Market Rallies on ECB Promises

Early this week I stated that the last time the debt yields on sovereign bonds rose above 7% the ECB stepped in to calm the fears associated with default. They have done it again pushing the equity markets up 1.5%, Treasury bond yields rose and the dollar fell against the euro. All with one simple comment that the ECB will do everything to preserve the euro. That led to the relief rally today in the global markets. The million dollar question is will they follow through and if so when? The details will matter going forward .

How do we proceed on this news? Just like always… one day at a time. The timing of the announcement was great as the yields were up to 7.6% on the Spanish bonds and the short interest in the market was high. That sent the shorts to cover and allowed the global markets to bounce. The proof is in the pudding and Europe has much to overcome short term. Thus, proceed with caution.

All of the sectors I covered in my notes this morning bounced off support put the downside move on hold. The leadership question was not answered, but healthcare was up 0.8%, financials gained 1.1% and telecom jumped 4.1%. This puts them back on the road to recovery within the trading range and bounce of support, but there is still plenty of work to do if a leader is to emerge soon.

Sectors-to-Watch:

The S&P 500 index gained 1.4% on the day and saw a move off support yet again. While the index remains in a trading range it has managed to survive another flirt with support on the downside.

Since the June 4th low there has been a constant rotation of leadership. The obvious result of that is an inconsistent trend or trading range. The creation of new pivot points on the higher highs and higher lows brings with it new leaders and losers. Energy was the leader off the July 12th low, but has also been a leader on the downside of the July 19th high. Financials have acted similar with the highs and lows. Energy, Financials, Telecom and Healthcare have rotated leadership. Utilities, Consumer Staples and Consumer Discretionary have been moving sideways, and Industrials, Materials and Technology have been the most volatile overall. Some strong leadership from the value or growth stocks would help moving forward. Today was just the bounce off support and we will have to watch for a follow through on the upside if we are going higher from here.

The support level for the S&P 500 index remains the 1330 level.

This remains a traders market and one that shifts on news and emotions… Today is just another example.

Volatility Index – The index has been bouncing between 18 and 21 currently as investors sentiment shifts on Spain and economy. The rumors of more Fed stimulus has been the only calming influence on the markets until today’s comments from the ECB President. The story worked for today, but we will still have to watch the outcome short term.

WATCH: VXX came back into play with the Tuesday selling. Looking for move above $14.80. Entry $15 if fear continues to mount. Fear fell on the announcement from the ECB, thus the decline in volatility benefits SVXY today up 6.3%.

Dollar – Hits new high Tuesday on renewed concerns on Europe. Today drops big on the news from ECB. Took the exit on the move and we will see how this plays out short term.

WATCH: UUP – Support is at the $22.80 short term. Watch resistance the $23 mark (Broke higher today). Take exit if we break the $22.75 mark. (HIT STOP ON THE VOLATILITY TODAY)

Treasury Bonds – The yield moved up to 1.43% on the ten year bond in response to the ECB. Some of the worry is off the table short term, but the follow through by the ECB will set the tone for interest rates. Hold your positions in IEF as this plays out.

WATCH: IEF – $108.80 Entry.  Stop at $109 for now.

S&P 500 Index – The uptrend off the June 4th low was tested and held, but the move higher on the ECB news today is just that for now a move on news. Held above the 1330 support and now back in the trading range yet again. The comments from the ECB are not a done deal and there is still plenty to be concerned about short term.

WATCH: SPY – A move above $134.50 is a trade. Needs above average volume to interest me. Gap higher negates the entry for me. Watch to see how this plays out from here.

NASDAQ Index – The  test of support at 2850 held the last two days and today we bounce back to the 2900 mark… resistance? I knew posting the short opportunity would bring the buyers back 🙂 Bounce is in play and we watch to see how this plays out.

NASDAQ 100 index tested 2550 support and bounced off support to move back to 2590 resistance. Watching the large cap index for signs of life and a follow through on the upside.

WATCH: – QID Entry @ 33.90 or QQQ Entry @ $63.50

Small Cap Russell 2000 Index – Solid move higher at the open today, but faded back up only 0.8% and lagging. Not looking good after the break of the uptrend on Monday. Took stop off the short play at the open to let this work out and we are okay for now. The downside is still in play based on today’s activity. Watch and manage your risk.

WATCH: Short play with TWM on the break of 200 DMA. ($32.15 entry) Set stop @ $31.35.

Housing – Positive outlook for housing sector and the homebuilders going forward. The new home sales data on Wednesday didn’t go over well with a 8.4% decline and the test of support near the $20.80 mark took plays. The upside is still in play with some stalling short term taking place. Watch and manage the opportunity going forward.

Watch: XHB – testing support near the $21 mark. Watch support at $20.80 to hold or the downside comes into play.

Financials – XLF tested the 200 day moving average as the downside came back into play? The outlook continues to weigh on the sector overall, but the comments from the ECB did encourage a 1.2% bounce on Thursday. We are not out of the woods short term and the sector shows signs of cracking and a short play was taken on Tuesday. Today we had to manage our way out on the stop best we could. Craziness of news continues.

WATCH: Watch the downside opportunity with SKF (entry $45.30) – Stop $44.35 (Sold $44.25)

Energy – ECB promise of help is believed by all and the sector rallies back to the previous high before this mess started. This remains a sector that will move higher if the perception of recovery in Europe remains. Watch the upside and see how it plays out short term. Break above $69 will continue the uptrend.

WATCH: IEZ testing $47.75 support – watch for entry if it holds. Gapped higher on the gains today.

Commodities:

1)  Crude remains above the breakout level on OIL at $20.75 ($21.87 close). Closed at $89.50 today despite the worries. Could set up a trade off support ($21.50).  2)  Gasoline bounced slightly, but still questionable. Closed at $52.45.  3) Natural Gas holding above $20 on UNG $20.60 is stop on position. 4) Gold rose from the grave and above the downtrend line off the March high. GLD, $148.50 is support. $156 entry today on the follow through. 5) Gold mining stocks jumped on move in gold, up 5% on GDX. Move above $42.60 today and looking for confirm on the move.

Global Markets:

The global markets were moving higher in response to the ECB comments relative to the euro, Spain and Italy. The EAFE index was up 3.3% on the day. Watch to see how this plays out short term.  1) China (FXI) tested the lows bounced on the European news today gaining 1.7% and at the downtrend line watching for a follow through break higher, $33.70 entry.  2) Mexico (EWW) moved lower after a test of the March highs and bounced on Europe news. Look for a bounce off the $60.50 support (got it today) and the 30 day moving average (closed on it today). Look for follow through on the upside.   3) Europe (IEV) testing support at $31.80 (Held) and bounced on the ECB news gaining 3.9% today. 5) Singapore (EWS) was moving back near the high at $13 and bounced off support at $12.50, and took the entry at $12.70 on Tuesday. (stop @ $12.60) Nice follow through to $13.05 today.

What I am watching now?

Leadership remains the missing component of the market overall despite what the ECB offered with the comments today. They have to follow through and that is what many will be watching for is action not just words.

Follow through to the bounce off the support. The key issue is believability of the ECB and EU.

Gold is setting up to in a consolidation pattern. Broke the downtrend line on Wednesday, followed through on Thursday and still looks ready to run higher on the trade. Silver attempted to run today, but failed to join the break higher. Watch for the opportunity. SIL and GDX are worthy of attention as well. The miners have lagged the price of the metal.

Fixed income adjusted for the move higher in yield on the Treasury, but not much. Investors aren’t believing yet either. Watch for a trade in TBT if the trend higher in the yield follows through.

Economic data remains in play for Q2 GDP (Friday). New home sales (down 8.4% for June), jobless claims (big drop to 353K) and pending home sales (dropped 1.4%, worse than expected). Consumer sentiment will end the week (Friday). Watch as the trend relative to data continues to move lower.

Watch and play according to your risk tolerance. 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 downside risk determines your long term results. Trade smart.