Market Outlook for Week of August 10th

MARKET OUTLOOK:

“When the horse dies, dismount.” Theodore Roosevelt

The jobs report on Friday got some of the blame for the downside to end the week, but the reality is more likely to be given to those who believe the jobs report would prompt the Fed to hike rates at the next FOMC meeting in September. In other words the market continues to be news related and linked to speculation. The Fed hiking interest rates has been thorn in the markets side since last November. With that in mind we review what is happening across the markets and various sector son the move up or down.

Rotation is happening as the healthcare, biotech, technology and consumer sectors all add downside to the charts. The leaders are being challenged currently and this puts the downside in play. Added some short opportunities below. They will add to the short trades already taken. It is important to remember that downside moves accelerate quickly and we will be willing to lock in gains and take profits off the table as it unfolds.

We start the week with four sectors in uptrends, four sectors in downtrends, and two sectors moving sideways. All four of the uptrend sectors shifted lower last week and that puts a negative bias in place to start the week. We keep our patience hat on, but we are willing to establish some short side trades it the downside follows through.

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

  1. Biotech (IBB) took it on the chin to end the week with a break below the $368.70 support. The 50 DMA was broken as well and the long term uptrend is coming into play currently. The sector has broke down before, but has managed to snap back quickly. A failure to do so in the coming week will invite more selling as speculation will build around the downside. BIS hit the first entry at $28 mark Friday. $29.40 is the next entry point as we start the week. Healthcare (XLV) in same downside move… $74.73 break, 50 DMA break, and $73.85 exit point or short entry.
  2. China (FXI) is a mixed bag of nuts. The government intervention versus the free markets for stocks? Not clear which is winning? For now the government is with outlawed selling stocks. $41.50 entry point on FXI as possible relief bounce. I am still leaning towards the downside based on the economic data. Watch and see.
  3. Emerging Markets (EEM) attempting to hold support near the $36.30 mark. Attempted bounce, but no conviction. Watching to see if there is a upside trade above the $37.25 mark or a downside resumes with break of low at the $36.30 mark… patience is key.¬†Willing to take the short trade here as well on the break lower.¬†
  4. Semiconductors (SOXX) broke $87.20 support and looking for a base to build if this is going to bounce. If the downside accelerates the short entry is $85.30. SOXS $57 entry.
  5. Dow Jones Average (DIA) Broke the 17,450 support level to end the week. 17,265 next. Trading below the 50 and 200 DMA and the 50 is close to crossing below the 200 DMA which is technical death cross. Short side trade is there we need look at the entry and risk this week. SDOW entry $20.35.
  6. S&P 500 Index (SPXS) hit the $18.25 entry mark on Friday. Watching for follow through and trade if the downside continues this week. Big wedge pattern at the end of the chart on the short ETF.
  7. Japan (EWJ) in position to break through the downtrend line and move higher. The $13 mark is the entry point and level to watch as we progress.
  8. Cyber Security Software (HACK) The support at $29.75 is breaking lower. This is a short trade setup for the sector. Remember you must borrow the shares prior to selling the position short. Watching for the entry and 4-6% move lower. Patience with the entry.
  9. Volatility Index (VXX) The index bouncing off the low and setting up for a near term trade. Entry $16.65. Be patient with the entry to start the week after the weekend it will give some clarity.
  10. Treasury Bonds (TLT) rally on as the rates decline on more speculation the Fed will not hike rates in September. The selling in stocks has pushed money to the bonds as well… perfect storm short term for bonds to rise in price. The downside is still the trade of choice as this all unfolds. Watching for the downside trade to set up.
  11. Soft Commodities (DBA) consolidating at the current lows. Looking for the opportunity if it can bounce. Short side would be by individual commodity versus the whole. BAL, CORN, SOYB, JO, WEAT…

MAJOR INDEX STORIES:

S&P 500 Index (SPY) 200 DMA and $206.10 are the support levels to watch this week. Moved back above the $208 entry point to add. Stop is $204.40. The triple top is still an issue relative to a ceiling on the index currently. Not sure who is in  control near term and willing to let this play out on either side for now. Selling returned last week and we are now on watch relative to the stop and the trend.

NASDAQ 100 Index (QQQ) Managed to break below the $111.10 level for short term trade on the test lower. SQQQ is downside trade entry at $22.50. Stop $22.05. The index has been subject to the large caps selling and some the leadership made some negative turns to end the week. Patience is the key to see how this unfolds short term.

Russell 2000 Index (IWM) Managed to break below the $121.25 support level along with the 200 DMA. Short side trade setup with TZA entry taken (see below). The internals are bad a move below the $118.80 mark will make matter worse for the index. Not seeing much in terms of love for the small caps. Patience.

Volatility Index (VIX) made the move to 14.1 Friday. The volatility has shown up modestly on the selling, but nothing to write home about. The VXX trade entry at $16 triggered with the stop at $15.80 for now. No acceleration on the VIX, but there is a worry in the air.

Transportation (IYT) Moved back to the $148.50 level on sector earnings and the brake through resistance. Entry at $149.50. Stop $147.50. Still need to see the upside resume short term, but this is a positive for the major indexes. Selling knocked the sector back near the $150 level still has work to do if the upside is going to resume. The test of the breakout is now in place. Reversal on the upside breakout could offer opportunity to add the position on the move.

Dollar (UUP) The dollar technically is attempting to break from a double bottom pattern, but reversed to the end the week. We are watching how this responds to the employment cost speculation around the Fed. I still like the upside for the dollar near term. Moving back to the $25.66 resistance. 

Crude Oil (OIL) Crude continues to¬†be downside bias commodity. Despite the drop in supply data there is still plenty on the horizon. In fact, Congress is considering allowing US oil companies to export oil… that should say something. The price fell to $44.25 on Friday and remains in a downtrend. Short side trade¬†remains for now. See trade below.

SECTOR STORIES: 

Small Caps (TZA) short side of this trade is setting up to be traded again based on the activity the last few days. Entry at the $10.45 level is attractive for the short side trade. HIT entry $10.45. Stop $9.75. Followed through on Friday and looking at how this unfolds to start the week.

Energy Sector (XLE) modest bounce on the short lived rally in crude. Ended with the earnings and drop in crude. Short side trade in play again. ERY at $26 or lower if we get a test early in the week. Nice short side trade and follow through as stock fade again. Stop $25.25. Watching to see if oil finds room to bounce off recent selling to lows.

Apple (AAPL) tested the low at $112 level and bounced. That is worth watching for a follow through bounce and trade back to the $122.50 level. Entry $116. Stop $112. Consolidating near the low and looking for the upside to bounce back.

Crude Oil (OIL) short term rally as the supply data shows bigger drop than expected. Then the sellers returned as earnings in the sector put a damper on the outlook along with warnings from the companies. Short trade back on? SCO at 88.90 entry on renewed selling. Sellers remain in control of the commodity with break below the $45 mark. Stop $94.  

Regional Banks (KRE) Held the test of the 50 DMA and bounced. Took some selling on Friday from the employment cost speculation stating the Fed may put the rate hikes on hold. Holding XLF below and here we are looking at KRE again as opportunity $43.90 entry. Patience as the news unfolds. Hit entry, stop $43. Still need some upside momentum near term.

Utilities (XLU) Not an exciting sector, but one that is paying a 3.7% dividend and offers some upside as all the noise around the dividend stocks subsides. The bounce and test off the low is now in position to offer some upside opportunities. Entry of $43.50 is Hit the entry managing the risk of the move with Stop $43.15. Nice bounce to move higher on Friday.

Real Estate (IYR) REITs are moved off the low in June. Hit resistance at the 50 DMA and looking for the downtrend to break as well. That means catalyst to break through the resistance. Watching and looking for entry near the $74.75 level. Hit that level on Friday and added the position. Stop $73.40 for now. Let this unfold and if the rate hike rumors return the downside may return. Stuck in range at resistance for now.

Financials (XLF) remains challenged by the uncertainty issues. But, the Fed is committed to hiking interest rates and the longer term view is to own the sector. You have to be willing to stomach the volatility and add to the position on weakness. Moved back above the $24.50 mark¬†added¬†positions. $24.70 entry.¬†Still challenged… Stop $24.70 on the positions.¬†Holding for now and will manage the trade.¬†

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 (entry) helped for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $77.30 exit point raised stop.¬†Now we look for the retail data for July as more insight into the consumer.¬†Speculation on the earnings from Disney has pushed the sector lower.

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