More testing and indecision

OUTLOOK: May 9th

Investors can’t decide as volume declines yet again and stocks meander through the day. The big deal of the day was President Trump pulled out of the Iran nuclear agreement and oil prices rose yet again on the worries about sanctions against Iran. By the end of the day, the price settled at $69 with the uptrend firmly in place off the February low. The challenge for investors will be the impact on the consumer long term. Higher gasoline prices and oil prices will creep into every aspect of the economy. We will look at how it unfolds, but there are concerns from every perspective about oil prices. The market continues to deal with the news and we continue to deal with the lack of direction near term.

The S&P 500 index closed down 0.7 points at 2671 and remains below the 2675 level as the index trades lower on news and closes the day essentially flat. Energy and industrials were the best gainers on the day with seven sectors closing in the red as utilities shed 2.5%. The chart is holding the long-term trendlines off the January/February 2016 low. The consolidation remains in place and volume is below average. Indecision is obvious when you look at the chart and the consolidation over the last three months. I am approaching this with caution as the direction will eventually unfold.

The NASDAQ index remained above the 7103 level of support/resistance and closed at 7266 on Tuesday. The SOXX continued to show some leadership gaining again on the day to keep the bounce alive off the $167 support. The lack of direction, volume, and breadth have allowed big swings as the buyers and sellers fight for direction. Patience is required along with a strategic approach to managing money.

Small Cap index moved higher adding to the move above the key $154.90 level to end the day at $157.83 pushing against resistance. A move above the $161 double top would be nice to see, but we need to hold support above $154.90. The leadership from the sector is a positive near term for the broad markets. Watching how the opportunity unfolds.

Gold (GLD) bounced off the 200 DMA and is hovering near the previous support at $124.50. The weakness remains in the metal near term with a strong dollar and higher interest rates. Looking for confirmation of direction at the current level. The gold miners (GDX) made the move back above the $21.92 mark, but with the turn in the metal moved back to test the 50 DMA. Base metals (DBB) reversed the speculation trade on sanctions against Russia… the metals cleared $19.35, but back to the 200 DMA and holding… news drove the move and reality is settling into the sector. Too much uncertainty for my taste.

The dollar (UUP) bounced and cleared resistance at the $23.65 level and pushed back above the 200 DMA. The move above $24.35 on Tuesday clears resistance near term and puts $24.75 in sight. The move is a positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… the rise in interest rates is the cause of the rise in the buck for now. Took the upside trade near term as the move above $23.75 was the entry point for UUP. Stop $24.15 (adjusted).

Crude oil (USO) made a move higher breaking from the small trading range near the highs of $69… why the move higher? OPEC has agreed to extend the curtailed production and the proposed sanctions on Iran could impact crude up to $10 a barrel according to the analyst, it is already up nearly $7 since the Iran talks started. Estimates are as much as 1 million barrels a day would disappear from supply… that speculation has driven the price higher. The uncertainty remains around the inventories, production, global discord, and the dollar. UCO entry $26.05, stop at $29.60 (adjusted).

Emerging Markets (EEM) dumped lower breaking $47.90 support and testing the short side. It did manage to hold above the $45.50 support. The trend is still on the downside and watching what happens with the next support levels. The dollar, tariffs, trade wars, and interest rates are all playing into the volatility of the sector. We will let the market speak and we will decide what trend to trade.

The Volatility Index (VIX) closed at 14.7 as investors worry remain steady. With stocks stuck in neutral, there was little change in the index overall… some intraday volatility as news and speculation rule the day. Watching how the week unfolds.

(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. Testing the support levels again and looking for some leadership… failed to develop to this point… watching and waiting for now. 

Semiconductors (SOXX) Bottoming pattern in play as the sector tests the 200 DMA. Bounced Thursday and moved higher on Friday to break from the bottoming range. Needs to follow through on the upside as this sector is key to the broader index… $176.45 level to clear. Nice addition to the bounce last week and watching for some leadership. $177.50 entry on Tuesday. Stop $172.  

Software (IGV) bounced off the near term low and test at $171.11 support. A nice move higher clearing the $179 resistance level. Holding the uptrend with some volatility of late. Addding to the upside bounce. 

REITs (IYR) The sector made a break from the trading range Friday clearing $76.22. Interest rates have been the challenge overall… I have been looking for the opportunity to add a position and collect the dividend long term. Added on the move back above $75 and followed through. Entry $75.50. Stop $72. Nice follow through upside would be great. Testing the move higher as interest rates move up slightly. 

Treasury Yield 10 Year Bond (TNX) moved to 3.02% and faded the last seven days to close at 2.94 failing to hold the move above the 3% mark. The move pushed rates to their highest levels since February, but the retreat isn’t helping the call for higher rates and worries about an inverted yield curve. Still looking for higher rates to be the trend going forward. 2.96% on Tuesday and showing some upside movement again. 

Energy stocks (XLE) Cleared $68.82 on the upside to break from the current trading range. The move in crude gave cause for the buying. Held the move and establish an uptrend currently in the sector. Entry $70, Stop $71.50 (adjusted).  Flag pattern in play with an attempt to move higher for the continuation of the uptrend. Early gap lower faded on the day as prices moved higher on Trump removes the US from the Iran nuclear agreement. Upside in crude will impact the stocks longer term.

Natural Gas (UNG) forming a bottoming pattern currently after falling more than 19% off the January highs… watch for the next opportunity in the commodity. Bounced back to the top of the range and gaining some momentum. Failed to hold the move above $22.91 selling lower again… still watching as the commodity remains in the trading range. Back to the bottom end of the range… needs a catalyst. 

(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 5/8: News was all about the Iran/US issues over the nuclear agreement. There was Disney (DIS) earning beating expectations, the Fed promised to keep hiking interest rates, and more M&A activity… however, at the end of the day stocks were essentially flat on the day. There were some takeaways of interest at the end of the day…

  • Small Caps (IWM/TNA) they are holding above the $154.90 support/resistance. They look positive on the upside. Their leadership is a positive near term. Clearing the previous highs would be a win for the broad markets.
  • Energy (XLE/ERX) the sector stand to benefit from the Iran sanctions being reinstated on crude. The US companies will come back into the picture as well as the OPEC agreements. A target of $43.50 near term on our positions. IEO and OIH are moving higher as well. UGA adding to the upside… need to invest to offset the cost at the consumer level.
  • Dollar (UUP) continues to move higher and helps our position in the buck near term. The short side trade on the euro (EUO) is looking good as well.
  • Technology (XLK/TECL) upside follow through is a positive near term. SOCL, HACK, IGN, IGV and others all moving higher as well… need the leadership.
  • Treasury Bonds (TLT/TMV) rates have settled in near the 2.95% mark… watching how the bond responds to the Fed talk of hiking rates further…
  • Utilities (XLU) fall 2.5% as worries about the rise in yields on Fed talks. Watching as we have positions in the sector.

There is always something and somewhere to invest money… the questions is risk/reward. As the current scenario continues to unfold we will add positions that allow us to control and measure the risk appropriately.

MONDAY’s Scans 5/7: Added to the gains from Friday, but faded later in the day. Volume remains a concern. Breadth. Leadership. The trading is focused on a few stocks and sectors as reflected in the scans. Money is looking for leadership, but not much to be had. Technology stocks are seeing money flow, but even that is limited. Willing to take what is there, but I do so with extreme caution.

  • Biotech (IBB/LABU) showed leadership on the day but struggling to bounce off the current lows. Clearing the 200 DMA and $79.06 resistance would be next step.
  • Clean Energy (PBD) spiked higher in response to the Iran news. Interesting to watch how this unfolds if the sanctions are not levied. TAN, FAN and other moved higher as well… watching how the storyline unfolds with reality.
  • Semiconductors (SOXX) nice follow through to Friday and watching if it holds. Willing to add a position if the upside is more than a bounce.
  • Small Caps (IWM/TNA) nice follow through to the Friday bounce. We need leadership and this is a good sector to provide it… watching for the upside breakthrough to add volume and conviction.
  • NASDAQ 100 (QQQ) key leadership if the markets are to head higher. Moved to a key resistance level at $159.10. If we move through this level willing to add a position. Technology is leading the sector higher and digging into that leadership equally will add some interesting trades.

Other moves to watch today… KWEB, IGN, ITA, IAI, FDN, HACK, SOCL, MVV, URE, IHI

Patience as this all unfolds daily.

FRIDAY’s Scans 5/4: Solid upside gain for the broad markets on lower volume. The upside was praised by the talking heads as they pontificated on slower wage inflation being an upside catalyst. One month of data doesn’t change the trend. Thus we will watch how this unfolds going forward and take what the market has to offer. Always willing to let the data validate along with the trend.

  • Trend changing moves Friday: SOXX, XLK, QQQ, USO, IYR, IHI… looking for follow through moves on Monday and more to follow the lead.
  • Moves of interest on Friday: UCO, SOXL, TQQQ, FAS, CURE, KRE, IEZ, IYT… Need more leadership and these sectors will be key to any upside follow through.
  • Total Market ETF (VTI) Shows clearly the consolidation pattern with the failed attempts to bounce Feb 26th, Mar 9th, and Apr 18th. Any move above the last high of April 18th would be a win for the upside cause.
  • Crude Oil (USO/UCO) upside gets a move on analyst comments concerning the sanction against Iran. We will watch how this unfolds and look for the opportunity to add to our existing position in both oil and energy stocks.
  • Apple (AAPL) gapped higher on earnings and then added to the move with Warren Buffet increasing his stake in the stock. The move above the $181 resistance is a positive for the chart.

Friday’s move was a positive for the day. It put some sectors in a position to continue their upside moves. It put some in a trend reversal position. I curbed the fall of others… the challenge is follow through. There have been plenty of opportunities for a trend change since the low on February 8th… but none have followed through… we are looking for a follow through if the trend is to shift. Equally we need a catalyst that is strong enough to carry the trend forward.

THURSDAY’s Scans 5/3: Lower open, bounced with a nice intraday rally, and spent the last two hours trading sideways. The downside bias is growing from my view and a look at the charts, but you can never assume anything… the bouncing effort helped, but we need to follow through and it is Friday… Watching to see how the day unfolds… the scans were uneventful again as the day was basically neutral.

  • Financials (XLF) dropped to support at the $26.90 mark. This is a key level to hold. It is showing a negative bias short term and the trade with FAS is available should the sector fail to hold support.
  • Healthcare (XLV) equally failed on the day and tested key support. Watching the downside with RXD or LABD. Watching how today unfolds. BIS is set up as well on the short side.
  • Natural Gas (UNG/GASX) failed to break higher and has now reversed on the downside to show a possible short side trade.
  • VIX Index (VXX/UVXY) solid move higher on worries early… failed to hold, but watching how it unfolds today. $43.50.
  • Watching today… FAZ, TZA, SOXL, TMF, YANG… all are at key levels of opportunities.

China is in town to talk trade and that could have some interesting repercussions for the market. Economic data is showing signs of inflation. The economy is slowing, but still growing. Earnings remain in the background and investors are willing to wait and see for now. Patience as the day unfolds along with the future.

WEDNESDAY’s Scans 5/2: Downside day as the market continues to test within the range. Not much in terms of volume, breadth or leadership to discuss. The scans are more of the same as we see the day-to-day movement that remains lackluster. These are the type of markets that create anxiety for investors… they want action, not lethargy. I remain patient and let it unfold one day at a time.

  • Emerging Markets (EEM/EDZ) still trying to confirm the move above the $42.42 level of resistance to continue the uptrend in the short side ETF.
  • NASDAQ 100 (QQQ) Bounced off the April lows and continues to test within the range. No leadership despite the gain from Apple, Facebook, and ADP on Wednesday. Look at the parts more than whole for opportunities.
  • Coal (KOL) bounced finally after five days of selling lower. Watching the short side trade.
  • Small Caps (IWM) nice bounce to hold near the $154 mark and the sector still shows upside potential.
  • Dollar (UUP) another solid move on the upside as the buck continues to find strength in the Fed and globally.

Another day within the consolidation… financials, consumer staples, and healthcare show some weakness on the day, but remain within the current range.

(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 remain below the $58.44 entry point and holding above the April lows. The trend remains down from the January highs. Watching how this unfolds going forward. FCX and NEM have been a key weakness the last two weeks for the sector. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. I waited for support and the next opportunity as the fear evaporated and reality settled in. $48.55 entry. Stop $49.50 (adjusted). The ETF pays a 3% dividend and I am willing to stick with the slow-moving sector for now. The close above $51.11 with a test this week is a positive for the chart. The break above consolidation range ($51.11) offers another entry point to add to the position.  Fall on worries about interest rates. 
  • 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? Bounced off support again and making another possible move higher… watching $27.25 entry level.
  • XLP – Consumer Staples broke the February lows, March lows and is in the process of establishing the April low. The downtrend remains in place and the short side has paid nicely the last two months. Unless there is some leadership in the sector we remain short XLP. Stop $50.63. Grocery stores have been the big drag in the sector.
  • XLI – Industrials broke support at the 200 DMA and testing the $71.43 mark. Watching for the next opportunity to unfold from here. Defense contractors are the drag on the sector currently. Positive bounce back to the 200 DMA. 
  • XLE – Energy broke from the bottoming trading range move up 7.5% and is now in a flag pattern. Looking for the continuation of the trend by clearing $74. Entry $68.82. Stop $$71 (adjusted). Crude move on Friday gave little benefit… need to confirm the upside in crude and stocks will follow. moves higher in the range… looking for more upside based on the current news surrounding the sector. 
  • XLV – Bounced off $79.50 support. No upside follow through as the sector moved back below the $81.81 mark… tested support from April low and not looking very positive near term. Positive bounce on Friday, but we need to see more to have interest in the sector. Testing the previous lows again. 
  • XLK – Technology tested $64 support after failing to hold the bounce off low in March. The bounce on Friday was a positive to help restore the uptrend short term. SOXX is key to move as it added solid gains on Friday. Software (IGV) moved higher as well. SKYY and HACK looking positive in uptrends as well. Added some upside leadership again on Tuesday. 
  • XLF – the sector has become a hot potato with the interest rates moving, dollar struggling, and geopolitics in the news daily. Held support at $26.90. Sluggish response to the positive earnings data. The sector is weaker than I would like. Need to follow through to the bounce on Friday. KIE has been the weak link. Positive moves off the test of support. 
  • XLY – Consumer Discretionary sold to support at $99.40. Bounced and cleared $102.51 resistance. Testing the move higher and watching the upside. Entry $102.50. Stop $99.37. XRT key to the upside. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. Bounced off the $84 support again and cleared the $85.65 resistance. Entry $86.45. Stop $84. KIM, HCP, DLR, SPG, and CUZ leading the bounce higher. Sector broke through resistance and showing positive upside opportunities short term. Added to the break higher on Monday. 

The trend since January high is down. We are in a short-term downtrend despite all the talking heads stating and hoping otherwise!

The long-term trend off of the February 2016 low is up. Testing with a consolidation pattern currently that will determine a continuation of the trend or a trend shift. 

We continue to look for a solution to the consolidation which is leadership… none in place for now. A catalyst would be equally helpful… Patience is the key.

No big changes on Monday or Tuesday… watching the news and volume. 

(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. There is a lack of conviction from either side as the volume remains below average and neither side seems to want control. The leadership has not appeared yet. We are do see Energy, Dollar, and Commodities and taking on some leadership… but, they are not sectors you want to lead. Only four of the eleven sectors moved higher for the week. The S&P 500 index closed slightly lower on the week and needs some leadership if it is to follow through on the move Friday. 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. Earnings helped earlier in the week and modest economic data offered some upside Friday to end the week. Short term we are in a process of a bounce off support and a test. We need to break through the resistance 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.

“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.