Market Ready for End of the Year Push?

Monday, November 26th

The bounce on Friday left the charts with mini breakouts and V-bottoms. We did hit several entry points on Friday as updated in the tables, but they were taken with a cautious eye towards the trading week. The retail sector managed to lead as positive news from Black Friday shopping was the catalyst. The headlines are buzzing with positive news from the retailers and Cyber Monday is on tap today as the next big thing.

The challenge for this week will be good news in retail versus the other issues facing investors. Greece? Fiscal Cliff? Economic Growth? Etc. How does this all unfold and how much conviction to traders/investors have looking forward? As always we default to the charts for the answers as they provide the answers.

We start the week looking to add new positions if the upside follow through confirms in the first full day of trading following the holiday. I fully expect a test of the move from Friday. The S&P 500 index moved back above the 1400 level without much pain in light volume, and we will watch to see how it starts Monday.

The dollar struggled on Friday with a big rally in Europe? Another development of interest.

Be patient and stay focused as this all plays out during the last week of the month.

What am I watching?

Natural gas made a move above resistance on Wednesday. BOIL moved through the $56.20 leve and heading towards the target of $61. UNG is the unleveraged play for the commodity.

DXJ – Japan’s Dividend ETF made a move above the 200 day and top of the current trading range to break higher. Watch for entry opportunity on the move.

ITB or XHB – homebuilders moved back towards the recent highs. Is the sector for real and ready to take the next leg higher? Or are the pretenders and ready to test lower near term?

YCS – Short Yen ETF continues to jump higher on the weakness in the yen currently. Thus, the rally in Japanese stocks EWJ heading higher as well as DXJ above.

EPHE – Philippines country ETF breaks higher as well showing a continuation of the uptrend.

Oil jumped higher on Monday and gave it back on Tuesday. Wednesday it is back near our original entry point of $21. Watch as this plays out for an upside play.

Treasury bonds reversal on a market rally. TBT is the trade on the upside.  Watch and protect the position as the bonds have been equally volatile on price.

Looking for a short set up on the bounce. The gap higher on Monday took the bounce trade away and we will see how this sets up going forward.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index rallied on the hope of resolution to the fiscal cliff on Monday. Tuesday dealt with the Bernanke speech stating the Fed needs the Congress to come to a useful resolution on the budget and taxes. Wednesday was boring as everyone heads to a Happy Thanksgiving feast. And Friday was the rally on retial hopes. The real clarity should come on Monday. Watch to hold the 1400 level on Monday?

The Scatter Graph below has a starting point of 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and then renewed the trek lower and on the 15th bounced off the recent lows. The bounce is in play now and we will shift the pivot point forward to the 15th if this move holds.

The leadership for the move on the 15th low has come from Consumer Services, Financials, Consumer Durables and Basic Materials. We would like to see Energy and Telecom join the move to the upside as well. Energy made a nice move on Wednesday after some selling on Tuesday. Still need some clarity going forward, thus be patient for now.

Breaking the Sectors Down:

Financials – Bounce in play. cleared $15.45 resistance on the move today. Watch for confirmation and follow through on the bounce. Got some movement today as we watch for the follow through upside on the bounce move.

WATCH: XLF – $15.72 Entry (Friday) on the move back towards the top end of the trading range.

Review the Watch List on S&P 500 Model – Updated 11/25

NASDAQ Index – Have we found support? Intraday reversal on Friday gave some hope, follow through provided a opportunity on the upside for a high risk trade. Gap open was a challenge and now we look for test of the push higher. We will watch and be patient to see how it plays short term.

Watch: QQQ – V-bottom formation 65.10 entry possible on follow through or test of 63.90?

Homebuilders – there was some selling on news, but the current bounce off the lows comes from the data points showing gradual improvement in the sector. The consensus that it only goes higher from here is being challenged and some different views on the table. Watching the test of the previous highs with interet. See comments below.

On my Watch List looking forward:

The housing sector has turned the corner just in time to see a train coming head on. The sales have improved and inventories drawn down, not to mention the homebuilders stocks have have climbed better than 45% during the year. Why the train comment? The budget issues facing the country need income to feed the deficit. Thus, what better place to go than the interest deduction for interest on a home loans. If the rumors are true, that change could derail any continued recovery in the housing market short term.  XHB is testing support near the $24.35 level. The economic data relative to housing continues to improve this week. Existing home sales were better than expected, builders index was up over October and housing starts were better than expected. Impact on XHB… not much. The upside continues to struggle with the overhang of the current fiscal cliff issues and taxes. Watch for downside risk to risk on a pullback in the broad markets.

Short opportunities are not over… we did get the bounce we were looking for and now it is matter of sustainability? I am not inclined at this time to believe that exists. The oversold snap back was just that for now. This could and should based on what we know, produce a short opportunity on the rally and an opportunity to take money out of positions that have been lagging overall.

The VIX index (S&P 500 Volatility Index) remains low and not showing any elevated fear from investors.  This remains interesting to me short term and we will continue to watch how this plays out. Moved even lower Monday on the rally with the index moving back towards the 14 level.

2) Currency:

Dollar – The dollar bounce still in play, but volatility is rising short term. We will take the trend as the key and hold with our stop in place. The big drop on Friday was interesting considering the daat surrounding Europe. Watch and see how this unfolds to start the week.

WATCH: UUP – Entry – $22.05 – Stop $22.05 HIT STOP FRIDAY

Euro – Watch for a play to develop in the euro near term as support tested and the oversold conditions bring buyers in. Big bounce on Monday. $127.30 is the entry target for now. Gap open passed, but this is interesting development for Europe in light of Greece.

WATCH: FXE – Entry – $127.50 Gapped above the entry -passed looking for test of the move.

3) Fixed Income: Yields bounced again on Tuesday putting downside pressure on Treasury bonds. The shift is welcomed for equity holders.Tested the lows and looking for some definitive direction short term.

Treasury Bonds – Reversal short term as yields climb on the 10 year to 1.68% and the 30 year to 2.82%. Watch the downside to play out short term with TBT is the yields continue to rise.

WATCH: TBT – Entry $60.25 / Stop – $60

High Yield Bonds – Big bounce on Monday with stocks moving higher. Watch the downside to return as the bonds tend to trade more in tandem with stocks.

WATCH: HYG – $91.70 short play <OR> SJB – Entry $33.25 (ProShares short high yield ETF)

4) Commodities: The commodity sector continues to be a challenge without clear leadership. Natural Gas has moved off the recent lows and is challenging the previous highs near term. Worth watch and potentially taking a trade if the trend continues higher.

WATCH: SLV – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance. Hasn’t materialized and looking to exit if we don’t move higher on Monday. Got the move higher and we watch to see how it progresses.

WATCH: OIL – $21 Entry – Gapped higher on Monday, tested the move on Tuesday. Middle East issues playing havoc with the futures market.

WATCH: UGA – Entry $56.25 / Stop $56.25- Watch and manage the volatility. Move above $57 positive.

5) Global Markets: The NASDAQ Global Market Index (NQGM) broke below the 200 day moving average and the downside has accelerated similar to the US markets overall. Likewise it rallied or bounced off the lows this week and a move above 930 would be positive. The EAFE index (EFA) moved back above the $53 level and is looking ready to move higher short term. Solid bounce back in China (FXI) after testing support. Still no clear direction in the global markets as the risk remains high in the asset class. Watching for upside follow through.

WATCH: DXJ – Japan total dividend ETF is breaking higher on the rally in Japan. The break from the trading range is a positive with a trade entry at $33.25.

WATCH FXI – China is bouncing off support and a move above the $36.70 level would be a reasonable entry point for short term trade.

6) Real Estate (REITS) – The sector broke support at $64 (IYR), and tested the $61 support for the recent bounce. Should see some stability, but limited upside for the near term.

WATCH: IYR at the 200 day moving average.

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. 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 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 of your portfolio.