More worries keep market in check for now

Tuesday – Notes & Research

More challenges as earnings begin. The broad markets continue to limp along as guidance is offered for fourth quarter earnings. The fixation on how good or bad earnings will be is keeping the broad market in check as anxiety towards the reality builds. The VIX index remains flat near 13.8 showing no fear building. Tomorrow is another day and for now the upside remains in control.

Plenty of new headlines concerning the outlook for gold. The negative turn of events for the metal of late has all the supports out in defense. The attitude towards risk is positive currently and has been since mid-November. That doesn’t bode well for gold as investors are willing to take the risk of stocks. Thus, if the current sentiment remains in place I would expect more downside in store for gold in the short term.

Utilities and energy continued to push lower after leading the downside on Monday. The telecom sector was the leader today dropping 1.6%. Basic materials and healthcare were the leaders on the upside as they both closed slightly higher on the day.

Alcoa hit earnings and raised guidance after hours. The stock is trading higher by 1.5%. The question is will this be enough to keep the rally going in basic materials and base metals? Definitely something to watch in trading tomorrow.

Still in patient mode for now.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index continued to struggle today as more mild selling hit the markets. We could be in a position to see the index test 1430 before making a move through the 1470 level. Not making any predictions, but this is something to watch short term.

The chart below has a starting point of 11/15 which was the pivot point for the uptrend. The first vertical line drawn on the chart shows the starting point of the drop relative to the fiscal cliff issues. The second is the rebound started last Monday. The last two days show the move turning sideways for now.

The chart below is the 28th of December starting point looking for current leadership on the renewed push higher. OR the leadership on a reversal short term.

Energy, Financials, Materials and Industrials remain in the forefront of the market move. Utilities, Telecom and Consumer Durable are the biggest laggards. This chart shows the potential for the reversal and test of the current move. 1430 is the level to test short term.

The VIX index remains at the lows near 14. No signs of anxiety yet.

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

Tracking the Indexes and Sectors of Interest:

NASDAQ Index – The index bounced back close to 3110 last week and has continued to hang tough. Watch the large cap technology stocks for clues to the short term direction. We need to clear resistance at the 3110 mark short term. A test of 3060 support isn’t out of the question.

Dow Jones 30 Index – 13,440 is the level to clear on the upside. 13,200 support may come into play short term.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Small caps are above the previous highs already and holding as well as mid caps? Weigh out the risk factor of buying at these levels currently. Looking for a test of near term support as entry opportunity.

Financials – XLF was one of the stronger sectors during the selling and has moved to a new high at $17. A test back towards $16.50 would give better entry point.

Basic Materials – XLB  hit a new high and remains one of the leaders. This is another sector to like on the upside. Any test of the move would offer a better entry opportunity. The earnings forecasts for the fourth quarter were cut by as much as 14% for the sector, but it has maintained the upside.

There is some topping patterns developing, but the optimism of the investors remains in play. Watch for a small test of the move short term as we go forward. A 2-4% test on the downside would provide better entry points short term.

2) Currency:

Dollar – The dollar made a bounce off the lows as the Fed minutes gave reason to believe that QE funding would stop. That hasn’t happened, but the dollar has been a benefactor. Watching resistance near the $22 level on UUP. Needs to make a definitive move to the upside in order to play.

Euro – The euro is testing lower on the rally in the dollar on Thursday. The support at $129.35 is in play currently and break is the exit point for the play on the euro.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds – The yield on the 10 year held at 1.87% and the 30 year to 3.07%. The downside risk in Treasury bonds is in play, but they are poised to bounce short term. TLT is is testing support at $118.40 and could provide a buying opportunity. (SEE SECTOR WATCH LIST)

High Yield Bonds – Testing the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. They have bounced off the December lows, but lack much in terms of upside conviction. Even the breakout move on Wednesday seems lackluster. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. The bounce off the lows didn’t hold short term and the new low today was not pretty. Short natural gas seems to be the better opportunity (KOLD).

OIL – Oil has been stuck in trading range, but on Monday moved above the top end of the range and today continued higher towards $93. Still looking for clarity in trading relative to the price of crude. The upside is in play, and the breakout on Monday is confirmed to the upside.  The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70. (STOP $21.45)

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. Manage risk if you take any trades here. UGA at $58.50 Entry? Watch move higher today to confirm it holds.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We are in the midst of a test of $161 on GLD. The bounce back to $163.50 on Wednesday showed there are still interested buyers, allbeit they were not interested long as give the gains back on Thursday. Sold further intraday, but managed a rally into the close? Downside looks better than the upside in gold.

Silver – SLV gapped higher and is holding above $30. Filled gap and sold back to $29.25.

DBB – Base Metals failed to hold support at $19.10. The sector has struggled to hold the upside, but the still looking for opportunity on upside to continue. Watching for entry. ENTRY $19.25 if holds. Friday failed to hold the support we were looking for, but it is still on my watch list.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain. Resumed higher today on the cliff resolution.

WATCH: EFA – The uptrend short term continues, but getting a small test short term. Stick with the uptrend play for now as it holds support.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range was a positive trade entry at $33.25. Manage your risk and raise stop to $36.75. Yen has been rising again and the drop today hit the stop on the play. Still banked a nice gain on the play.

WATCH: FXI – China has firmly established the uptrend off the November low. However, there is a test of the move in play today. The gap down to $40.50 is due to news about the consumer. Watch and use $39.75 as key support level currently.

WATCH: IEV – Europe continues to rally despite all the negative reports and sovereign debt issues. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently for IEV. Upside target is $45.50 going forward.

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 as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90 Gapped open on Wednesday, but still of interest on test of the move. No real test on Thursday… watch. Break above $66.12 is an entry point of the move above the next level of resistance.

ENTRY $66.15, Stop $65

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD. Watch the volume as money flow picks up in the sector and gives opportunity to add to positions.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range and trading higher for now. HOLD.

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.