Positive Response to Positive Tone in Washington?

Wednesday, November 28th

Intraday reversal for stocks comes on the comments that the politicians want to play nice now? The divide is too large and there inability to put differences aside to do what is best for the country is too great. I expect more of the same going forward and the markets will react at each step of the way.

The VIX index move up towards the 16 level on the noise today and all the major indexes ended the day in the red following the various comments above. Watch VXX if the rhetoric continues as a trade opportunity.

The challenges remain the same old issues facing investors. Greece? Fiscal Cliff? Economic Growth? Etc. How does this all unfold and how much conviction do traders/investors have looking forward? As always we default to the charts for the answers.

Global markets followed suit again today with the US giving back some of the gains with Europe down across the board. China traded lower for the third day and continues to test the move higher. Watch the downside risk relative to the worries and the ripple effect of the US.

Still not convinced of the upside move. Looking for a test of the move, hold support and then take another stab at moving higher. Downtrend is still in play on the charts. Respect the trend and be patient.

What am I watching?

Updated the list below in parentheses.

While we missed the trade on the upside move in Apple, the target was hit on our original post at $589. Downside play? I am a believer in the downside looking forward and it makes sense short term. I don’t play many options, but this is one that looks interesting to me. (didn’t bounce with the rest of the market. This leaves the downside still a potential play.)

Natural gas made a move lower dropping 3.5% on Monday. Still watching the uptrend as it remains in play. If you look at the weekly chart their is a potential double top developing with support at $20.50. (Wednesday got the break lower and possible test of support?)

DXJ – Japan’s Dividend ETF made a move above the 200 day and top of the current trading range to break higher. Watch for entry opportunity on the move. Testing the move higher with $32.80 support. (Hit on Wednesday and back to the upside.)

Retail is playing Yo-Yo with the move higher. The downtrend line is the level to watch. (Wednesday made the break higher and the entry is to hold the move above $63.50 tomorrow)

Tech still pushing higher as XLK runs to $29 resistance on the close. Watch for a test at $28.35 support. (Tested support on Wednesday and moved back near the $29 resistance yet again.) Trade on the breakout.

Utilities finally bounce off the lows. Looking for move above $34.70 as potential entry point and play opportunity. (Took the entry on this sector and looking for follow through short term holding period.)

Watch TLT at $125.50 if the bounce off the support follows through. (Wednesday made the move above the level on a gap open. Moved back below the level by the end of the trading day. Still watching for the reversal or a play in TBT.)

IHF, healthcare providers ETF was down 1.8% as a result of downgrades the last two days. The concern is the delay in the roll out of the medical exchange networks for the states. Thus, to grow multiples and push stock prices higher the transition needs to be more seamless and progressive. Watch the downside risk here and maybe even a short play develop. The challenge is the entitlement cuts that Congress wants to make and that could impact the seamless transition for the states. (Wednesday tested support further and bounced. Still question market surrounding the sector.)

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index rallied on the hope of resolution to the fiscal cliff again today after a back and forth week on the rhetoric being thrown around Washington. We start the week out with a test of resistance and test of conviction from investors. The test was small and not much changed overall. The Scatter Graph below has a starting point of 10/17 which was the pivot point for the recent downtrend. The move lower turned back to the upside on the 15th and bounced off the recent lows establishing the next pivot point and uptrend potential. Thus the bottom chart is the new leadership on the move off the low.

The leadership for the move on the 15th low has come from Consumer Services, Consumer¬†Durable, Industrials, Technology and Basic Materials. Utilities made a move off the lows on Monday. The shift off Friday’s high is a worth watching to see if the pivot point holds on the recovery. Still need some clarity going forward, thus be patient for now.

It is important to note that the bounce off the 15th low now has bounced back to keep the uptrend hopes alive. Thus, we are keeping both charts here to track the progress moving forward.

Breaking the Sectors Down:

Financials РBounce in play. cleared $15.45 resistance. Watch for confirmation and follow through on the bounce. The testing of the current move today hit the $15.50 level, held, and bounced. Still in the game of attempting to move higher. Still looking to the banks (KBE) for the leadership on the upside.

WATCH: XLF – $15.72 Entry – Stop $15.40

Utilities – bounced off the lows and building a base to move higher. We have added this sector to the S&P 500 model and we continue like the upside as well as the dividend opportunity short term. Expect volatility in the trade, but keep your outlook 6-12 months.

Telecom – the sector is in position to break higher short term. Scanning the sector to look at the stocks versus the ETF. There are some clear leaders and some clear losers in the sector. Respect the risk of the trades in any of these stocks and manage your risk accordingly.

WATCH: FTR, VZ ($43.75 entry), CBB ($5.28 entry), T ($34.30 entry), HLIT (4.55 entry), JNPR

S&P 500 Model Watch List has been put to work and the positions are being monitored in the Model. Added Basic Materials, Consumer Durable and Telecom entry points today. 

NASDAQ Index РTested lower on the intrady selling, bounced to close above the 200 day moving average. The NASDAQ 100 index showed the same promise on the upside move. Took the entry on the QQQ move today as posted here. The play is held in the Sector Rotator Model.

WATCH: QQQ – 65.10 entry (Wednesday) Stop – 64.75.

Dow Jones 30 Index – The bounce back to the 200 day moving average is a positive, but now we need to make a move above this level short term. Patience with the entry as the index has struggled with volatility and consistency short term.

WATCH: DIA – See Sector Rotation Watch List.

On my Watch List looking forward:

Housing¬†– The housing sector has turned the corner just in time to see a train coming head on. The sales have improved and inventories drawn down, not to mention the homebuilder stocks have climbed better than 45% during the year. Why the train comment? The budget issues facing the country need income to feed the deficit. Thus, what better place to go than the interest deduction for interest on a home loans. If the rumors are true, that change could derail any continued recovery in the housing market short term.¬† XHB is testing support near the $24.35 level. The economic data relative to housing continues to improve this week. Existing home sales were better than expected, builders index was up over October and housing starts were better than expected. Impact on XHB… not much. The upside continues to struggle with the overhang of the current fiscal cliff issues and taxes. Watch for downside risk to risk on a pullback in the broad markets.

Short opportunities are not over… we did get the bounce we were looking for and now it is matter of sustainability? I am not inclined at this time to believe that exists. The oversold snap back was just that for now. This could and should based on what we know, produce a short opportunity on the rally and an opportunity to take money out of positions that have been lagging overall.

Transports РIYT has bounced off the bottom of the current trading range and is moving back towards the top of the range. Does that lend confidence to the bounce off the recent lows? The index has done virtually nothing over the last year. Plenty of thoughts surrounding this sector, but if it mounts a rally through resistance the upside follow through is worthy of our attention. Scanning the 19 stocks in the index it is easy to see the rails are picking up along with trucking. The airlines are the drag of late, but that could improve if fuel costs remain lower. One for our watch list as we move forward.

The VIX index (S&P 500 Volatility Index) remains low and not showing any elevated fear from investors.  This remains interesting to me short term, and we will continue to watch how this plays out. Tested the lows on Monday, but has bounced back towards 16 as some uncertainty on the budget negotiations has rattled some. Watch VXX opportunity it the volatility picks up. SVXY if the volatility remain mute.

2) Currency:

Dollar РThe dollar sold lower on Monday, but held support at the $21.95 level on UUP. The dollar index (DXY) pulled back to support at 80.20 as well. Watch if this holds for a bounce or upside play.

WATCH: UUP

Euro РWe were looking for a play to develop in the euro of a support test. That happened, but it was a gap higher on Monday leaving us unable to take the trade. Some testing early on Wednesday, but then rallied back. Not willing to chase this based on the current data.

WATCH: FXE – Gapped above the entry – looking for test of the move.

3) Fixed Income: Yields becoming fragile short term. The move lower on Monday rattled some investors relative to the opportunities in stocks. Key to be patient with the move lower in bonds

Treasury Bonds РReversal short term as yields falling again on the 10 year to 1.61% and the 30 year to 2.77%. Watch the yields to reverse if the rally on Wednesday in stocks is to take root.

WATCH: TLT – Gapped higher and then retraced it all. TBT maybe the trade if stocks follow through on upside.

High Yield Bonds РBig bounce on stocks moving higher. Watch the downside to return as the high yield bonds tend to trade more in tandem with stocks.

WATCH: HYG – 92.75 resistance?

4) Commodities: The commodity sector continues to be a challenge without clear leadership. The volatility remains very much in play off the recent lows. Gold had more than a $30 swing on the downside on Wednesday expanding on the volatility in commodities.

WATCH: SLV – Entry $31.50 / Stop $31.50 – Looking for upside momentum through resistance. Holding near $33 resistance, but need some follow through or look to lock in gain and see how it plays out.

WATCH: UGA – Entry $56.25 / Stop $56.25- Watch and manage the volatility. 50 day moving average is acting as overhead.

5) Global Markets: The NASDAQ Global Market Index (NQGM) broke below the 200 day moving average and the downside accelerated similar to the US markets overall. Likewise it rallied or bounced off the lows last week and a move above 930 was positive. The EAFE index (EFA) moved back above the $53 level and is looking for a follow through on the move higher short term. Still no clear direction in the global markets as the risk remains high in the asset class. Watching for upside follow through.

WATCH: THD – Breaking above the downtrend line and move above $76.40 would be positive entry point.

WATCH: DXJ – Japan total dividend ETF is breaking higher on the rally in Japan. The break from the trading range is a positive with a trade entry at $33.25. Crazy trading day Wednesday with the intraday volatility. Raise stop to $32.85.

WATCH: FXI – China is testing the gap higher and watch for the $36.65 level to hold as possible entry play short term.

WATCH: TUR – 59.20 support held and solid bounce to maintain the uptrend. Look for trade entry on test of the move near the $60 mark for now.

6) Real Estate (REITS) – The sector broke support at $64 (IYR), and tested the $61 support for the recent bounce. Should see some stability, but limited upside for the near term. Resistance at the 200 day for the move off the recent lows.

WATCH: IYR at the 200 day moving average. Entry 63.40.

7) Global Fixed Income РUncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector. Greece back on the table along with Europe. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and attempting to hold support at $121.. Broke on Friday… watch to see how it plays this week.

WATCH: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

WATCH: PAFCX – bounced off support near the $11.66 mark. Held the uptrend line and held the support for now. Still looking for entry opportunity on the play at $11.74.

WATCH: PICB – International Corporate bonds are breaking above the top end of the current range. 29.15 entry point?

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.