Markets Open Higher and Close Lower

Monday, December 3rd – Notes & Research

The economic data set the tone on the day as the manufacturing sector slumps into the contraction zone. This is the fourth of the last six months the number has been below 50%. Thus, what we were hoping would provide a distraction to the fiscal cliff talk, has turned out to be a equal negative to the cliff talks. Thus, be prepared for some volatility as this all unfolds.

Throw in the fiscal cliff issues and you have the making of a bigger negative hit to the sentiment. The Republicans offer their counter offer to the White House today. Let’s just say the battle is just beginning and we have 28 days and counting. The President was on Twitter getting help from the general¬†populous¬†to confirm his side of the matter. Crazy is the only word that comes to mind to¬†describe¬†the situation as it moves forward. I don’t want to speculate on the outcome as there are plenty of article on that for your reading pleasure. What I would like is a solution simple, to the point and workable. I still believe in Santa, by the way.

China was back in the headlines as their PMI picked up showing some promise as investors liked what they heard. The upside gave way to some selling in response to the US markets. This is a country we need to watch and look for the upside opportunity as it plays out.

Bottom line plenty to consider and deal with relative to the fiscal cliff issues and the economic data. Both will come into play this week relative to trading. As always we will take it one day at a time and be patient with the opportunities.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index rallied early and then sold often. When it was all said and done the index closed at 1409, down 6.7 points. While the reaction to the ISM manufacturing data was negative, if could have been worse. The index closed on the lows of the day, and left questions relative to the sentiment going forward. The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. We have eliminated the downtrend chart with move establishing the next pivot point as the one to play.

The leadership for the move on the 15th low has come from Consumer Services, Consumer Durable, Industrials, Technology and Basic Materials. Utilities made a move off the lows setting the tone last week. Now we are looking for some solution to the fiscal cliff and the economy to keep the upside trend alive. We need some clarity going forward, thus be patient for now and take what the market gives short term.

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

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РTested lower bounced to close above the 200 day moving average. The NASDAQ 100 index showed the same promise on the upside move. Took the entry on the QQQ move as posted here. The play is held in the Sector Rotator Model. Manage your risk.

WATCH: QQQ – 65.10 entry (Wednesday) Stop – 64.75.

Dow Jones 30 Index¬†– The bounce back to the 200 day moving average is a positive, but now we need to make a move above this level short term. Patience with the entry as the index has struggled with volatility and consistency short term. The selling today wasn’t critical, but did get our attention

WATCH: DIA – See Sector Rotation Watch List.

S&P 400 Midcap Index РThe bounce off the low has now returned to the top end of the previous trading range. A break above the 1000 mark on the index would a positive and a opportunity to trade the sector. Be patient with the entry as this unfolds.

WATCH: IJH – See Sector Rotation Watch List.

2) Currency:

Dollar РThe dollar sold lower and broke support at the $21.95 level on UUP. The dollar index (DXY) pulled back to support at 80 as well. Does the break mean more downside for the buck?

WATCH: UDN – Entry $27.25 – Got the edge on the selling today.

Euro РFXE is poised to move above the $129 mark and challenge the $130.60 mark. Got the follow through on the upside to confirm the downside play for the dollar Monday. This produced a short dollar and long euro trade opportunity for about 1.5% ROI short term.

Yen РFXY is testing support again at $119. This could bring upside bounce play.

3) Fixed Income: 

Treasury Bonds РReversal short term with yields up on the 10 year to 1.65% and the 30 year to 2.84%. Watch for the yields to reverse if the rally in stocks are to continue. If they both travel higher together that could make things interesting..

WATCH: TLT – Gapped lower and then retraced it all. Wedge pattern setup. Watch for the directional break from the setup to give guidance on the trade. The break lower is setting the short play in TBT in motion.

High Yield Bonds РBig bounce on stocks moving higher with stocks. Interesting bounce.

WATCH: HYG – 92.75 resistance? Blew through it on Thursday and Friday. $93.50 is the target for now.

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. The best course of action is to take the trading opportunities presented short term.

WATCH: SLV – Entry $31.50 (See ONLY ETF Model) Looking for upside momentum through resistance. Holding near $33 resistance, but need some follow through or look to lock in gain and see how it plays out.

WATCH: OIL – Cleared $21 again on the break higher, but failed to hold the move above $21.50. The entry was $21 for a upside trade and that is in play for now. Target is $22.50 and the stop would $20.85 on the trade.

WATCH: UGA – Entry $56.25 / Stop $56.25- Watch and manage the volatility. 50 day moving average is acting as overhead.

WATCH: 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.

5) Global Markets: 

The NASDAQ Global Market Index (NQGM) broke above the 200 day moving average and the V-bottom is still in play on the upside. 967 is the level to break above on the index currently. The move is reflective of the positive push in the US and it is nothing more than a trade short term with tight stops to protect against any reversal short term.

WATCH: EFA – Back at the highs of $55.20 and in position to break from the trading range for a trade set up. The jump back to this level has been quick and may test before continuing higher. Be patient and see how it play to start the week. ONLY ETF Model.

WATCH: THD – Breaking above the downtrend line and move above $76.40 was the posted entry point. Continues higher short term.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the 200 day moving average and has moved higher again. The break from the trading range is a positive with a trade entry at $33.25. Consolidating near the current high. Manage your risk and raise stop to $32.85.

WATCH: FXI – China is testing the gap higher and watch for the $36.65 level to hold as possible entry play short term. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. The PMI data was positive on Monday, but the move was lower? Watch for trade on the break from the consolidation.

WATCH: TUR – 59.20 support held and solid bounce to maintain the uptrend. Look for trade entry on test of the move near the $62.40 mark for now. Monday produced the move higher and looks ready to move even higher.

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 – moved above the 200 day moving average. Entry 63.40 (HIT ON FRIDAY) – Stop $63.25

7) Global Fixed Income:

Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector. Greece back on the table along with Europe despite the resolution to give more money. All of the charts have bounced off the low and continued their respective uptrends. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and attempting to hold support at $121.. Broke on Friday… watch to see how it plays this week.

WATCH: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

WATCH: PAFCX – bounced off support near the $11.66 mark. Held the uptrend line and held the support for now. Still looking for entry opportunity on the play at $11.74.

WATCH: PICB – International Corporate bonds are breaking above the top end of the current range. 29.15 entry point?

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.