Outlook for the Week of July 27th

MARKET OUTLOOK: 

What started out to be a continuation of the upside for the broad markets turned into selling by weeks end. Investors liked the start of the earnings period, but found themselves doubting the outlook following the news from companies like Apple. It is the forward guidance that is causing the most angst for investors currently… that lack of conviction I talked about last week even as the market was climbing to new highs on the NASDAQ. The VIX index jumped to end the week showing some concern stepping back into the markets. That said, what are looking at going forward?

More of the same from view is the outlook for the coming week. The confidence factor is key for me as investors continue to trade off news. The charts show the choppy impact of this type of trading and it reflects very clearly what news is doing. The start of earnings pushes the NASDAQ 100 index up 7.5% and we have now retraced 38% of that move on the close Friday. It also moved to a key support level of 4560 for the index. It is this type of movement that is keeping the markets in check and not allowing for breakouts to maintain their trajectory. That means caution from my view.

We will conclude the month of July which will lead to more data to digest, but we will take that as we get it… for now it remains focused on earning and the deterioration of the global markets… We look at all this below.

NOTE: The following are things to watch and evaluate during¬†the trading week…

  1. Retail (XRT) was on our watch list, but it failed to hold the move and managed by week end to close at the key support levels near the $97 mark. The 200 DMA is just below at $96 and a break of these levels would bring out the short sellers for the sector. Watching how this unfolds to start the week. Break lower short trade is on. Bounce we watch to see if it can recover the upward trajectory.
  2. China (FXI) broke support at the $42.30 level following the bounce off the aggressive selling the first week of July. Now the question is with the move lower does the selling resume? Based on the move Friday the answer is yes. Hit the entry on YANG at $82.65.¬†The debt currently held by Chinese companies could be the next shoe to drop… still looking for definitive move for the country. Stop $80.10.
  3. Financials (XLF) breaking lower as the banks continue to react negative to new regulations from the Federal Reserve on large banks and reserves. You have to love government regulations… they are good for two things… stopping growth and raising taxes. Both impact the markets. FAZ entry $10.65 if downside continues.¬†

MAJOR INDEX STORIES:

S&P 500 Index (SPY) tested the $204.50 support level and¬†resulted in a bounce off support back to the previous highs… and reversed lower again. This leaves a triple top in place, which from my view is a big negative for the index. News remains in control¬†with earnings and news in the banks dragging the sector lower. Need to hold¬†the 200 DMA and bounce back above¬†the 50 DMA. Hit stop $209 on Friday and watching how this unfolds.

NASDAQ 100 Index (QQQ) Negated the break to new high above the $111.12 level. In fact we closed at that level on Friday. How does this play out? Flip a coin as the lack of conviction continues to negate the upside movement and then the worries show up along with the sellers. Stops hit on positions and now watching to determine how this unfolds near term. Patience is the key.

Russell 2000 Index (IWM) Managed to bounce back above the $123.75, but failed to hold the move. The move on Friday confirmed the break below the $123.75 mark and now is testing the $121.25 support level. This is the next level of support and a move lower raises the short flag for investors. TZA is the short ETF and entry was $9.85. Short side in play with stops to protect the risk of the trade.

Volatility Index (VIX) made the move lower to¬†11.95 last Friday and this Friday is back to 14.6… reflecting the increased volatility in the market indexes.¬†I stated 12.8 was the upside entry for VXX and we hit that mark on Friday with an entry of $16.80. Watch the downside risk as the weekend can reverse negative momentum. Stop $16 to start and give some room for volatility.

Transportation (IYT) Moved back to¬†the¬†$148.50 level, but can’t find any momentum above that level. The 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term. The break¬†above the resistance line at $148.50 failed to follow through on the upside and accelerated lower again to end the week at $144.34. Negative sign for the broad markets going forward.¬†

Dollar (UUP) The¬†dollar technically is attempting to break from a double bottom pattern. It has stalled at the key resistance at the $$25.65 level. Euro (FXE) continues to struggle and the outlook remains weak currently… dollar strength is hurting the commodities overall.

Crude Oil (OIL) Crude continues to move lower closing at the $48 mark to end the week. The break of support only added to the selling and now the next level may well be the previous lows at the $43 level in March. Short side trade is still winning. We still own SCO from the trade posted several weeks ago. (see table)

SECTOR STORIES: 

Emerging Markets (EDZ) short side trade in the emerging markets showed upside momentum with move above the $35 level. Entry at $36 as the upside continues. Hit the entry point with the sector selling off further. The upside on the short trade in play and stops at $36.80. Downside risk accelerated with the stronger dollar getting the blame.

Russia (RUSS) Short trade on Russia set up based on the continued weakness in crude oil and stronger dollar. The move above $34.20 was breakout. If we confirm above $35.10 short term trade opportunity. Hit the entry point on Wednesday and managing the risk as we go day-to-day. Stop $37.50. The downside risk remains in place with crude holding the move lower.

Cyber Security (HACK) Tested lower and bounced off support. The entry of $31.50 was taken on the move last week. The move above $32.25 failed and we closed back at the $31.65 support mark again. Stop on the trade is $31.15. Watch how it opens to start the week.

Social Networking (SOCL) Sold lower to support at $18.40 and looking at a potential bottom reversal with entry at the $19.50 level. The buying last week hit the entry point and added the positions. News driven, but trade the technical data. Stop $19.60. Testing lower to end the week. Worst case is a break even trade.

Financials (XLF) remains challenged by the uncertainty issues. But, the Fed is committed to hiking interest rates and the longer term view is to own the sector. You have to be willing to stomach the volatility and add to the position on weakness. Moved back above the $24.50 mark¬†added¬†positions. $24.70 entry.¬†Still challenged… Stop $24.70 on the positions. Selling to end the week a big negative and raised stop to break even on the position.

  1. Banks moved lower and hit our stops last week. However, the upside move in the sector is still on my watch list as opportunity. KRE at the $44.20 entry would be worth adding back if it shows positive momentum. Hit entry and it¬†followed through to start the week. Stop $43.50. Renewed worry, renewed selling… raise stop.

Energy (XLE) failed attempt to¬†bounce… the one day of positive for the sector… sold lower again and broke the $73 support putting the downside back in play. ERY is the short ETF trade. $23.35 entry.¬†Hit entry and added to the position.¬†Stop $23.35. Let it run it’s course.¬†

  1. Crude oil¬†– moved lower in response to the global fear. Short side trade remains¬†and watching to see how this plays out. Setup for a short trade on the commodity with SCO entry at $61.50. Raise stop to $81.30 on balance. Sold half of position at the $70.30 mark, let the balance run. End week lower and raised the stop… patience.

Treasury bond (TLT) The bond reversed off the low and cleared the $119 resistance and $120.50. The upside is fear driven… not enough fear to justify, but money has rotated nonetheless. I like the TBT (short trade still) play and we are watching for the entry to develop as the anxiety fades. Entry $47.15 as it stand now.

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 helped for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $77 exit point raised stop.¬†Still plenty of work to do, but watching with suspect eye as the upside move failed to hold on Friday.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.