Markets Continue Higher, But Cautiously

Thursday – Notes & Research

More blather about the fiscal cliff keeps investors on edge. Tomorrow is Friday and then it is pressure time. The President promised to veto any passage of “Plan B” from Congress. Of course both side are continuing to blame the other, and on, and on, and on. Thus, protect your downside risk and be focused on what you want, versus letting the worst case happen. Be proactive versus reactive.

The late day trading moved higher on positive comments, but we still closed flat on the NASDAQ as Apple struggled, but the S&P 500 moved up 0.6% on the day. Gold was off 1%, silver down 3.8% and oil was flat. Tomorrow promises to be interesting as we head toward the Christmas holiday.

Our goal remains to manage the risk of what we own… look for the next opportunity, and protect against the downside risk of a market running on hope. Tighten your stops and let em run for now.

We continue to see short term swings in volatility and prices across the sectors. The key is patience, discipline and focus. Don’t get distracted by how much money your are making… manage the risk of this market going forward.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The uptrend remains in play off the November 15th low. The index remains above the 1430 level and we live to play another day. 1465 is the upside target for the sector near term. The outcome still hinges on the resolution on the fiscal budget prior to year end.  To say we are cautious at this point is an understatement. We will stick with the trend and see how it plays out going forward.

The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. The winners have been financials, consumer discretionary, energy and technology leading the upside. Today Financials exerted themselves further on the upside maintaining the leadership. The balance were positive without much changing relative to direction and leadership.

The VIX index jumped back to 17 on Wednesday and above the 20o day moving average today. VXX was up more than 2.5% again today. Still looking at the selling pressure and what the downside risk is for stocks going forward. VXX has been the play on the last few days.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index – Stalled in a trading range of 3030 on the upside and 2960 on the downside, but managed to break above the top end of the range on Tuesday and is testing the move higher. NASDAQ 100 index is testing  the 2700 level and both indexes are in a micro uptrend off the recent lows.

Dow Jones 30 Index – Similar to the NASDAQ the index tested the top end of the trading range at 13,300. The support is 13,080 short term. Watch to hold support or break above the top side resistance. Testing  the 13,300 on currently… still work to be done on the upside if this trend is to continue.

WATCH: DIA – See Sector Rotation Model.

S&P 400 Midcap Index -The break above the 1000 mark on the index was a positive and a opportunity to trade or add the sector. Manage the short term volatility relative to the objective. Hitting against the September high.

WATCH: IJH – See Sector Rotation Model.

S&P 600 Small Cap Index – Stalled near resistance at the $77.60 level on IJR. Still looking for a break from the consolidation to the upside short term. The lower support level remains $75.60 for now. Watch and manage your positions.

WATCH: IJR – See ONLYETF Model

Telecom – IYZ broke through the short term resistance $23.90. Support on the move is $24.20 and then $23.90. Watch the decline on Wednesday of 1.4%? managed a small bounce on Thursday and we need to manage the risk of the play short term.

WATCH: IYZ – SEE ONLYETF MODEL.

Financials – XLF made a solid move higher support at $16. The upside remains in play as we attempt to move above the September high. Banks (KBE) are key to the catalyst and held most of the gains from Tuesday. Solid bounce back today gaining 1.4% to continue the upside move today.

WATCH: KBE – broke above downtrend line, tested and now moving higher. ONLYETF MODEL.

Basic Materials – XLB made a solid move back to the $36.85 resistance. Solid follow through on Tuesday to the upside trade, held on Wednesday and resumed higher on Thursday.

WATCH: XLB – S&P 500 Model

2) Currency:

Dollar – Downtrend remains in play – WATCH – UDN

 

Euro – The euro breaking above the $130 resistance mark on FXE. May be the beginning of a run higher in the euro.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds – The yield on the 10 year fell to 1.80% and the 30 year to 2.98%. The downside risk in Treasury bonds is back after a test on Friday. TLT broke support on the downside helping the play in TBT, but we have to be cautious.

WATCH: TBT – See ONLYETF Model.

High Yield Bonds – Testing the highs and resistance near $94 on HYG. Break higher would positive for the bonds as well as stocks.

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. Look for a bounce off the lows near $18.70 short term? We did get a small reversal, but it is now set up to rise higher. Watch for upside play on a move above $19.75.

OIL – Oil is stuck in trading range too narrow to even trade short term. Testing the upside of the current trend and needs to determine clearly the path… patience as a play develops.

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level? Watch for entry point if we continue higher for trade.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months. Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds. All of this is finally setting up on the down side for gold. GLL moved above the $62 entry point and holding. Got the break lower today and set up a possible short play in the metal. Watch for confirmation on the downsie short term.

Silver – Short play continues to do well with ZSL. The downside momentum has been picking up and we now have to shift to protecting our gains and managing our stops.

DBB – Base Metals are failed to hold support at $19.10 after a positive move on the upside. This is an interesting development after the move in Steel. SLX has been the trade on the upside along with the mining stocks in XME. Watch the overall move in the based metals, but take the play in the leaders.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. Setting up to break higher today.

WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now. ONLY ETF Model.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range is a positive with a trade entry at $33.25. Manage your risk and raise stop to $35.40. Falling yen is driving the stocks higher.

WATCH: FXI – China gapped higher followed through on the upside. Clearing the $38.10 resistance on FXI. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage your downside risk.

WATCH: IEV – Europe continues to rally despite all the negative economic reports and sovereign debt issues looming. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently and putting a target of $45.60 on IEV.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.

WATCH: IYR – Look for reasonable entry. $64.90

7) Global Fixed Income:

Uncertainty about the sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range. HOLD.

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 losses.