Move Higher with Later Reversal To Close Flat

Wednesday, December 12th – Notes & Research

As we stated in the morning notes the FOMC meeting could set the tone for the day. Investors continued buying stocks in light of the rumor the Fed would put more money to work in the form of quantitative easing. ¬†The end result was to add $45 billion per month to long term Treasury bonds. That is on top of the $40 billion per month in Mortgages. The old adage of don’t fight the Fed comes to mind. However, the results were the same as the QE3 announcement… a rally higher and then some selling. This leaves a big question mark heading into tomorrows trading. Up or down?

The NASDAQ moved back near the 3000 level on the close and leaves the chart still looking for a break higher. The S&P 500 index made it through the 1430 level intraday, but close at 1428 or flat on the day and looking for a break through resistance. The Dow was flat on the day, but held the breakout point for the index. Watch how these indexes fare tomorrow.

I will be the first to admit that I don’t have PhD in economics, but can someone explain to me the logic behind tying the future hike of interest rates to the rate of unemployment? The Fed decided to keep rates low (0%) until the unemployment rate reaches 6.5%. This assumes that inflation remains below the 2.5% mark. Oh what a tangled web we weave! Zero percent growth, zero percent interest rates and austerity… makes for the perfect non-growth scenario for the US economic picture.

Needless to say the action taken didn’t settle well with investors either as they decided to sell on the news. Is the small push higher or buying the rumor over? Tomorrow and beyond will show what the outcome will be.

Still taking it one day at a time for now.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved to the top side of the resistance range at 1428 on Tuesday. Moved higher on the Fed announcement on Wednesday. Similar to the QE3 announcement, didn’t hold the gains into the close. ¬†The key is to break through the 1430 resistance which was accomplished intraday, but not on the close. ¬†The 10 day moving average has crossed up through the 30 day and the confidence has been building from investors. The concern relative to today, was the reversal and it could come back to be a negative. For now we stick with the trend and see how it plays out tomorrow.

The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. The correlation between the sectors remains high with industrials taking the leadership role! That is not the sector you want to define the leadership. Materials bounced back from the selling in an attempt to play catch up, and the selling Wednesday is worth watching. Technology has struggled with the Apple saga, but posted solid gains  to bounce back over the last week. Strong leadership remains the struggle for the broad markets. Telecom has made a solid move to participate as one of the leaders the last week.

The chart is showing rotation to financials, industrials, healthcare and telecom as the leaders. Energy has made a turn off the low despite oil dropping back to $86. We continue to watching the jockeying for position short term, but we are still in need of a catalyst to the upside to break through resistance on the index. The Fed stimulus offered some hope, but based on the late day trading that hasn’t panned out. The market wants to move higher, and made a solid push towards that goal Tuesday. Watch to see how it unfolds.

VIX index rose last week before the big drop on Friday. The downside is back on play with the consistent drop of late on positive trading. Late day bounce on Wednesday, but still in the lower end of the range.

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

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РApple bounced on Tuesday gaining 2.1% and that helped the broad index post a positive gain on the day as well. The index cleared both the 200 day moving average and the 3000 mark again. Tested on Wednesday, but held. Watch and manage the risk.  As goes Apple, so goes the index for now. Not willing to buy into the index until the Apple flu is cured. This could get interesting short term.

Dow Jones 30 Index РThe bounce back above the 200 day moving average is a positive, and we made the move above the 13,080 resistance. 13,300 is the next level to clear on the move higher (hit it Tuesday). The close was positive, but some resistance is now in play.

WATCH: DIA – See Sector Rotation Model.

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 was a positive and a opportunity to trade the sector. Took the entry Monday on the move from the trading range. Reversal on Wednesday is the level to watch short term. Watch and manage the risk.

WATCH: IJH – See Sector Rotation Model.

S&P 600 Small Cap Index РStalled near resistance at the $76.80 level on IJR. Still looking for a break from the consolidation to the upside short term. That took place Tuesday on the move through resistance and a positive close.

The intraday reversal on Wednesday was negative. There is cause for concern on the move and we will have to watch how this plays out on Thursday.

WATCH: IJR – Watch for entry if we can confirm the upside move.

Telecom – IYZ broke through the short term resistance $23.90. CCI, LVLT and LUK have been leaders on the move off the low November 15th. AT&T and Verizon both broke from the consolidation to lead the upside today. Watch and play according to your risk tolerance.

WATCH: IYZ – SEE ONLYETF MODEL.

Financials – XLF made solid move higher intraday, but failed to hold the all the gains. The move was enough to keep the upside in play as we inch back towards the September high. Banks attempted to continue the leadership, but fizzled in the end. KIE, Insurance ETF actually closed negative on the day. The upside leadership is coming into question and thus, we have to watch the broad sector for a near term top.

WATCH: XLF – See S&P 500 Model & EGG Model.

2) Currency:

Dollar РThe dollar sold lower and broke support at the $21.95 level on UUP again. The greenback has been up and down of late and for now I am more interested in watch than owning the dollar. The dollar index (DXY) pulled back to support at 79.6 again.

 

Euro РThe euro dropped back to support and bounced on the dollar losing ground on the day. Watch FXE?

Yen РFXY tested support again at $119 and bounced two days and reversed to $119 again. We will watch to see how support holds? Broke support on Wednesday and at $118 now with $117.25 next on the support level.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year rose to 1.69% and the 30 year to 2.89% on Tuesday. For TLT that pushed it lower from the consolidation wedge and triggered the trade opportunity on the short side. We added to the ONLY ETF Model today. Watch and manage the short term risk as we know all too well on these bonds.

High Yield Bonds¬†– Big bounce on stocks moving higher with stocks. Interesting bounce. Hitting resistance at the 93.50 level. Watch for a follow through move higher on today’s close?

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

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.

KOLD _ Natural Gas near support at $19.35 and the 200 day moving average. Patience as this sets up and confirms any plays.

OIL – Oil moved higher after testing near term $86 support held. Still not acting well, but the rally was in reaction to the Fed announcement. This is another area where the longer term outlook is on the downside. We could see oil test back near the $70 level based on supply and demand. Looking for the downside play going forward.

UGA – Gasoline fell to the 200 day moving average and bounced. Watch for direction.

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.

GDX – Gold miners had nice gain on the day up 2.8% and closed at the 200 day moving average. Worth watching the move along with the SIL, Silver Minders +2.35%.

DBB – Base Metals are testing resistance at $19.40 on the upside and if we find the catalyst to move through that level would be short term trade opportunity. Moved higher today and is ready to climb further short term.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above the 200 day moving average. However, the week ¬†the index has tested lower.¬†The reversal isn’t reflective of the move in the EAFE which closed near the top end of the current trading range. Watch for the support to come into play.

WATCH: EFA – Back at the highs of $55.20 and in position to break from the trading range for a trade set up. Cleared resistance at $55.20 and holding. 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: 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. Manage your risk and raise stop to $33.60.

WATCH: FXI – China gapped higher on Wednesday (passed on our trade) and followed through on the upside today. Clearing the $38.10 resistance on FXI 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. Gap higher on Monday as money rotates into the ETF.

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 and entry point. SEE Sector Rotation Model

7) Global Fixed Income:

Uncertainty about the sovereign debt issues remain, but they are clearing up as the global economy bottoms. Thus, the lack of willingness to accept much in the way of risk from this sector.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 held support at $121. HOLD.

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

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

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