support and watching. Moved lower on the day as Apple-related chips fall. Watching earnings from NVDA and AMD for positive impact.

Software (IGV) Broke $167.88 and bounced back above the same level to create the December lows and start the new trend. $167 level added a trading position. Entry $167.90. Stop $214.80 (Stop Hit). Breaks below the $209 level of support. Back to the October highs. Held support and produced a solid confirmation move higher on Thursday

REITs (IYR) Recovered from the uncertainty from the Fed and the economic outlook. The interest sensitive sector reacts when the Fed is in the headlines and speculation rises. Holding for now and letting the FOMC news settle. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted). Held well on a day of selling. Moved higher on lower rates. Back at the previous highs.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.45% with some volatility in rates from the China/US trade talks. The bounce from the low in March has stalled with the uncertainty surrounding what the Fed will do going forward. Watching how this unfolds near term. TLT is a hold if you own bonds. Flight to safety related to the China tariff threats. TLT hit entry at $124. TMF $20.26. Yields hit 2.37% on Wednesday. Small bounce back to 2.4% on Thursday. Watching as stock buyers show some life on Thursday.

Crude oil (USO) Found some support at $61.60 all week. The trek higher hit a roadblock with Trump’s comments concerning OPEC increase production. The sanctions in Venezuela and Iran, the tension in Lybia, and global data are weighing on supply, despite the data released by the US energy sector… the saga goes on. In the end, the data will prevail relative to pricing. Banked our profit in the position and looking for the next opportunity. Small reaction to the selling over China trade. Small bounce from consolidation as positive signs… watching.

Emerging Markets (EEM) The bottoming pattern moves above the $43.80 resistance failed again as the issues with China-US trade talks remain a thorn in the side of the sector. Moved to $41 support and held. Entry $41. Stop $42 (stop hit). News is driving the sector and watching how the opportunities unfold. More downside on tariff chatter. Bounced two days and retreated on Thursday.

Gold (GLD) building a base of support and looking for a catalyst to return to the uptrend. The dollar has been strong and outlook for global growth weak adding to the pressure on the metal. The downtrend is in play, but a bottom is forming near term. The Goldminers (GDX) offered a short side trade on the move lower and looking for a break above the $24.34 level. Entry $22.60. Stop $21 (adjusted) DUST. Big bounce on trade worries and money looking for safety. Retreated on Thursday’s buying in stocks.

MidCap (IJH) The uptrend from the December low tested with a move back to the $190.44 support. Watching if the bounce on Friday can follow through or more of the same? The attempt to break higher and through resistance at $197.60 reversed. Entry $190.45. Stop $193.10 (Stop Hit). Moved below the $190 support. Watching. Modest bounce clearing $190.44 level and watching how it unfolds.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Not a good week for the ETF as it traded down 6.5% overall with a lot of activity. We did trade the short side of this with YANG. Entry $42.70. Stop $50. Watching how the new week unfolds. Fell in reaction to the tariff talks and threats… Ugly chart. Small bounce last three days… watching.

(The notes above are posted every weekend and updated daily Bold Italics)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for May 16th: more buying, but it did show some conviction this time. Software, telecom, basic materials were upside leaders and garnered my attention. The weakness in the SOX was duly noted as a disappointment. There were some bright spots with AMD and NVDA beating earnings. Taking it for what it is currently… a bounce willing to trade the strength and avoid the weakness. Be focused and disciplined in any trade opportunities short-term.

  • S&P 500 Index (SPY/SPXL) upside trade opportunity with the confirmation of the bounce from the lows. Watching how this unfolds.
  • NASDAQ 100 Index (QQQ/TQQQ) upside trading opportunity with the confirmation of the move higher on Wednesday. Managing the risk of the sector and watching how the semiconductors unfold. Software (IGV) leading the upside move along with SOCL, HACK, SKYY.
  • Semiconductors (SOXX) watching how negative sentiment unfolds in the sector relative to Apple. NVDA and AMD earnings could help shift the tide.
  • Crude Oil (USO/UCO) upside resumed and watching for follow through. UGA also broke higher on the day. Energy stocks added some upside as well.
  • Positive moves from IYZ, IBB, XLF, XLK, ITB, XLV, UNG, USO, XLE.
  • Negative moves from SOXX, IWM, TLT, XRT, EEM, GLD.

WEDNESDAY’s Scans for May 15th: the bounce continued on the rumors of a delay in auto tariffs. Is that enough to elevate stocks and prompt a rally back to the previous highs? Not likely. Looking at the push to the 50 DMA along with volume and sentiment. Still plenty of question marks and willing to be patient and let this all unfold.

  • S&P 500 (SPY) needs to clear resistance 2860 and offer clear entry point. Watching today.
  • NASDAQ 100 (QQQ) $182.50 entry level cleared… watching today for confirmation. Large cap techs did well on Wednesday with GOOG leading the upside.
  • Technology (XLK) $75.05 level to clear if we are to take a position. Watching how today unfolds.
  • Treasury Bonds (TLT) still rising on the decline in rates. The flight to safety remains in play short term. Adjusting the stop.
  • Homebuilders (NAIL) topping pattern of consolidation. Managing our stops, but looking for a follow through upside as yields favor buyers.

TUESDAY’s Scans for May 14th: Modest bounce back from the selling on Monday, but faded into the close giving up some of the gains. As stated above not convinced the indices to retest the support near the 200 DMA and other levels. Letting this unfold near term. The charts show a modest bounce from the lows, but that does not indicate reversal at this point. Need more evidence and more positive activity as it relates to volume.

Watching the following… XLK, SPY, QQQ, XLK, SOXX, XLY, TLT… looking for clarity of direction and how any bounce or reversal will unfold. Patience as this all plays out.

MONDAY’s Scans for May 13th: More reactions to the China news of believing they can survive a trade war with the US. Only time will answer that question, but in the meantime, investors believe it will impact stocks and they selling accelerated. Sell on the rumor? We will see how this unfolds. Not really willing to chase the downside acceleration and watching for now how this unfolds. Some opportunities will arise from the ashes as news continues to drive the markets near term.

  • Major support levels broken… SPY, QQQ, IWM, XLK, SOXX, MDY. No shorts taken on the move, but willing if this all confirms.
  • Treasury Bonds (TLT) flight to safety remains in play.
  • Gold (GLD) moves higher on the look for safety.
  • China (FXI) tanks on the news.
  • Technology (XLK) not good sign as breaks lower.

FRIDAY’s Scans for May 10th: The trade talks remain the key headline to watch for investors. The speculation on one side ended Friday as Trump stated he would levy tariffs on the remaining imports from China. The talks will continue along with the speculation. The upside bounce into the close on Friday was more relief of knowing what the White House plans to do than continued uncertainty of what may lie ahead. Taking it for what it is… news. CPI numbers were positive and hope springs eternal about the outlook.

  • China (FXI/YANG) Watching how this unfolds next week with some reality given on Friday and the speculation that builds into the outlook.
  • Uber (UBER) failed to impress on their debut on the NYSE. The stock fell 7.6% from the offering price of $45. Plenty of talk about this all day… Don’t chase butterflies.
  • Managing the risk of positions… stops were hit this week on long term holdings and we will watch how they respond from here. It is never a bad thing to bank gains and holding cash during uncertainty in the markets. We made some solid trades in the VIX index as well as the short side of China. Taking what the market offers.
  • Looking for some clarity in the coming week for stocks. Energy stocks are moving nicely at the individual level and looking for opportunities in the sector as a whole.
  • Best trading opportunities last week came from YANG, SOXS, EDZ, UVXY, and TECS.

Sector Rotation of S&P 500 Index:

  • XLB – New lows and found support… got the move above the $50.35 mark. Entry $50.50. Stop $56.75 (Hit Stop). Upside hit resistance at the $58.13 level. Sold below the $56 support. $54.15 support held with bounce on Friday. Breaks support again on Monday. Holding for now without much change.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance and showing some near term topping. Watching and managing the risk. Entry $53. Stop $56.75. Topping pattern showing on the chart and the $57.12 level of support held with a solid bounce on Friday. Climbed again on a flight to safety. Holding near the highs.
  • IYZ – Telecom has a rolling top pattern and hit our stops to lock in our gains. Broke $29.50 support and bounced off the 200 DMA on Friday… watching how it unfolds. Breaks 200 DMA and support at $28.62. Upside leader on Thursday with solid gain off support.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and continued upside trend. Managing our risk. Entry $51.90. Stop $54.25 (adjusted). Solid bounce on Friday. Hung tough on Monday. Nice bounce to new highs as leading upside move.
  • XLI – Industrials moved to near-term low and bounced. $65 level cleared for trade opportunity. Entry $65. Stop $76.50 (Hit Stop). Broke support hit stop and watching how it unfolds. Moves to the 200 DMA and support at $74.17. Modest bounce and watching.
  • XLE – Energy stocks have struggled the last two weeks on the uncertainty about supply and production. Crude moved lower and the downside in stocks accelerated offering a short side entry on the break of support. ERY – Entry $39.60. Stop $42. A modest move higher from the consolidation pattern.
  • XLV –  Healthcare fell below the 200 DMA and accelerated. The cause of the doom-and-gloom for the sector is a proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Found support bounced, offered reversal trade at $86.80 entry. Stop $88.50. Gave back the gains from Friday. Tried some upside on Wednesday and Thursday.
  • XLK – Technology moved to near-term lows and bounced. $61.70 cleared for trade opportunity. Entry $61.70. Stop $75.93 (Stop HIt). Tested the 50 DMA and holding for now… patience. A big drop of 3.7% on Monday and bounced the last three days… watching.
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $25.76. Cleared $26.33 level of resistance and followed through. Holding support of the February highs. Ugly drop to the 200 DMA and $26.65 support. Small bounce on Thursday and watching the impact of lower interest rates on the sector.
  • XLY – Consumer fell to near-term lows and bounced. $98.96 level cleared for trade. Entry $99. Stop $117.50 (Stop Hit). Cleared resistance at $113.50 level. Bounced at the 50 DMA. More selling as the downside takes hold. Broke the 50 DMA. Cleared the 50 DMA on the bounce.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $95.50. Watching and managing the risk. Bounced from the test of support. Held under pressure. Added upside again on Thursday hitting new high.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

WHAT DID WE LEARN: Thursday

News and speculation work in both directions. The President tweets all is well and rumors of delayed tariff on autos sparks some upside. Then economic data and earnings help the follow through on the bounce from the current lows. All is well… right? We will watch and see, but in the meantime, we added some short-term trading positions on the move. You have to manage the risk of these type of trades and keep your eye on the prize. As stated above there were some positives and some negatives on the day. Some setups for downside trades as well.

Remember the markets hate uncertainty despite the bounce on the rumors and data. The economic news from China was weaker again as expected… FXI resumed its downward trek. US economic data was positive on Thursday helping to balance the not so good news on Wednesday. This continues to be a tightrope we are walking relative to growth and government policy. The test of the April low in interest rates gets noticed by investors. The inversion on the yield curve is deepening and the impact could be inflation… This is a key fact to watch moving forward.

We remain in heavy cash positions for now. Looking for the opportunities worthy of the risk. Taking our time to understand the current environment of emotions versus logic. Patience wins the race in periods like this.

FINAL NOTES: What did we learn from the trading week?

Markets tested and held key support levels after trading lower all week. Key issue this week was a trade deal with China. No deal, but we did get clarity of why and what is happening for now. The indexes closed in the red for the week, but it could have been worse. Sectors broke lower and we hit stops on positions. We traded some volatility with the VIX. We traded the volatility in China. We exited where the risk rose and now we look to find the next opportunities as we move forward. Economic data was on the positive side with the PPI and CPI showing inflation under control. The Fed kept its line of communication being the economy is steady. The talk in Washington of social medical programs continues to raise concerns in the healthcare sector. Some sectors are moving higher, some are moving lower, some remain sideways. Plenty of question marks and only time will tell the outcome. There are some issues facing investors as the trade agreement has not materialized with China. We will continue looking at positions to take profits, adjust stops, and manage the risk of the current environment. Holding cash is not a bad thing during uncertain periods… remember one thing… you can make up for lost opportunities, but the loss of principle is much harder to regain. The goal is to avoid speculation and follow our disciplined strategy for each position. Taking it one day at a time.

All of the eleven sectors managed to close the week in negative territory as money continues to move with some rotation. Technology and industrials led the downside for the week and raising new questions about the trend. Gold found support, the dollar is holding steady, and the economic data will help the buy side and the rumors and speculation subside. Seven sectors remain in a positive uptrend with three moving sideways in consolidation patterns. One (XLE) has broken into a new downtrend short term. Crude is holding support at current levels. We continue to take this one day at a time. There are plenty of influencers in the markets currently and headlines are the drivers.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time. 

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.