Rates jump along with the dollar and stocks fall

OUTLOOK: May 16th

The test continues as REITs, healthcare, and technology give back gains. Small caps tested back near the $158 level and then closed in the green showing some positive signs of leading. Stocks overall tested as you would expect from the push higher last week and now comes the opportunity if the upside resumes. I am looking for new opportunities that will be presented by the setup. The dollar gap higher on the day clearing resistance. Gold gaps lower breaking from the trading range on the downside and setting up the short side trade. The 10-year bond yield jumps above 3% again as yields put to 3.08%. This break came with some strength adding to the downside pressure on the bonds. TLT fell 1.1% and puts the short side trade back on firm footing. Today is of interest on all fronts as stocks now have to validate last weeks move on the upside.

The S&P 500 index closed down 18.6 points at 2711 and is testing the move above the April high. Ten of the elven sectors closed in negative territory on Tuesday and we watch to see how this all unfolds. The doji candles left on Monday followed through with selling on Tuesday. We will approach the day with optimism the test will result in a continuation of the move higher… however, we do so with our stops in place should the downside continue. The chart is holding the long-term trendlines off the January/February 2016 low. Patience is key.

The NASDAQ index cleared 7297 resistance level last week and closed Monday at 7351  testing the move higher. The SOXX showed a positive bounce off the intraday selling to close down one percent. Technology equally struggled on the day, but in the end, the charts look positive relative to the textbook test of the current patterns.  The key now is follow through and testing the move. Patience is required along with a strategic approach to managing money.

Small Cap index moved lower to test support and managed to close in positive territory showing a solid pattern set up to break higher. Holding the $158 level is key to the current move and watching how this unfolds today. A move above the $161 double top would be nice to see as a clear sign of momentum from the sector. Entry $155. Stop $157.30. Managing positions as trades and letting the market determine if it becomes a long-term trend.

Gold (GLD) gapped lower and broke below the 200 DMA negating the bounce last week and break below the trading range of the last five months. This is a big negative for the metal and puts the short side firmly in play (GLL).  The gold miners (GDX) made the move back below the 200 DMA on Monday and gapped lower on Tuesday as the metal fell. Entry$21.92. Stop $21.92 (adjusted). Base metals (DBB) reversed the speculation trade on sanctions against Russia… the metals settled back to the 200 DMA and holding… Watching how the base unfolds near term.

The dollar (UUP) bounced and cleared resistance at the $23.65 level and pushed back above the 200 DMA. Gapped higher on Tuesday with a move above $24.35 and puts $24.75 in sight. The move higher is a positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… the rise in interest rates is the cause of the rise in the buck for now. Took the upside trade near term as the move above $23.75 was the entry point for UUP. Stop $24.20 (adjusted).

Crude oil (USO) made a move higher breaking from the small trading range near the highs of $69… and continues in the uptrend off the February lows. Why the move higher within the trend? OPEC has agreed to extend the curtailed production and the proposed sanctions on Iran are impacting price on speculation. Crude could move up $10 a barrel or more according to the analyst, it is already up nearly $8 since the Iran nuclear agreement issues started. Estimates are as much as 1 million barrels a day would disappear from supply… that speculation has driven the price higher. The uncertainty remains around the inventories, production, global discord, and the dollar. UCO entry $26.05, stop at $29.60 (adjusted).

Emerging Markets (EEM) dumped lower breaking $47.90 support and testing the short side. It did manage to hold above the $45.50 support and gapped above the 200 DMA last week. That was negated on Tuesday with the gap lower on the stronger dollar. The trend is still on the downside and the move lower erased any near-term hope of the upside returning. The dollar, tariffs, trade wars, and interest rates are all playing into the volatility of the sector. We will let the market speak and we will decide what trend to trade.

The Volatility Index (VIX) closed at 14.6 jumping higher on the move in the dollar and interest rates. Investor worries seem to emerge with the move in the dollar and interest rates on Tuesday. Watching how the week unfolds.

(The notes above are posted daily based on the activity of the previous days trading)

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) remains a sector of speculation… The sector has taken on an emotional ride of ups and downs based on the current belief and market volatility. The worries over the President following through on campaign promises has been dogging the stocks. He announced Friday the changes proposed to drug pricing, etc. They were better than expected and the sector bounced off the current lows and gained 3.85% the last two days… added a position on the move back above the $107 mark to complete the bottom reversal attempt. $107 entry. $104.50 stop. 

Semiconductors (SOXX) Bottoming pattern reversed as the sector tested the 200 DMA and bounced back above the $181.60 resistance. Despite the small test on Friday, the leadership from the sector is positive. The move higher on Monday retreated to close with a doji candle and remains a big question mark now. We did add a position on the move above $173.50. Stop $180 (adjusted). 

Software (IGV) bounced off the near term low and test at $171.11 support. A nice move higher clearing the $179 resistance and tested at the highs the last two days. A move back below the $180 level would be a negative on the chart. Entry $176. Stop $179 (adjusted). Moved lower testing the upside gains of late. 

REITs (IYR) The sector made a break from the trading range Friday clearing $76.22. The test lower on Monday has my attention along with the bump in interest rates. Interest rates have been the challenge overall… I have been looking for the opportunity to add a position and collect the dividend long term. Added on the move back above $75 and followed through. Entry $75.50. Stop $76 (hit stop). Dumped lower on the hike in interest rates weighing on stocks. 

Treasury Yield 10 Year Bond (TNX) moved to 2.99% Monday putting the upside move in yields back on the table as it trades in the topping range. The move pushed rates back near their highest levels since February, the move is based on a call for higher rates and worries about an inverted yield curve. Still looking for higher rates to be the trend going forward. TMV at the support of $20.50 again… watching how this unfolds. Rates spike higher and bonds head lower with the short side in play again. 

Energy stocks (XLE) Cleared $74.50 on the upside to break from the flag pattern to continue the upside move towards the January highs. The move in crude prices is the cause for the buying. The established uptrend remains in place and we will let our position run as we monitor the stop. Entry $70, Stop $74 (adjusted). Held their own on the day. 

Natural Gas (UNG) forming a bottoming pattern currently after falling more than 19% off the January highs… watch for the next opportunity in the commodity. Bounced back to the top of the range and gaining some momentum. $23 level to clear for entry. Held the move above $23 and watching.  

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

TUESDAY’s Scan 5/15: Some more testing of the upside move from last week. Some positive takeaways with small and midcaps good patterns. Some negatives with gold and treasury bonds dumping lower. Some optimism in the overall look of the charts and more patience as this all unfolds. Taking what the market offers and managing the risk of the positions we hold.

  • Volatility Index (VIX/UVXY) the upside move showed the anxiety levels rising again as interest rates rise, stocks decline, and the dollar moves higher. $13.30 level to watch on UVXY.
  • Gold (GLD/GLL) dumps lower on the rising dollar and interest rates. DUST at $24.34 of interest if the downside follows through in the metal.
  • Emerging Markets (EEM/EDZ) downside back for the sector with the dollar and interest rates playing havoc on the stocks again.
  • China (FXI/YANG) downside shows up again after breaking from the descending triangle… stops in place on upside moves and watching how it unfold near term. Is this a test of the breakout? Need to move back above $48.25.
  • Treasury Bonds (TLT/TMV) Watching how this responds today as the gap higher traded through our entry point. A test of the move is likely… looking where to take our entry.

Overall negative day for stocks with some interesting components moving. The dollar and interest rates stole the headlines and could very well steal the rally should the moves become too robust for stocks. The key is patience and watching how it unfolds near term. This remains a market of indecision.

MONDAY’s Scan 5/14: Interesting day as the leadership tests already and the sluggish start to the week brings the negative comments from the analyst. It was a day of jumps and dumps as the market close basically flat after some early gains. The reticence to hold upside moves could be counted as a test, but the reality is there is plenty of challenges still on the table for stocks and money flow remains weak overall. Some good moves in the sector from stocks, but they ended the day with some stocks higher and some lower.

  • Software (IGV) ran higher early and then retreated to close lower. RHT lost 4.5%, DATA and PRGS closed lower as well… ZNGA and MSFT moved higher… end of the day IGV loses 1.1%… leadership is testing.
  • Semiconductors (SOXX) big start to the day and then forfeited most of the gains by the close. MRVL, XLNX, QCOM, and AMD added to the upside… INTC, NVDA, and TSM all tested the move. Watching how the leadership unfolds.
  • Crude Oil (UCO) holding near the highs as the consolidation continues with an uptrend in play. Energy (XLE) remains one of the leaders with MRO, NBR, and PTEN pushing higher.
  • Retail (XRT/XLY) the key to upside movement is a positive consumer sector. A nice break higher on the day from the trading range. CHS, TFT, TSCO, HD all looking positive on the upside move.
  • Emerging Markets (EEM) headed higher and tested on the day. $47.90 is the level to clear on the upside if the bottom reversal pattern is to unfold. China (FXI) is adding to the upside along with EWH, EWT, and others.

Still looking for the leadership to unfold if the trend reversal is to hold and move higher. Plenty of question marks, but we will let it unfold one day at a time and take what the markets give.

FRIDAY’s Scans 5/11: Sluggish end to a positive week for stocks. The volume was back to the sad levels of lethargy. We can call it digesting the move from earlier in the week or we can say nothing and let the new week unfold. For now, the key is belief… do investors believe enough in the outlook for stocks to continue to put money to work. That will unfold in the coming weeks as this attempt at a trend reversal short term unfolds.

  • Leadership for the week came from biotech (IBB), semiconductors (SOXX), energy (XLE), and technology (XLK). Small caps (IWM) did their part as well to make the charts show positive moves the last six days.
  • The long-term chars… still is an uptrend with a giant descending triangle of consolidation at the end. This positive more than negative as we watch patiently.
  • Trend reversals are appearing in sectors and the key will be follow through. The S&P 500 index (SPY) cleared the April high and closed above that level to end the week. That is a positive sign currently for the markets… Follow through will be needed to provide the trend strength. QQQ did the same. IWM is testing the January/March highs. XLK moved above the January highs and looks toward the March levels. XLE is moving back towards the January highs. Plenty of positives in the trends currently.
  • China (FXI/YINN) moved back above the 200 DMA and faces some key resistance short term. A move above $35.55 would be of interest. This would go a long way to helping the emerging markets (EEM) reverse the trend.
  • The focus for the new week is follow through. I expect some testing of the move, but the key will be volume and a continuation of the upside momentum. This calls for patience and taking what the market offers versus speculating and putting money at too much risk short term. This remains a trading environment until which time we have clarity and belief in the long-term perspective.

THURSDAY’s Scans 5/10: With all eleven sectors positive the scans are positive. The leadership is evolving slowly and the move this week has been on the plus side. Still, a trading environment until the charts prove otherwise. The trend reversal is in play with the move above the April highs and watching how it unfolds.

  • NASDAQ 100 (QQQ/TQQQ) holds the move above April high and adds to the upside. Entry $160. Stop $159. (adjusted)
  • S&P 500 (SPY/SPXL) moves above the April high and break from the consolidation pattern… looking for further confirmation on the move and trade. Entry $43. Stop $42.
  • Small Caps (IWM/TNA) upside continues with positive volume. The leadership from the sector is a plus and looking for a move above the January and March highs. Entry $75. Stop$69.40.
  • Utilities (XLU) bounced off support at $49.50 to maintain the uptrend. Holding our position and collecting the dividend for now.
  • REITs (IYR) cleared resistance the $76.22 level and adding to the upside as the money flow returns and the worries abate. Holding our positions and collecting the dividend.

Leadership remains with XLK, SOXX, XLE, XLF, and XLY. Added some upside with FXI, EEM, and IEV.

Patterns are breaking through resistance and showing upside opportunity. Follow through is the key… markets shift trends slowly and you have to take trades with the short term in mind and an eye on the longer term developing. Manage the risk as this all unfolds for now.

WEDNESDAY’s Scans 5/9: Buyers showed up and stayed. The positive moves were hopeful technically on the charts as the move was accompanied by volume on the day. Looking for a follow through and a reversal of the downtrend from the February highs. It is a lot to ask for, but if we are going to make a move there has to be some conviction in the process. Everything is a process and we will take it one day at a time.

  • Semiconductors (SOXX/SOXL) Nice upside follow through and looking for the leadership to continue. Watching MU, AMD, MKSI, and NVDA.
  • Software (IGV) nice bounce higher to close above the March highs… nice leadership.
  • SKYY, HACK, TECL and others moving higher. GOOG nice move clearing $1057 entry.
  • Commodities continue higher as well with Crude (UCO) adding to the upside. Agriculture (DBA) testing the upside jump of late.
  • Energy (XLE/ERY) gapped higher and held the move. Watching how the speculation in crude unfolds along with the stocks near term. Adjusted our stop on the move.
  • Financials (XLF/FAS) moved above the resistance short term to show some signs of life again.
  • Small Caps (IWM/TNA) nice follow through and move above resistance. Watching microcaps (IWC) and midcaps (MYY) as well on this upside leadership.

Positive day with some leadership returning along with hope. The key is always follow through and we are at the next point of looking for some upside momentum. The crude issues will be on my radar as a longer term negative should crude move back to $90 a barrel as some suggest.

Taking it one day at a time.

 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials moved above the $58.44 resistance level again. The trend remains down from the January highs and we would need to move above the $60 level to bring my confidence back in the sector. Watching how this unfolds going forward. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed. I waited for support and the next opportunity as the fear evaporated and reality settled in. $48.55 entry. Stop $49.25 (adjusted). The ETF pays a 3% dividend and I am willing to stick with the slow-moving sector for now. The test back to $49.50 this week was not fun, but we hold our positions for now and look at how the week unfolds. Tested again on the day. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Bounced off support again and making another possible move higher… watching $27.65 resistance level. Turned at resistance. 
  • XLP – Consumer Staples broke the February lows, March lows and is in the process of establishing the May lows. The downtrend remains in place and the short side has paid nicely the last two months. Unless there is some leadership in the sector we remain short XLP. Stop $50.63. Grocery stores remain the big drag in the sector. Still testing near the current lows. 
  • XLI – Industrials made a move back above the 200 DMA on the week and is testing the $75 level of resistance. Watching for the next opportunity to unfold from here. Defense contractors are the drag on the sector currently.
  • XLE – Energy broke from the bottoming trading range move up 8.5% and consolidated in a flag pattern. The continuation of the trend took place last week by clearing $74.50. The next level of resistance will be the January highs. Entry $68.82. Stop $$71 (adjusted). IEO and IEZ moving up nicely as well. Crude oil over $70 is the contributing factor to the sector. 
  • XLV – Bounced off $79.50 support. Some follow through as the sector moved back to the $81.81 mark… The positive move on Friday came from the President stating his outlook for drug pricing looking forward. Some relief, but not enough data yet… I expect volatility to remain and we will treat this sector as a trade only. Added to the upside move and cleared $83.24 resistance… willing to add on the follow through. Negated the move higher above the $83.24 mark
  • XLK – Technology added some upside leadership this week with a move above the $66.75 resistance and the April highs. The break above resistance is a positive looking forward. As with all move, the key will be follow through. Entry $67. Stop $67 (adjusted).  
  • XLF – the sector has become a hot potato with the interest rates moving, dollar movement, and geopolitics in the news daily. Held support at $26.90. Made a solid move back to the top of the current range. Looking for upside follow through. $28.24 is level to clear with some volume. KIE is still the weak link for the sector. 
  • XLY – Consumer Discretionary sold to support at $99.40. Bounced back to the $105 resistance. Testing the move higher and watching for the upside to take root. Entry $102.50. Stop $101.50. Still in consolidation mode. 
  • RWR – REITs have been hampered by the uncertainty around the hike in interest rates and the Fed. Bounced off support again and cleared the $85.65 resistance. Entry $86.45. Stop $84. KIM, HCP, DLR, SPG, and CUZ leading the bounce higher. Sector broke through resistance and showing positive upside opportunities short term. Manage the risk of the positions. Tested lower on interest rate moves above the 3% mark. 

The S&P 500 index cleared the April high to complete a double bottom pattern and show some hope/signs of a trend reversal taking root. We will watch and manage the move according to any follow through or lack of one. Patience is the priority going forward. 

The long-term trend off of the February 2016 low is up. Testing with a consolidation pattern currently that will determine a continuation of the trend or a trend shift. 

We continue to look for a solution to the consolidation… leadership is one key ingredient needed… some emerged last week and the next step is following through on the move. A catalyst of longer-term views would be extremely helpful… Patience is the key.

Testing the move higher from last week is normal… now comes the opportunity to validate the move with an upside follow through. Looking for a positive upside to result, but manage the possibility it fails. Today is retail earnings day… WMT, M, JWM, and JCP. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

The question remains about direction and volume despite the positive week. Friday is where my worries lie… lethargy as the week ended. No profit taking and no desire to take on additional risk into the weekend. Worries remain and therein lies the challenge. There is a lack of conviction from either side as the volume remains below average and neither side seems to want control. The leadership has not appeared yet. We are do see Energy, Dollar, and Commodities taking on some leadership… but, the moves in technology, healthcare, semiconductors, and energy did give some signs of hope last week. Nine of the eleven sectors moved higher for the week showing some positives. The S&P 500 index closed above the April highs and shows signs of a trend reversal. We need to follow through this week if the trend is to take root. The key is to focus on the strategy you want to take during the current market environment. News and speculation will drive the short-term while fundamentals drive the long term. Short term we are in a process of a bounce off support and a break above resistance. We need to follow through on higher volume if anything is to materialize on the upside. The goal remains money management, not market speculation…

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.