Open Lower, Reverse and Close Higher

As we discussed in the trading notes this morning, the buyer have the upper hand, but they still lack the overall confidence to take the broad indexes higher through the current resistance levels. That said, we just have to exercise some patience with the current environment and take what the market gives. Even it the break above resistance doesn’t hold, we still need to take the opportunity and manage the risk of the move.

The worries that were rattling investors have been put on the back burner for now, but they are still alive and well. The media, analyst and investors are looking for reasons to buy stocks versus sell them. I reviewed that in detail in last night’s video update. The internals for the market show strength more than weakness. That said, you cannot make any assumption, and you have to put your focus on entry and exit points. Discipline is the key to success in the current market environment and guessing could get ugly.

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November 12th Update

Below we updated the components we had discussed last night as the positive move in the markets today warranted the follow up on those outlined. Still plenty of work left for the markets overall, but the positive gains on Wednesday help the argument for the upside bias.

State of the Market:

The trend of the market remain on the upside both short term and long term. The micro term (13 weeks or less) is where investors are focused currently. Why? The media and analyst feeding them are concerned about the current valuation of the market overall versus buyers appetite for risk. The VIX index shows the worry factor doesn’t even exist at this point. We have all voiced our concerns about the movement of the market near term, but the key will be to let it play out versus speculating on direction.

First the cuts were rumored and now the Fed Presidents are basically calling for the cuts earlier rather than later. Yesterday’s comments didn’t send the markets lower, and today they bounced off early selling worries and closed higher on the day. The buyers are inching towards the confidence to push the indexes to higher highs. I don’t expect big moves up, but the bias is on the upside and today validated that fact further.

Index and Sector Watch:

Dow Industrial Index (DIA) – the chart continues to bump against the top of the up trending channel. A break above this resistance level gets interesting for the broad index. This validates what I was discussing above about the markets wanting to move higher despite any sentiment otherwise. Wednesday the index reversed from early selling and made a move to a new high.

S&P 500 Index (SPY) – the chart is similar in the push back towards resistance of the previous highs. A break above this resistance level is another positive sign for the broad markets. Wednesday provided the break above the $178 level and now we see if the confirmation of the move follows through.

NASDAQ Index (QQQ) – the chart shows more of a topping formation on the index with the short term 10 DMA pointing down or turning negative short term. This index is a balancing act for the two above as it isn’t as positive relative to the short term look. Wednesday the index did as we suggested… played catch up to the other indexes on the upside. This needs to confirm and follow through, but the move was positive today.

Russell 2000 Small Cap Index (IWM) – More pronounced on the topping formation than the NASDAQ index and the 10 DMA approaching a cross below the 20 DMA. Support at the $108 level is going to be telling short term. Again this is a contrast to the two positive indexes above. Wednesday the upside returned to the small caps and this puts all four of the key indexes on the upside momentum. That should bod well for the markets looking forward if they follow through on the upside.

Leading Sectors of Interest:

Technology (XLK) was a leader today with a positive move back towards the previous highs. Semiconductors were the leaders in the index, but software and networking are making positive moves the last few days off the recent lows to assist in the move of late. Wednesday hit a new high as the semiconductors continue to lead the broad sector higher. Nice move above $34.05 to hit a new high.

Consumer Staples (XLP) is still consolidating from the break above the $42 level of resistance. Need a follow through on the upside to keep the upside trend moving micro term (less than 13 weeks). Wednesday provided the follow through with the move back near the previous highs. Watch to the move to follow through with a new high.

Retail (XRT) broke to new high on Monday and continue to follow through each since. The consumer services (XLY) has been one of the primary leaders off the November 2012 low. It’s that time of year when investors start to look at who the winners will be for the holiday season. Wednesday earnings from Macy’s set the tone on the upside for the sector. solid gains and this calls for stop adjustments to protect against the downside reversal.

Negatives Sectors of Interest: 

Precious Metals – Gold (GLD) reversed off the October high and continued to break support at each step of the way. Tuesday the ETF tested $121.85 low from October 11th. Not pretty and the downside trade has been the best course to take the last two week. The longer term trend of the metal remains negative. The question in play currently is will the metal find a low here and bounce higher going forward. OR does it continue the downward trek towards the $116 level of support? My vote is on the downside.

Crude Oil (OIL) – Tested the low from last week and managed to hold, but not pretty. We warned about the topping formation in September and it has been downhill since. The downside pressure is in play for now and it is going to take a significant shift in demand to sway buyers. The stronger dollar has put pressure on the price as well. Wednesday the bounce early helped right the ship somewhat, but the pressure remains on the downside. Downtrend is in control, the buyers will have to exert some effort to reverse the direction.

Emerging Markets (EEM) – The worry about the Federal Reserve cutting stimulus has the sector on the downside. The chart show the initial reaction to the idea in May. It managed to rally back on the Fed stating they would not cut stimulus in October at the September meeting. Down again on concerns of cuts in December are now in play. Not willing to short here, but worth watching to see how it plays out. Wednesday the ETF tested lower and managed to rally back to positive territory? Beginning of a bounce or just noise? Watch how it trades tomorrow.

Interest Rates/Treasury Bonds (TLT) – the rise in rates has bonds moving lower. This is a negative for treasury bonds, but it is a bigger negative for the interest sensitive asset classes like Real Estate, Utilities, Telecom and other bond classes. If the yields continue to creep higher that negative sentiment will potentially spill over to the general stock market indexes as the negative sentiment builds. Wednesday the yields receded some and gave some breathing room to the bond and interest sensitive assets. That accounted for part of the positive news from the broader sectors moving higher. Still have to account for the movement of the bonds in relationship to stocks.

What to Watch Tomorrow:

Trading Notes tomorrow morning to set the tone for the trading day. Don’t get them? Send and email to don@jimsnotes.com to find out how to try them free.