Markets Close Down on the Week

Friday, October 12th

Again the market opens higher only to retreat and the S&P 500 Index struggles to hold the 1430 level on the week. The challenge on Friday came from the financials. Despite the solid earnings from JP Morgan stocks sold off. Is this all a sign of what is on the horizon for stocks? Looking at the charts we see the sellers have taken control for now and the downside is still in play. This is a market set up for more selling risk short term. We have to be defensive and manage the risk accordingly. This is not a time to buy into  the everything is going to be okay and this is just a minor pullback in an uptrend. If the later statement is true the charts will validate the move.

The challenge remains in the numbers being reported from the economy and earnings. Wells Fargo beat expectation, but revenue is declining raising questions. Worry is growing and the sellers are growing in boldness. As we possed the question yesterday, should we be worried about the current reports on the economy? Global economy? Corporate earnings slowing? Commodity inflation? Does any of this really matter? The simple answer is not until it does. The only challenge with that is determining when that will be? Thus, manage your risk, determine your exit points, set your stops and watch to see how it plays out short term.

Treasury yields continue to decline with the thirty-year bond back below the 2.85% as investors continue to rotate towards safety. This is another sign of weakness for the broad market indexes.

Overall it was a challenging day for the markets, but it amounted to another test of near term support. There is still plenty of work to do and worries to conquer for investors and their confidence, not to mention earnings reports.

What am I watching?

Treasury Bonds – TLT bounced off support at the $120.75 mark. If the momentum builds bad news for stocks. The $124.50 break higher is a trade set up for the bonds again. Fear is the driving factor again.

Natural Gas has jumped higher with a break above resistance. Watch for confirmation on trade. FCG move above $17.95 would be of interest as trade opportunity.

China breaks out despite all the talk. Buyers are putting money to work. FXI cleared $35.70 look for entry on confirmation of the break higher. GXC is more diversified play, but the volume is much lower.

Bank earnings should have helped the sector, but there was more selling in response. KBE, XLF and KRE all broke down. Watch to see how this unfolds on Monday – the leadership of the sector has been important. More selling will be bad for the overall sector.

Technology – remains weak and the downside is spreading in the sector. The move in Apple has been the most visible, but Intel isn’t far behind. SSG is playing out well for now. Watch the other short opportunities in the sector near term.

Continuation of short play on NASDAQ 100 index QID?

Gasoline – UGA – Hitting against resistance again $61.40 watch the upside on a breakout. The refiners are part of this move as well. Looking to see if any of them reverse the short term test over last two weeks. — The reversal lower on Friday was a negative to the upside move. Still watching for direction.

Apple – (AAPL) Can the stock hold support at the $623 level? If so, a bounce play may develop short term.

Below we address the sectors looking forward:

1)  US Equities:

S&P 500 Sectors-to-Watch РThe index picked up selling momentum and failed to hold the 1430 support on the close Friday. 1420 is the next key level for the index to hold support. As we discuss below financials sold on Friday dropping 2.5% to pushe the index below support.

The Scatter Graph below is run from a starting point off the high on 9/14 following the FOMC meeting rally and current high. As you can see we drifted lower and we are testing support again. The leaders have turned lower with healthcare, consumer staples and telecom shifting lower. Utilities and Consumer Staples are holding steady, but the balance of the sectors are picking up some downside momentum. The next pivot point to watch is the high on October 4th and that is showing technology and consumer services leading the downside momentum. Watch the current selling for confirmation as we go forward.

 

Financials – The sector dropped 1.4% on Friday and hit the stop on XLF. The banks sold off 2.4% to lead the broad sector lower. Friday was not a good day for the sector overall. The earning from JP Morgan and Wells Fargo weren’t bad, but it was a no win situation as traders have been looking for a reason to sell the stocks. Thus, watch the downside movement short term.

WATCH: XLF – $15.75 Entry – Added on Monday – Stop $15.85 (HIT STOP)

Energy –¬† The sector has been churning on the up and down movement in crude. The support at $72.50 is in play and a move lower invites the downside play as a trade opportunity.

WATCH: XLE – Trading range $72.50 – 74.50 for now. / DUG – Short play on the sector $21.20 entry.

Telecom – Added the play with the sector remained in a positive uptrend. Selling returns on Friday and support is $25.20 watch the stop and see how this plays from here.

WATCH: IYZ – $25.75 Entry Added – Stop $25 / WATCH: VZ & T weakness as a buying opportunity.

Healthcare – The sector has pushed gradually higher, but there is some more testing the move higher. The selling puts the index is a tough spot relative to support. Hit our stop on XLV and we now watch to see how this plays out near term.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $40.40 (HIT STOP)

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling. Apple is putting downside pressure on the index short term. Raise stop to break-even and watch for move through resistance near the $29 mark. hit the short term target… watch to see how this plays out from here – tighten stop.

WATCH: – QID Added short play with the support break on NDX. Added QID at $28.15 – Stop – $28.40 (Raise Stop)

Transportation Index – The transports bounced off support last week at the $86.75 mark on IYT. They were chugging along nicely, but hit some resistance as the broad indexes have been selling. Still looking for this to be an indicator on the upside or downside for the economic picture short term.

WATCH: IYT – retest of support near the $86.80 mark.

2)  Currency:

Dollar – The dollar, like stocks, is being pushed up and down based on the daily sentiment towards Europe and the global economic picture. The downside pressure on the dollar has met support currently and bounced. Looking for a clear direction on the buck.

WATCH: UDN – Entry: $27.40 / UUP – Entry $22

3)  Fixed Income:

Treasury Bonds – The upside for the bonds are in focus as the markets reach a point of uncertainty. Looking for money to rotate back into bonds if the risk is rising.

WATCH: TLT – Watch for a break of the downtrend line off the July high. ($124.50 watch for break higher)

Question: Is there are bubble in the High Yield Bond Sector? HYG recently tumbled from $94 to support at $91.60. While the decline was only 2.5%, the show of volatility and risk relative to the price of these bonds was made abundantly clear. Is the party over in the sector or is this a buying opportunity? A break of the near term support would be a exit now and ask questions later event. We have bounced, but there is still a concern for the bond class. $91 Stop is good.

WATCH: Short play on HYG or JNK if support breaks.

4)  Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. Watch for shift in direction short term.

WATCH: GLD Рtrading range breakout? not yet / SLV Р$33.80 Entry. Breaking lower watch downside.

WATCH: DBB – Tested lower again as the selling accelerated. Watch support 200 day moving average?

WATCH: OIL – up/down??? Watch to see if we gain any short term clarity.

WATCH: UNG – natural gas broke higher (cleared 22.60 resistance) on Thursday – looking solid short term on upside.

5)  Global Markets: The global markets bounced last week off the low at $53 on EFA. It has been testing the support level again along with the 50 day moving average. Break of support brings the short trades into play. Small bounce of support on Thursday, still watching the downside.

WATCH: EFA – Moving lower testing support? / WATCH: EFU – short play on the sector. Entry – $19.85

6)  Real Estate (REITS) РThe sector tested the recent high and support at $64 (IYR). Watch your downside risk if you still own this sector. We are looking for upside play if support holds. Testing without any conviction for now.

WATCH: URE – watch for entry / WATCH: SRS – short REIT play. Entry $26

WATHC: REM – Shift in sentiment and broke support at $15 as the downside is gaining momentum. NLY is acting the same short term as money rotates from the sector. Watch for support?

7)  Global Fixed Income РUncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80.

WATCH: Emerging market bonds (EMB) – they continue to move steadily higher. Testing the highs.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing near term support on minor pullback.

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 downside risk determines your long term results. Trade Smart!