Markets head lower

By December 6, 2017Jims Notes, Research Post

OUTLOOK: December 6th

It was simply one of those days where money was taken off the table. There were plenty of things blamed and reasons given, but at the end of the day, there are times when investors and traders alike are willing to take some risk out of their portfolios. There was some testing in the NYSE and S&P 500 indexes. The NASDAQ attempted to push higher with technology stocks early but failed to hold the gains in the end. Telecom led the downside along with the interest-sensitive sectors of utilities and REITs. Not a good day for stocks as we turn our attention to today with futures pointing lower to start the day.

Ten sectors moved lower with the S&P 500 index closing slightly lower on the day. Telecom (IYZ), utilities (XLU) and REITs led the downside moves with each testing key levels of support. The day was clearly set on selling and profit taking and assigned whatever reason sounded logical for the action. Technology (XLK) attempted to rally posting gains in the first hour but spent the rest of the day giving back the gains to close even on the day. The charts show some damage technically, but we will see how they unfold going forward. Interest rates remain a hot potato with the up and down tug-o-war over the Fed making a decision on raising rates prior to year-end. Plenty of question marks still remain relative to the overall direction and we will let this all unfold moving forward.

The S&P 500 index closed down 9.8 points at 2629 and holding near the recent high. The uptrend remains in control of the index with above-average volume in the selling. All the moving averages are still pointing higher. The biggest movers in the index were MU (bounce in the test lower at support), EBAY (continuation in the reversal of support), VLO (break higher in continued upside), EA (first bounce in selling trend), and DLR (bounce off support?). The downside leadership came from EIX, RHI, MAT, FL, and DISCK. Mixed activity with consumer stocks leading the downside as investors bank some profits. The broad index remains near the recent highs and the leadership for the last thirty days has come from financials, consumer discretionary, and consumer staples… getting some rotation of late with financials, industrials, and energy leading over the last ten days.

Gold (GLD) tested lower again after an attempted to break through resistance at the $123.05 mark. The $120.45 support broken on close… watching downside trade opportunity. The dollar (UUP) can’t find direction as worries abound relative to the Fed, taxes, and geopolitics. The emerging markets (EEM) moved to new highs near $48 and now testing the $45.52 support level. The Volatility Index (VIX) closed at 11.3 despite the selling in the broad index.  VXN move to 18 settled back to 14.7 as the NASDAQ volatility calms with technology stock attempted bounce. Watching how this unfolds moving forward with the last month of trading started and some jockeying for the year-end ensue. There is plenty on the table relative to dynamics and agendas from traders and investors alike. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your mind. Manage your risk and stay focused on the horizon, not the rear-view mirror.

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

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. There is no clear resolution to that issue and that has now led to money rotating to where is it has better opportunities and clarity. The downside broke support at the $103.65 level only to recover as the challenges remain with a lack of clarity about Washington more than anything at this point. Bottom reversal started? Watching how this one unfolds. Made move to resistance on Friday at $105.70 and watching if the upside resumes this week. Test back to the $103.65 mark and sitting on the 200 DMA. 

REITs (IYR) The sector tested the $76 level of support and bounced back to resistance and tested, and bounced, cleared the $81 resistance… only to test lower again… and bounce again. We continue to focus on managing our risk and collecting our dividend versus the near-term volatility and uncertainty. This is a growth and dividend holding with a 4.2% dividend from our entry point in April. Entry at $75.75. Stop $76.25 (adjusted). Ended the week above $81 and letting this play out as a long-term position. Consolidation pattern at the highs. Moved back to the $81 support level. 

Treasury yields (TNX) moved to 2.42% last week as talk of the Fed hiking interest rates renews despite the talk of tax-cuts stalling in Washington. We still have the price of crude climbing and a stronger dollar impacting the rates as well. Willing to let this unfold for now as the rumors and speculation create a lack of clarity for bonds. One big consolidation pattern as this unfolds and the Fed decides what action to take. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility of the trend is speculation and news driving money. The selling speculation on the rumors of the Fed hiking interest rates tested the $120.45 support. The bounce back to resistance at $123.05 failed again and tested $120.45 support… watching how it unfolds. Moved below support… watching GDX and DUST for short side trade opportunities. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue. The last seven weeks the commodity has managed to fight its way back above the $50, $52.50, and $57.50 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $55 (adjusted). The price continues to climb despite some worries about the supply. Patience remains the key as this plays out. 

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production had not resulted in any real measurable cut that would impact prices. The double bottom pattern clears $63.22 for entry and a stop at $66 (adjusted). Investors reacted to the decline in price and found support at the $67 mark. With the bounce in price the stocks are again responding on the upside… still plenty of work to do going forward relative to the belief factor. Moved back near the November highs on optimism… patience required. 

Volatility Index (VIX) The positive week for stocks ended the jump higher in volatility amid false news. The close at 11.4 is elevated and we will watch to see how it unfolds this week. The news is bad enough, but when it is false it only makes things less predictable. No movement despite the selling… not enough worries defined. Too many generalities. 

The S&P 500 index closes at new highs Thursday… false news pushed the index around to end the week, but the uptrend remains in place. All the moving averages are positive and volume is running near average to elevated volumes. The willingness of the buyers to keep stepping in at each attempt by the sellers to push the index lower shows some resolve. I remain cautious overall. The rotation of money is showing financials, telecom, and industrials leading the week. Patience is required with the markets overall with news leading the parade and the data points not offering enough to keep the long-term money engaged. Some testing of the highs, but not enough yet to count. 

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

Daily Scan Results:

TUESDAY’s Scans 12/5: Sellers send a message? Not really the volume was average and it was an organized movement in taking some profits and adding to cash. The scans show a test of support or minor moves lower… there will need to be more urgency in the selling if this to become a trend. Natural Gas (UNG/DGAZ) continues to show negative momentum following the attempt to move above $6.40 resistance. The commodity hit a new low on Tuesday. Small Caps (IWM/TZA) adding to the downside and watching $13 level in short ETF. Silver (SLV/ZSL) short side trade continues to run higher. Adjust your stop accordingly. REITs (IYR/SRS) selling in the sector shows some opportunity to trade the downside if we break the $81 support. Soybeans (SOYB) break above resistance. Overall some testing and opportunities building.

  • Biotech (IBB/LABD) downside showing some interest. Closed above the $5.40 resistance level and with a follow through below the 200 DMA (IBB) worth trading the setup.
  • Gold Miners (GDX/DUST) moved above the $28 resistance and the break lower in gold offered the short side opportunity. Entry $29, stop $26. GLL$73.25 level to watch. If gold moves lower short side trade is attractive as well.
  • Treasury Bonds (TLT/TMF) moved above $22.25 as positive for the bond. Watching how the FOMC meeting unfolds. December 13th will make it interesting.
  • Malaysia (EWM) break to a new high is positive and looking at the opportunity for trade in the country ETF.
  • Technology (XLK/TECS) at the decision point for the downside test. Patience as it unfolds. The parts are worth our attention as well with SOCL, IGN, FDN, IGV and SOXX all at key decision points.

Markets spent the day methodically moving lower as the sellers were calm and average volume. Watching how today unfolds and what opportunities develop moving forward.

MONDAY’s Scans 12/4: Divided between buyers and sellers… otherwise known as rotation with financials gaining on the move in banks (KRE) and brokers (IAI). Technology (XLK) struggled as chips (SOXX) fall to support near $166. Retail (XRT) continues to show strength with the consumer sectors posting solid gains. With the holiday shopping in full swing, stocks are rising on hopes of better than expected moves by consumers. Macy’s (M) and Gap (GPS) both posting solid moves on the upside.

  • Retail (XRT) following through on the move above resistance at $41.45 heading higher. Stops moved to $42.75.
  • Semiconductors (SOXX/SOXS) back above the entry at $16.40 and watching how this unfolds near term. Stop moved to $16 on the upside move.
  • Technology (XLK/TECS) short side move above $7.45 entry if the selling continues in the sector.
  • Small Caps (IWM/TZA) Watching the topping movement in the sector with big swings the last two days. This sector is an indicator for growth stocks and worth watching.
  • Consumer Discretionary (XLY) heading higher on the hype around retail. Let it run and manage the risk of the positions.

Brazil (BRZU) setting up a double bottom pattern and watching. Gold Miners (GDX/DUST) break above resistance $28.20 opens short side trade. NASDAQ 100 (QQQ/SQQQ) breaks above $23.45 short side trade gets interesting. Homebuilders (ITB/NAIL) still moving higher adjust your stops accordingly. Transports (IYT) vertical move still in play. Overall markets are divided and looking for the leadership to emerge from the battle… financials are winning so far.

FRIDAY’s Scans 12/1: A day of news drives the indexes crazy along with investors. The trading frenzy over misleading reporting led to a big drop and buyers coming to the aide as the reports were corrected. The Senate passed a tax cut that will now find its way to the House and we will see how well that unfolds. News stepping back into the picture and we have to be aware of the drivers as they validate or invalidate any beliefs that drive the trends.

VIX index (VXX/UVXY) led the trading day, but in the end was up slightly and watching. Interest rates (TNX) were equally volatile on the news closing lower on the day after spiking higher during the week on the belief the Fed will hike rates at the final FOMC meeting. Crude oil (USO/UCO) continued higher as the commodity continues the positive trend. Technology (XLK) continues to struggle, giving some on the downside Friday. Emerging markets (EEM) continue to struggle with China (FXI) leading the downside movement. Greece (GREK) continues the bottom reversal and resistance at $9.45 next to clear.

  • Semiconductors (SOXX/SOXS) the downside is gaining some momentum. Worth our attention if the short side of the sector if it builds. Watching $16.50 level for entry on short trade if we follow through to start the week.
  • Oil Services (IEZ) upside resumes following test of support and cleared the $33 level of resistance and entry last week. $35.50 target short term.
  • Russia (RSX/RUSS) short side starting again as trade breaks from the bottoming range. Clearing $24.92 on Friday as an entry with the stop at the $23 mark.
  • China (FXI/YANG) short side playing out as well in the country ETF. Follow through on entry Thursday and $6.74 is the level to clear.
  • Energy (XLE/ERX) cleared resistance at the $30.30 level and in position to head higher. Worth adding to our existing position to trade on the upside move.

Plenty of questions to be answered moving forward, but as will any market environment there is always something to trade. Strategy, discipline, and patience are the key to managing money and the risk of the markets.

THURSDAY’s Scans 11/30: Final trading day for November was positive and the upside continues with the technology sector joining on the day with a reversal from Wednesday… plenty to watch with the catalyst coming from the rumors of a tax bill vote heading towards the Senate. Overnight, however, some interesting developments could change that action today. Stocks could very well respond to the news with futures flat to lower currently.

  • Biotech (IBB/LABU) break to the upside from the bottoming range is a positive… now need a follow through an entry at $75.30. Watching how it unfolds today.
  • Energy (XLE/ERX) Cleared the $68 entry level on Wednesday… added and got the follow through Thursday. $69 level is key to hold the move higher and watching how this unfolds near term with crude oil stalled.
  • Healthcare (XLV/CURE) follow through on the break above $45.20… raise stop to $46 and let this unfolds. Target $49.
  • China (FXI/YANG) downside move above the $6.25 mark hit entry and stop at $5.90. Patience required along with following through on the selling.
  • Oil Services (IEZ) cleared $33 on reversal of test lower. Looking for the follow through on the move and crude to move higher. Entry$33.50 and stop at $31.70.

The move on Thursday came from the rumors of a tax cut vote… after hours the Senate was finding ways not to vote. Watching how that unfolds today… other moves to watch from Thursday’s scans… FCG, IYT, IEO, IHF, FAS, RUSS, XLI, ZSL, DIA, ITA, MVV, and KOL.

WEDNESDAY’s Scans 11/29: the tale of two cities. NASDAQ fall hard and the S&P holds steady thanks to financials gapping higher. The semiconductors (SOXX) drop 4.4% to set the downside pace for the index. This breaks the uptrend off the August low and the 50 DMA is in play now. Stops were hit on trading positions at the $175.50 mark and our longer-term positions remain with stops at $164. Software (IGV) joined the selling hitting stops at $155. SOCL fell as well with Facebook leading the downside. Technology (XLK/TECS) tumble to support near the $62.50 mark. Not pretty, but we watch to see how it unfolds going forward… opportunities arise from these type of moves. Financials (XLK/FAS) followed through on the upside move Tuesday with a solid gain. Industrials (XLI) and telecom (IYZ) each added to their respective upside moves. There were plenty of interesting moves on the day and that means today and tomorrow and the next week will have to validate the activity.

  • China (FXI/YANG) back on the downside move we discussed Monday. $6.25 is of interest for short trade if the negative continues in the country ETF ($46.50 level breaks short trade is attractive).
  •  NASDAQ 100 (QQQ/SQQQ) looking at the short side trade if this follows through. You have to trade with logic versus emotions and this setup is not one I can ignore despite my emotional beliefs.
  • Emerging Markets (EEM/EDZ) downside setting up as well in this sector. Watching how it unfolds with support at $45.52.
  • Natural Gas (UNG/UGAZ) Followed through on the entry level from Tuesday. $11.04 is the target and we will see how it unfolds with a stop at the $9.15 mark.
  • Transports (IYT) I discussed these on Monday as key to watch for the economic outlook of the market as they had moved to support in at the $170 level and bounced… since they have now climbed to the October highs and cleared $180 on Wednesday… positive sign and trade with the move above $174.

This market is one that keeps you on your toes. It also defines my belief that there is always something to trade somewhere. The NASDAQ downside move opens the door to the short side traders and if they follow through will make it interesting for the balance of the markets. The move higher in financials is equally interesting as the Fed remains in limbo about interest rates. We will take what the market gives with a disciplined approach to each position. Stay focused and trade your strategy not your emotions.

 

Sector Rotation: 

  • XLB – Materials continue the wave type pattern of rolling up and rolling down in an uptrend. The upside resumed in August and the positive wave has ensued. Cleared $58 and continues to hold near highs. Entry $54.75, Stop $56.50 (adjusted). Broke the first level of support at $58.44, but found buyers to move back to $58.45. Watching how the new week unfolds.  
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed, but they have attracted buyers the last four weeks. A nice move above resistance at $53.65 and solid move to confirm entry at $53.80. Stop $55 (adjusted). Testing the move higher with support at the $55.25 mark. Sold to support $55.24 and watching. 
  • 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? Retested the lows as the downside took root and broke support at $30.40. The bounce was positive and we added a position on the upside… $28.55 entry. Stop break even $28.55. A positive move above $29.50 resistance last week. Sold to support $29.51 and watching. 
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The break of the $54.50 support put the downtrend is in play again. The buyers returned to recapture the upside momentum. A continued move higher from the low last week hitting resistance at the $54.76 mark.  Nice upside follow-through move above $54.76. Break higher in the uptrend. 
  • XLI – Industrials moved sideways for two months and then back to the previous highs breaking out stalling at the $73 level. The long-term uptrend remains in play and the move sideways broke support and hit stop. Moved back above the $71.43 level and moved vertically until the news on Friday… watching for more upside.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. Entry $65.20 with a stop at $66.50. Watching as this unfolds short term with the move back to $67 support unfolds. Positive bounce to end the week and looking for follow through. $68 entry to add to the position if we can gain any momentum in the sector. Moved back above the $67 level and back near the previous highs.
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 back in play as the uncertainty returns. Watch the parts as well as the whole here… IHF, IHI, XBI, XPH. Positive moves in the parts give hope to the whole. Breakthrough resistance and entry at $82. Stop $81. Letting this play out. Tested lower. 
  • XLK – Technology uptrend remains in place with more new highs. Entry $48.50. Stop $60.50 (adjusted). Semiconductors hitting new highs. SOXX leading in the bounce off support. The new high test proves positive for the resumption of the move.  Gap lower on the selling in semiconductors. Support $63 holding for now. Testing first level of support in the selling. 
  • XLF – Financials pushed lower on worries about interest rates, the Fed, and no tax cuts. The retest of support at the $25.82 level was a concern for the short-term uptrend. Moved back above the $26.40 level adding our position back and watching how it unfolds. Stop $26. IAI and KRE also worth trading as they lead the sector higher. Leading the upside charge. 
  • XLY – Consumer Discretionary moved back near the previous highs and remains in a sideways trend. Entry $83.50. Stop $90.50 (adjusted). The clarity about the consumer is a challenge for investors, but the sector did manage to clear $90.70 resistance and the previous highs. The uptrend is in play. Santa rally on – watching how the retail (XRT) continues to add to the move. Leading upside move. 
  • RWR – REITs reacting to the current uncertainty around the Fed potential increase of rates. The longer-term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Big triangle pattern still in play (weekly chart). Watch how the week unfolds. Testing of the move higher as interest rate worries rise and trading at the ranges high. Testing lower in the range.

Solid trading week as uptrend remains with the leaders and the laggards are still in play as the indecision overall remains. This is a market driven by sector and not an overall belief despite the move to new highs for the major indexes. Taking what the market offers and nothing more. Four sectors are trending higher, two trending lower, and five moving sideways… about what you would expect in the current environment. We have to remain disciplined in our approach to investing our money. The goal is risk management as the storylines continue to unfold.

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

FINAL NOTES:

Investors are happy with the upside activity as it relates to the current trends. Traders are driving the short term swings and opportunities. Friday’s disruption of misreported news leaves a bad taste heading into the new week of trading, but we will watch how it unfolds. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. The rationale for the current trading environment is more speculation than fact. The economic data remains mixed and earnings have the same theme of some good, some bad, but enough to keep the buyers engaged. The political belief is there will be tax cuts on the horizon as the Senate finally votes and approves its version… the bill heads to the House and we will see what happens. No movement relative to reforming healthcare and the geopolitics remains in play as well. Since the market trades looking forward and evaluates based on past data investors have been buying in advance of the reality and hoping the data will confirm the belief. The challenge is the rumors becoming truth. The outlook for the economy is cloudy at best, the past data is not helping as it remains mixed with some good and some bad. Patience is the key for now. There are plenty of short-term trading opportunities, but the long-term remains less confident but has produced equal opportunities for those willing to be patient. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

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. 

“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.