Markets find reason to test the move higher

OUTLOOK: June 8th

G7 meeting starts and Europe takes a stand against the US tariffs. That headline tells the story of the day and once again the worry surfaces… despite that the markets held up well after selling most of the day. There was movement in the NASDAQ and small caps as they were ready for a test following the solid upside advance. We will watch how this unfolds and if money rotates to other areas of the market. That did not take place on Thursday. Technology stocks declined more than 1.4% early and rallied back at the close to cut the losses to 0.8%. Digging into the sector you can see the charts show some solid tests and opportunities based on the next moves. We will let the market make the choice and not speculate on the outcome. Friday and summer… not expecting much to take place today relative to charts… but, we have our stops in place just in case the worries return.

The S&P 500 index closed down 1.9 points at 2770 as the index tested the Wednesday move above resistance from the trading range. To validate the day of consolidation and testing energy and utilities led the upside. Technology and basic materials led the downside as investors ponder the next move. Industrials move above resistance at the $75.72 mark and consumer staples posted a positive move on the day as well. A look at the chart shows the break from the flag pattern on above-average volume. The move helps the cause to reestablish the upside trend with a move above the 2743 mark. The next hurdle is the 2800 level. The chart is holding the long-term trendlines off the January/February 2016 low. Patience is key.

The NASDAQ index closed down 54.1 points to close at 7635. The move above 7505 level (January highs) was positive and Thursday tested the established new high. The long-term uptrend remains in place as well as the short term move higher from the February lows. The index continues to show leadership in a market of news driven stocks. The large caps (QQQ) tested as well after leading the upside and closing above the March highs. The SOXX tested the move higher equally after breaking above the $187.03 resistance and continues to show leadership. The key remains patience along with a strategic approach to managing money.

Small Cap index tested on Thursday after hitting new highs three days in a row… it was due for a rest as the sector continues to show solid leadership overall. The leadership of this sector has been key to the bounce from the April lows with the move above the $160.50 double top as a clear sign of momentum from the sector. Entry $155. Stop $163.30 (adjusted). Managing positions as trades and letting the market determine if it becomes a long-term trend.

Gold (GLD) Modest bounce off the lows to keep the metal below the 200 DMA and holding the current levels of support. The downtrend is in play along with the short side trade. The gold miners (GDX) are equally volatile based on the metal and we are managing our position as the volatility plays out. Entry$21.92. Stop $21.92 (adjusted). Metals and Mining (XME) moved higher to clear the $37.40 level of resistance and holding for now. The sector is facing some resistance near term as the sector tests the move higher and the uptrend. Entry $37.50. Stop $36. Watching how this unfolds near term. Base metals (DBB) are on the move again with renewed talks of tariffs and politics. $19.35 resistance in play as it tested the move Thursday.

The dollar (UUP) bounced and cleared resistance at the $23.65 level to go on an uptrend move above the November high. The last week the buck tested the move higher and made a move lower the last three days showing some negatives on the chart… Stops are in place and watching how this unfolds near term. The overall move higher is a positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks. Took the upside trade near term as the move above $23.75 was the entry point for UUP. Stop $24.55 (adjusted).

Crude oil (USO) Bounced off the current low but remains below the $66.28 level of support. Speculation drove the price higher, and speculation is a double edge sword as profit-taking plays into the move… throw in OPEC and Russia discussing increased production… i.e. supply becomes an issue to consider. The question is will they? The trade will be based on the believability and timeline for the implementation. This would help offset the estimated 1 million barrels a day that would disappear from Iran sanctions… that speculation has driven the price higher, and now we have opposite speculation to offset the losses… the jury is out for deliberation. Hit stops and took profit… added SCO at the $18.25 level, stop $17.80 (adjusted), as the opposite speculation takes over the driver’s seat.

Emerging Markets (EEM) a rising tide raises all boats… maybe the case with the emerging markets as they move back above the $46.62 resistance Wednesday, but failed to hold the move on Thursday with some selling back in play. Volume spiked on the move Thursday and watching how this unfolds with the sector still in a downtrend. With the dollar, tariffs, trade wars, and interest rates all playing into the volatility of the sector it isn’t promising. We will let the market speak and it continues to say lower in the current trend.

The Volatility Index (VIX) closed at 11.6 Wednesday to eclipse the lows in May as optimism plays into the current environment. Thursday was a test of the move closing at 12.1. We saw some anxiety over Italy, tariffs, and uncertainty… and then some hope about economic data. It remains a buyers market for now with little anxiety in the chart… Remember there is plenty on the stove that could boil over at any time… watching how this unfolds.

Money Rotation in full bloom currently and following the leadership is key. The week was news drive but managed to end the week on economic data offering some upside hope. The thoughts of Italy leaving the EU will hang over the markets… that storyline is not over. Tariffs remain a challenge and with the G7 summit, it will hit the headlines next week. But, the employment data shows what is still king for investors… economic data that supports the growth story. Semiconductors showed a slowing in money flow for the week but moved higher. Worth our attention in the coming week. Energy dumped lower on the decline in crude but managed to bounce despite the commodity closing below support to end the week. Yet another storyline to track. Treasury bonds rallied along with the interest sensitive stocks as rates fell back below 2.8%. Watching the bounce on Friday to 2.89% to close the week… positive economic data trumped bad geopolitics. The NASDAQ broke higher from consolidation patterns and S&P 500 index struggled to accomplish the same… next week we will look for a follow through to the upside trend reversal and how news influences the direction overall. 

Monday, Tuesday, and Wednesday post a positive start to the week as indexes clear key resistance levels. The focus is follow through on good volume… which we have had… patience and stops in place as the week unfolds. Thursday showed we can test the moves and still remain in the uptrend. The question begs, how do we close the week on Friday? The upside opportunities follow through sometimes when you least expect them. And the downside resumes… when you least expect them. The G-7 meeting continues through the weekend and will play into how some view the outcome of the tariff issues facing global trade. Focus on your strategy, discipline, and patience. 

(The notes above are posted daily based on the activity of the previous days trading)

KEY INDICATORS/SECTORS &LEADERS TO WATCH: 

Biotech (IBB) remains a sector of speculation… The sector has taken on an emotional ride of ups and downs based on the current belief and market volatility. The worries over the President following through on campaign promises has been dogging the stocks. He announced the changes proposed to drug pricing, etc. and they were better than expected and pushed the sector off the current lows. We added a position on the move back above the $107 mark to complete the bottom reversal attempt. $107 entry. $107 stop (adjusted). Nice follow through for the week to close at $109.84. Intraday struggles continue with the small caps, but the large caps XBI continue to push towards the January/March highs… watching how today unfolds. We also own XBI. Entry $91.10, stop $94. Letting them both play out near term.

Semiconductors (SOXX) The sector tested the 200 DMA and bounced back above the $181.60 resistance and traded in a narrow range for two weeks… $181.60 vs $187.03. The solid close above the range on Friday was a positive and now we look for the follow through and leadership on the upside. We own a position… entry $173.50. Stop $187 (adjusted). Managing the risk of the current environment. Follow through on the break above resistance and pushing towards the March highs. Small test on Thursday as the upside remains in play. Solid leadership from the sector off the April lows. 

Software (IGV) bounced off the near term low and test at $171.11 support. A nice move higher clearing the $179 resistance and tested at the highs of late. A move above the $185 level eclipses the March and May highs. Entry $176. Stop $181.89 (adjusted). Letting it run and managing the stop. Break to new highs and test on Thursday. 

REITs (IYR) The sector made a break from the trading range clearing $76.22 only to reverse and test the move back to $75.21 support and bounce on interest rates declining back below the 3% mark. This week they rallied again as rates fell to 2.78% before closing at 2.89%. The volatility in yields in offering help to the sector. Watching how this up and down effect unfolds. Entry $75. Stop $75 (adjusted). 3.8% dividend. Clears the $78.30 level to continue the uptrend. Stalled at the $79.20 resistance. 

Treasury Yield 10 Year Bond (TNX) moved back to 2.76% Tuesday and closed the week at 2.89%. The up and down in the yield is pushing bonds up and down (TLT). The rally in bonds offered some upside to bonds, REITs, utilities, and telecom for the week. Yields dumped lower on the rotation to the dollar. The EU news prompted a big rise in US treasuries. In turn, this pushed the dollar higher and financials lower. TLT offered a buy signal, but we did not add any positions… interesting time for bonds. Watching how this plays out at the 2.925% mark. Back above the 2.3% level as interest rates retreat from the bounced on Wednesday and forfeited the gains on Thursday. This took out our new short trade and watching how it unfolds today. 

Energy stocks (XLE) The move above $74.50 on the upside to break from the flag pattern to eclipse the January highs was short lived as the downside pushed the sector back to support. The stops were hit and profit banked as OPEC and Russia discuss the increase in production to replace the Iran losses from the sanctions. You have to love speculation to trade crude or energy stocks as the news, hype, and speculation are a key part of the trends. In question now is the move higher even with the bounce off support. Watching with a downside focus if crude confirms the break of support. Crude moved slightly higher… watching the reaction in the stocks as they moved 1.5% upside. This is getting interesting near term.

Natural Gas (UNG) broke from the bottoming pattern after falling more than 19% off the January highs…the next opportunity in the commodity was presented and thus far has paid off. Entry $23.15. stop $23.30 (adjusted). Some upside optimism showing on the chart… I say it is more of follow the leader… watching how this unfolds in light of the decline in crude… adjusted our stops accordingly.  Back below the $23.76 mark and testing $23.33 with nice bounce on Thursday. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

THURSDAY’s Scans 6/7: A day of testing the moves to new highs. Interest rates dump lower again? Worries about G-7 rumblings. NASDAQ and tech test the moves higher. Dow continues upside move and some of the laggards bounce… utilities and consumer staples. Overall day of posturing… the futures are pointing lower today and that could add to some of the anxieties, but we will let it unfold and take what the market gives.

  • Energy (XLE/ERX) the sector bounced on the day holding the current consolidation pattern. Crude was positive, but not enough to add the upside in stocks? Hope springs eternal with the sector and I am watching how this unfolds near term.
  • Emerging Markets (EEM/EDZ) the downside was back as the bounce on Wednesday gives way to worries again. Still not a believer in the sector and willing to let this unfold near term.
  • Treasury Bonds (TLT) yields the last two days have been very active in both directions. There is uncertainty in the air concerning trade, tariffs, geopolitics, and other bantering. If things look good sell bonds, if things look bad buy bonds… letting this one sort out the headlines and emotions near term.
  • Technology (XLK) some profit taking? Some posturing? Some anxiety about the outlook? Some of it all is my speculation… watching and managing the risk fo the position as this unfolds.
  • Crude Oil (USO) small bounce in the commodity to establish a support point. Now we watch to see how it unfolds. I am not convinced the selling is over based on the supply comments surrounding OPEC, Saudi Arabia, and Russia. Stops in place on our short side trade, but still looking for more downside in crude.

Digestion day and we watch how Friday responds… patience and discipline with our positions.

WEDNESDAY’s Scans 6/6: A solid boost to the moves higher with the S&P 500 index and the Dow joining the upside break higher. This extends the second leg of the move from the April low… finally. The overall boost is positive with the NASDAQ and small caps continuing to move higher in their leadership… all is good… right? It is good for now as we let the positions run, add new ones on the respective moves, and manage our risk accordingly. Upside momentum in play… but caution is still underlying as the news can change quickly these days. Move in materials, healthcare, and financials has my attention as they were the lagging piece of the move.

  • Financials (XLF/FAS) finally make a move above the $68.50 resistance level and looking for a follow through to add a position. $70 entry if we hold the move.
  • Emerging Markets (EEM/EDC) Not convinced this is ready to move higher based on the current environment, but we add it here to keep our eye on how it unfolds. Cleared $113 and watching how today settles in.
  • China (FXI/YINN) clears $35.50 resistance on the day and now needs to confirm the upside break from the bottoming range. Definitely a news-driven piece of the market.
  • Healthcare (XLV/CURE) followed through on the move higher Tuesday. Entry $46, Stop $43. This is an important sector to aide the upside move for the S&P 500 index.
  • Europe (IEV/EURL) $36.24 resistance cleared on the close… looking for follow through and a possible reversal in the downtrend. Plenty to watch in this piece of the market.

All the laggards moved on Wednesday and created a stir for investors. Watching how this move unfolds and how much belief and conviction is behind the move. Taking what the market gives and managing the risk accordingly.

Solid follow through for leaders: IWM, QQQ, SOXX, XLY

Positive moves to XLF, XLV, XLB, XLP, and others as they find their footing.

Other moves of note on Wednesday: DDM, TMV, NAIL, KBE, IAI, KRE, LABU, IHE, MOO…

TUESDAY’s Scans 6/5: Mixed move on the day as the markets digest the upside break higher. No changes… leaders are leading and laggards are lagging. We up our stops on the upside moves and manage the short trades relative to the environment. It was more of day to manage positions, run scans, and look for the opportunities within the opportunity.

  • Biotech (IBB/LABU) upside holding the $98.60 level breakout. In position to run higher if the buyers remain engaged in the optimism towards the drug stocks.
  • Small Caps (IWM/TNA) solid move higher for the current leader. Adjust your stop to $81 level and let it run.
  • Retail (XRT) solid upside gain the last two days to confirm the break from the pennant pattern. Raise stop to $46.75.
  • Base Metals (DBB) running again as the tariff talks heat up with Mexico and others. Trading only in the sector as the speculation and news motives are extreme.
  • Coal (KOL) clears the $17.12 resistance and continues to the uptrend. Raise stop to $16.70.

Other moves to watch from Tuesday… SOCL, TQQQ, SKYY, HACK, FDN, KWEB, XLY all added to the cause on the upside… XLB in position to break above resistance… IHF in flag pattern… XPH in position to break through resistance.

MONDAY’s Scans 6/4: The solid move higher helps the broad indexes clear resistance. They need to hold the move and follow through. We continue to focus on the short term as the cloudy outlook of geopolitics and other issues remain. Take what the market gives with a defined strategy and risk management. I like the leadership of small caps, large-cap NASDAQ, and technology. We need the rest of the sector to play catch up or else the move will stall. One day at a time is all we can do for now.

  • Leaders break higher QQQ, IWM, XLK, SOXX all showing positive moves on the chart as our positions in each benefit and we adjust the stops accordingly.
  • Energy (XLE) remains a concern as crude (USO) continues to struggle. The short side trade (SCO) is playing out well. Looking at the downside in the stocks as the bounce shows signs of weakness… ERY at the $36 level will be of interest. The short side of gasoline (UGA) is playing out as well. $34.20 entry on short. Stop $35.10.
  • Emerging Markets (EEM/EDC) bounced off the lows and cleared $46.62 on the close. Worth watching for a trend reversal… there are many issues facing the sector, but worth our attention near term to see how it unfolds.
  • Treasury Bonds (TLT/TMV) interest rates back above the 2.9% mark and looking at the short side of the trade to unfold if yields continue the move higher. $20.25 entry on confirmation of the move.
  • Laggards continue to keep the move from accelerating higher. XLV, XLF, XLP, DIA, SPY. They cannot find that acceleration point as they continue to struggle with the upside momentum. They will move then stall… news is the challenge. Watching how they unfold going forward.

Other moves of note Monday: YINN, TQQQ, SOXL, XRT, URE, KWEB, SOCL, XLY, KOL, DBB. Scanning the markets are key to finding the leadership day-by-day as it develops.

Moves worthy of attention on Monday: IYT, TLT, USL, XBI, XLU, XLE, IEZ, EWC, DBA, TAN.

FRIDAY’s Scans 6/1: Rally on positive employment data helps the market rise. Like most investors, I like sound economic data as a catalyst for an upside move. Don’t get me wrong, this remains a news driven market with so many issues on the stove… Taking it for what it is as we add and subtract positions based on a defined strategy… right or wrong we stick to the discipline and let it all settle accordingly.

  • Semiconductors (SOXX/SOXL) solid upside to confirm the break above $162.70 resistance. Added a position last week at that level and managing our stop on the move higher. Raised to $160.20.
  • Technology (XLK/TECL) benefactor to semiconductors, but other sectors looking positive as well with IGV, SOCL, and FDN breaking higher. Taking the positions and managing the risk on the risk above resistance.
  • NASDAQ 100 (QQQ/TQQQ) benefactor to all the above as the large caps continue to drive the index higher. Cleared resistance at $55.55… added to our position and raised the stop to $53.55. MCHP, IDXX, AVGO, ALGN, and TSLA leading the index higher the last week.
  • Crude Oil (USO/SCO) added the short side trade on Friday with the move below support. The news about the increased production is weighing on the commodity near term. Entry $18.22, stop $17.50.
  • Biotech (XBI/LABU) nice follow through on the upside move after clearing resistance at $82.20. Raised stop to $94 and let this run for now. Target $110.

Other moves of interest from Friday: YINN, EDC, GREK, KWEB, SOCL, KOL, and FDN.

Taking it for what it is currently… news driving and economic data confirming. Discipline and patience are the keys to the current environment.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials moved above the $58.44 resistance level again and back to the $60 resistance again… and again, they declined to build the current consolidation pattern for the sector. Watching $58.44 support (entry) and $60 resistance. Upside follows through to clear the $60 mark. The move keeps the stair stepping upside in place… Tested at the $61 resistance level on Thursday. 
  • XLU – Utilities have been under pressure from higher interest rates. They got relief as rates moved back below the 2.8% mark. The bounce in yields Friday hurt the move higher in utilities as they reversed within the current range. Letting this unfold for now. still reacting to interest rates and moved below the May lows and February lows in sight. Rotation out of the sector in play. Watching the small bounce on Thursday. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Can’t make the move above the $27.65 resistance level. Finally a move above the $27.63 resistance and looking for a follow through to the move. 
  • XLP – Consumer Staples broke the February lows, March lows and is in the process of establishing the May lows. The downtrend remains in place, but the sector is attempting to find some upside momentum… watching. Indecision. 
  • XLI – Industrials made a move back above the 200 DMA and headed towards the $75.72 level of resistance. Watching for the next opportunity to unfold from here. Defense contractors are rebounding to help the sector.  Move above the $75.72 mark on the close a positive and looking for some follow through upside. Followed through on Thursday. 
  • XLE – Energy broke lower as selling in the sector built from the announcement from OPEC and Russia to increase production levels in light of the Iran sanctions. Hit stops on positions and now watching how this unfolds near term. Small bounce on the week, but crude is still on the downside… no positions currently. Flirting with reversal on the crude news. Watching $75 level. Nice bounce on Thursday and watching how it unfolds. 
  • XLV – Bounced off $79.50 support. Some follow through as the sector moved back to the $83.24 resistance holding… Needs to make the move through resistance. IHI and IHF leading the upside charge for the sector. Testing the $83.24 resistance on the chart. Cleared the 83.24 on the close… watching. Wednesday nice follow through with some volume to add to the upside move. Followed through on Thursday. 
  • XLK – Technology broke higher from the flag pattern of consolidation to push to new highs on the week. Leadership in IGV, SOCL, HACK, and others. Entry $67. Stop $67 (adjusted).  Cleared to new highs and small test on Thursday. 
  • XLF – the sector has become a hot potato with the interest rates, dollar, and geopolitics. KIE is still the weak link for the sector. Fell off the cliff with the news in the EU and the decline in rates impacting the sector. Bounced off support… still not great. More testing, but finally some upside momentum with the solid gains on Wednesday and Thursday. 
  • XLY – Consumer Discretionary moved above the $105 resistance and followed through this week on positive earnings from the sector. Entry $102.50. Stop $103.50 (adjusted). Still in a positive uptrend from the April lows. Dig into the sector for trades as they underlying strength is better than the sector overall. Nice acceleration in the upside move to clear the January highs. Taking on the leadership role. 
  • RWR – REITs have been hampered by the uncertainty around the higher interest rates. Tested lower on interest rate moves above the 3% mark… testing higher on the move below the 2.8% mark. Watching and managing our risk in positions. Continues the move higher with test. $91.20 support now. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

The question remains about direction and volume despite the positive move higher in the NASDAQ to end the week. The lethargy continued this week as the indexes tested lower and then rallied on the jobs report. I will take the positive gains, but worries remain on many fronts and therein lies the challenge. There is a lack of conviction from either side as the volume remains below average and neither side seems to want control. The data shows five sectors moving higher and six moving lower for the week. The end result is lack of leadership outside of technology. The volatility introduced in technology, financials and healthcare is not a good sign as they account for more than 50% of the S&P 500 weighting. The index closed above the April highs barely holding on to the trend reversal. We need to follow through this week if the trend is to take root. The key is to focus on the strategy you want to take during the current market environment. News and speculation will drive the short-term while fundamentals drive the long term. Short term we are in a process of a bounce off support and a break above resistance. We need to follow through on higher volume if anything is to materialize on the upside. The goal remains money management, not market speculation…

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.

The break higher is a definite positive for the charts and the psyche of the markets overall. The challenge is the background noise of tariffs, geopolitics, interest rates, crude oil, and many other items that can derail the move… Take what the market gives, manage your risk, and remained focused. Don’t assume anything. 

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.