Market Set to Test Lower on Europe

Europe could set the tone for the trading week as the worry level rises. The Stoxx Europe 600 was down 1.5% early over worries of implications of the French elections, weak Chinese manfacturing data and renvewed worries over Spain. While the issues in Spain are not new they continue to simmer and if they start to boil the challenges to the EU will create renewed uncertainty and outlook for Europe. That will ripple around the world economically and if France changes political leadership it will only add to the speculation. Thus, we start the trading week with renewed interest in Europe.

Chinese manufacturing slowdown isn’t really a surprise, is it? All the data has been showing slower growth, but each data point solidifies the reality of the slowing. Reality is sometimes a tough pill to swallow for investors. We have been tracking FXI, iShares China 25 ETF as an opportunity on the upside as the charts made a solid break higher last week. It is likely to test $37.20 support on the news, but should still hold above $35.70 support or the previous low. Watch how this plays out short term as it may present an opportunity to add a position on the test of the breakout.

There has been a renewed interest in dividends by investors and Wall Street. The year started with a shift from value to growth stocks and there is a move back towards value which has been prompted by the economic data and global outlook. My only comment is follow the trend and remember all stocks have risk on the downside. That said, I did find some interesting charts to watch as we start the new week of trading.

IYR, iShares Real Estate Index ETF has move back to the top end of the trading range. $62.80 is the level to watch on the upside. Investors have been buying REITs again as one of the dividedn opportuntunities. The ETF is up more than 10% on the year with investors pushed money into the sector. Since February it has traded sideways and the test of $59.80 support led to the current move back to $62.50. The momentum will continue with a break higher and renew the uptrend or another test within the range. This is worth watching either direcion as an opportunity this week.

The NASDAQ 100 Index is topping. The support level is currently $65.20 and break below would be a negative for the large cap index. The leadership of Apple has been one of the key drivers and the decline of more than 10% in the stock has taken it’s toll on the index. High volume selling on Thursday and Friday is hurting and worth watching on the downside short term. This could develop into a short play on the index if the break lower gains momentum.

The SOX index is breaking down with a strong downside showing on Friday. The close was below the March low and the outlook for chips is not optimistic short term. The move Friday offered a short opportunity as a trade, but this may provide more downside than originally thought. 396 on the SOX index is the key support level to watch. A break of that level offers more downside in the sector.

 

There are plenty of consolidation patterns when scanning through the sector ETFs. Unfortunately there are more negative patterns than positive for stocks. The fixed income charts are setting up for breaks higher as money is rotating short term towards safety. This may be the week the charts set in motion a new direction. If that is to the downside you have to play them as nothing more than a trade in most instances. The confirmation of an extended downside has not emerged yet. This remains a traders market and one that is dangerous from my view. I am always willing to take trades as they develop, but you have to respect the risk of the trade as well. Stay focused and disciplined in your trading. Plan your entry, your exit and your target.