More Downside to the Next Level of Support

Thursday – Notes & Research

The market starts with a positive bias in the futures, but at the open stocks moved lower and stayed lower on the day. We did experience some intraday attempts to move higher, but in the end the S&P 500 index did well to get back above the 1538 support level on the close. The downside is still in play! It is equally important to note that the close on the S&P 500 index closed below the previous low setting in motion a trend reversal. Watch closely to see how this plays out and if the short opportunities continue to build.

After hours MSFT, GOOG and IBM announce earning. Microsoft earnings rose and the stock was up after-hours by 2.8%. That was in the face of a downgrade by Goldman Sachs just a week ago. That is a positive. Google beat estimates as well, but revenue was on the short side (sound familiar?). The stocks was up slightly after-hours. IBM was the big disappointment. They missed both revenue and earnings on the quarter. In this market that is not a good thing, and the stock is trading down almost 5% in after-hours. Look for the IBM news to impact the Dow in the morning as it accounts for approximately 11% of the index.

Verizon jumped more than 2% on the day at it stated it activated 4 million iPhones in the March quarter. The news was part of the earnings release from the company which beat estimates. A total of 7.2 million smart phones activated for the quarter. What does this say about Apple for the quarter? We will know next Tuesday for certain, but there will be plenty of speculation over the next few days. Apple closed down 2.6% to break the $400 level. The short trade continues to work on the stock.

Sector Moves of Note:

  1. Gold gained 1% and hit our stop on the short play on Wednesday. The bounce is still not very convincing at this point and we will continue to watch the support. Hold and bounce or consolidate and drop.
  2. Commodities moved up 1% on DBC today and attempting to set new base or bottom. Gold held above the Monday low, base metals moved the low and the agriculture (DBA) sector was up slightly on the day. Still not convinced the worst is over here.
  3. Utilities (XLU) continue move higher as the defensive sectors hold tight in the current selling.
  4. Transports are still showing some short term weakness, but have held support above the $104.70 level. This is a barometer for the economy going forward. The chart is showing a consolidation wedge forming off the March high. Watch for the direction following the consolidation.
  5. Financials up 1% again today. I still like this sector with a longer term time horizon, but the short term volatility is squeezing people out of the position. SKF would be a good hedge if you want to hold longer term to offset the near term selling.
  6. Europe is testing the support at $39 on IEV. breaks we look to be short Europe.
  7. VIX index holding near the 18 again today. This puts the index above the Monday high. The anxiety over earnings and growth are in full bloom as earnings continue to set the short term tone for the broad markets. VXX has been a positive play the last two days.
  8. S&P 500 index closed at the 1541 mark and established a lower low. The short play on the index has been added to the models and we are looking at adding to the position moving forward.

The markets opened lower and never really looked back slowly progressing to close down on the day.  The trendline support was broken on the close as the next negative for the markets. That sets up an interesting day for tomorrow. No clear indication of selling continuing at this point, but the bias is shifting . The short plays for trades are setting up as nicely.

Economic Data:

The jobless claims moved higher as one more negative for the markets. Philly Fed falls again missing expectations and Leading Indicators were worse than expected. The misses keep coming! Bad news is building on itself.

Economic Events & Calendar 

1) US Equities:

The chart of the broad index is starting to look more like a heart monitor than the market. The ups and downs since March 14th have made me sea sick.  The index was at 1563 on August 14th and it closed at 1541 today. The downside or potential trend reversal is setting up. The consolidation or digestion of the move is in play and we will take all of that into consideration.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. The last three days have established a new potential pivot point on the downside to join the March 14th (Cypress and budget) high. Today’s move is testing the low from Monday and the trendline. This activity keeps the trend in a sideways trek, with a downward bias.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.


November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.


Sector Rotation of Interest:

Short side of the market is building momentum and that leaves us empty on sectors to track short term. We own positions in the models and we continue to trad those, but we will this build in the coming days and weeks.

2) Currency:

Sector Watch:

  • UUP – The Dollar broke the support at $22.35 mark on the downside Tuesday. Hit our exits and Wednesday bounces back to $22.47 of which it held on Thursday. Go figure… we will watch for now.
  • FXB – the British Pound jumped two weeks ago, held the move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. Wednesday it sold back near the support at $150.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
  • FXE –  The euro made gains on the week against the dollar and is in position to break higher.  We were looking for an entry on the upside, but for now we will just watch to see how the short term volatility plays out.

3) Fixed Income:

Sector Summary:

  • The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week, but resumed the downside in the yield and the upside for the bond.  The fear factor is back in play for the bond and puts both TLT and IEF in play again short term. 
  • 30 Year Yield = 2.86% –  down 2 basis points —  TLT = $123.09 up 30 cents
  • 10 Year Yield = 1.68% – down 2 basis points — IEF = $108.64 up 6 cents

Tracking Bond Sectors of Interest:

Treasury Bonds – Yields on the 30 year Treasury is back to 2.9% as the pressure on stocks fueled the rally in bonds. Economic data, some need for safety, you state the reason, but the great rotation from bonds has not occurred  At each sign of trouble money tends to flow back into the sector versus out. Expect more volatility in the price of the bonds a the worriers and the optimist duke it out.

High Yield Bonds – HYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. OR TBF to hedge your position when volatility picks up on the downside.

Corporate Bonds – LQD = 3.6% yield.  The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.

Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.

Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Testing the highs again near the $42.50 level. Watch stops and protect your gains.

4) Commodities – Sector Summary:

  • The commodity index continued held today with oil attempting to bounce and base metals gaining on the day. It has not looked back and with the acceleration of the decline on Friday and Monday with gold dropping to the to $1361. DBC broke support at $26.80 and attempting to build support closing at 25.79 today.  Without any good news… the downside remained in play along with a small bounce.
  • Natural Gas – UNG made the big move higher today closing up 5%. After testing the move higher it is resuming the trek higher currently. Part of the consolidating came from the seasonal transition. For now the commodity continues to drift higher and we will stay with the trade for now with our stops in place.
  • Crude Oil – Crude tested lower last week and has followed that same trend this week. Crude closed today at $88.40 gaining 2%. What does this mean looking forward? Downside in play on lack of demand. Not short or long currently, but watching to see who offers the best alternative looking forward. SCO is the 2 times short ETF from ProShares.
  • Gold – The metal showed no signs of an upside bounce on the day. $1377  is the close and that remains above the Monday close. Thus, some consolidation for three days.

Commodities Rotation Chart:

Natural gas still leading despite the test of the upside. Looking at the chart below you will note that the other nine ETFs of commodities have all turned lower the last week.  


5) Global Markets:  

Global markets drop on slower economic data in China, Europe and the US. They tested lower on the news in Europe and China keep the markets in check. Monday reversed the upside momentum and now we have to watch how the downside unfolds short term. One day at a time.  The downside accelerated on Wednesday and that brings the sideways range back into play for now.    

Global Mkt

Country Watch:

  • FXI – Wanted to move higher on the week, traded lower on the week to this point. Downtrend is still in play off the February highs and that is to be respected if the bounce off the low fails to produce a reversal. Still watching the downside or support at this level.
  • EFA – Faded and then tested the breakout level. The volatility in the global markets isn’t going away. Watch and let the move validate before making any commitments to the sector. Willing to watch for now to see if any leadership evolves from the global markets. Closed below the 50 day moving average, but holding above the $58 mark for now.

6) Real Estate (REITS):

Real Estate Index (REITS) – IYR tested $70.73 support on Wednesday. Watch the top here to see if any opportunity develops in the REITs on the test lower. Be patient for now.

Sector Summary:

  • Most of the REITs are extended short term on the upside, thus the test in IYR.
  • Scanning IYR we find the charts look very similar on the upside. SFI, VNO, PLD, LXP, FR, KRC, ARE and HST show some consolidation and potential upside worth putting on a watch list short term and find the opportunities.
  • Mortgage REITs are selling back towards support and worth watching. NLY, REM, MVBS, IVR, WMC and MBG.
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.

7) Global Fixed Income:

Sector Summary: Tested lower on Monday with the rest of the world markets.

  • The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be aggressive in managing your exposure.
  • There are some funds moving in favorable direction of late.
  • PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
  • PICB – hit support traded sideways and now breaking higher. Entry $28.95 + 3.1% dividend.
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25
  • PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield.

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.