Relief bounce to end the week

Market outlook for August 17th

The week ends on an upbeat note as buyers push the indexes higher bouncing off support once again. What was the news of the day… stimulus from the Fed in the form of rate cuts and Germany talked about the stimulus for their economy? Hope springs eternal. Rumors are not what make trends, facts are… until it is done it is speculation. Thus we take Friday’s move for what it is, a bounce on news. After all the trading and volatility the markets closed down 1% for the week and remains down 4.5% from the July highs. We will do our homework over the weekend and start the new week with a defined strategy for our money. Patience and risk management are key in this type of market environment.

The S&P 500 index closed up 41.1 points to 2888 as some of the anxiety abated from the selling. The focus was on stimulus to end the week and the hope of the central banks in the US and Germany cutting rates. All of the eleven sectors closed higher on the day with industrials and technology leading the upside. The downside took a break on the day to give some relief. I have still not abandoned my view on the short side of the market, the technical data pointed to bounce possibility and Friday was the start. Or it could just be a one-day relief move. The long-term trend remains in question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed up 129.3 points at 7849. The retest of the current low at 7726 held. Technology (XLK) stocks sold back to the $77 level of support and bounced as well. QQQ held above support at the $180.73 level and looking to clear the $186 mark. Patience as this unfolds in the coming week.

Small-Cap Index (IWM) The downside resumed with a move to June lows and held support with bounce on Friday. Short side trade with TZA. Entry $50.25. Stop $53.25 (stop hit on Friday). (Sold 1/2 @ $55 Thursday) Watching how near term unfolds.

Transports (IYT) The sector sold back to last weeks lows. $180 level failed to hold and the short side takes a major step relative to the belief in the economic picture. $175.33 support held with bounce on Friday. Short trade entry $180. Stop $177.16 (stop hit Friday banked small gain.)6

The dollar (UUP) The dollar moved higher as the US stance agrees with traders views. Holding near the current highs. Closed at $26.66. Watching the Yen (FXY/YCL) as it is the current benefactor of any tariff action.

The Volatility Index (VIX) closed at 18.4 as fear and anxiety fade with buyers stepping in the last two days. Some good trades in the index the last two weeks with the increased volatility. Watching how the new week unfolds.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector bounced at support again. Watching how this unfolds the short side is still an opportunity. We hit stops on our trade and banked a small gain… patience as this continues to unfold.

Biotech (IBB) The sector tested support near the $102 level and bounced. $107 level to clear on upside and $102 level to hold for support.

Semiconductors (SOXX) The bear flag pattern at the current low is of interest. Statistically, it will continue the downside move. Watching how the bounce trade unfolds from Friday.

Software (IGV) sector bounced again on Friday. Watching for the next opportunity.

REITs (IYR) The upside trend remains on the long-term chart. The test of support at $87.50 bounced and back at the previous highs. Patience with our long term positions and short term watching how interest rate market unfolds.

Treasury Yield 10 Year Bond (TNX) fell to the 1.53% level on all the worries. Money rotated to safety and our TLT trade went vertical. Stop $142.70. Watching how the rumor of Central Banks cutting rates impacts the near term.

Crude oil (USO) Tried to bounce on rumors of supply drawdowns and fell on OPEC outlook for global demand. Bottom line is patience. Watching support at $52.50 and resistance at $58.25.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Jumped higher on worries about economic data. Stop is now at $139.93.

Emerging Markets (EEM) Broke lower from the trading range as tariff threats add to the worries about an economic slowdown. Banked our gains on the short side trade. Watching for the next opportunity. Bounced off the low on Friday.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the move lower play out as Mr. Trump makes his intentions clear… as does China. YANG Entry $49.75. Stop $61.38 (hit stop Friday).

(The notes above are posted every weekend and updated daily Bold Italics)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for August 16th: This remains a traders market. The short term volatility invites trading the drivers such as news in specific sectors. We have done some in the VIX, treasury bonds, China, and energy. The bounce on Friday is just that for now… it would need to follow through and take out the resistance levels left from the last attempted bounce. The April/May highs would need to be dealt with as well… I am willing to coast into the new week of trading with stops adjusted on current positions. Looking for the follow through on the bounce or the driver that will break the indexes lower. Patience as this unfolds.

  • Consumer Staples (XLP) cleared resistance for entry $59.84.
  • REITs (IYR) cleared previous highs and resumes the uptrend.
  • Utilities (XLU) broke through the resistance at the top of the current trading range.
  • Homebuilders (NAIL) returned to the headlines with the talk of lower rates… the challenge is the economy more than interest rates.
  • China Internet (KWEB) interesting bottoming pattern on the chart showing some upside opportunity with follow-through.

THURSDAY’s Scans for August 15th: More talk about trade. More talk about the inverted yield curve. More talk about the dollar. More talk… Traders are having a field day with the volatility and lack of direction in the markets. We have done some trading where the risk matches and avoided others due to the risk/reward parameters. Nothing changed on Thursday… Friday is options expiration and will have high volume. The technical data is showing a possible bounce at these levels and we will evaluate the open for opportunities in QQQ, XLK, and SOXX. Trade with discipline or don’t subject yourself to the risk.

  • NASDAQ 100 Index (QQQ/TQQQ) Testing key support at the previous lows. Watch for entry if the bounce materializes. IF it gaps higher pass as the risk will adjust.
  • Technology (XLK/TECL) Testing key support as the previous lows. Watching for bounce led by semiconductors and software. IF it gaps higher measure your risk accordingly.
  • Semiconductors (SOXX/SOXL) Same as above.
  • Software (IGV) Started the bounce on Thursday and looking for follow-through.
  • Natural Gas (UNG/UGAZ) Followed through on bottom reversal pattern offering entry at $12.68.

WEDNESDAY’s Scans for August 14th: China doesn’t believe the President will enact the new tariffs and went on the offensive Wednesday. The end result is a game of Chicken between the two countries. All the banter, along with an inverted yield curve sent stocks lower. As stated yesterday, I believe the downside is still in play. Our short side trades did well and we adjusted our stops. The long trades in gold and treasury bonds did well also and we adjusted those stops as well. Watching how today unfolds as we are at the previous lows. Do we bounce or accelerate through this level of support to new near term lows? We will see how this unfolds. Not willing to take unnecessary risk and will manage what the markets give near term.

  • Added VIX trade back with UVXY and will manage how it unfolds today.
  • Natural Gas (UNG/GASX) short side trade continues to run higher. Adjust your stop and manage the risk.
  • Energy (XLE/ERY) downside accelerated from the rest/consolidation to move higher.
  • Russia (RUSS) short side accelerated as pressure builds on crude.
  • Semiconductors (SOXX/SOXS) triangle consolidation pattern on the chart… short side? or does it rally?

TUESDAY’s Scans for August 13th: Tariff delays ruled the trading direction from the open. The important data came after that… which sectors held the gains which forfeited them. This is where we have to focus our efforts and understand that news is temporary… facts/data move stocks longer term. I am not saying the move wasn’t a positive… I am saying be cautious about what you believe to be true… facts speak louder to me than news.

  • Industrials (XLI) and Basic Materials (XLB) gave up half of the early gains as seen in stocks like CAT and DE.
  • S&P 500 index moved to the May highs and retreated… resistance is alive and well.
  • Small (IWM) and Mid-caps (IJH) gave back half of the gains on the move higher. Not a confidence builder.
  • Gold (GLD) fell 2.3% early and was off only 0.6% at the close. This is a tariff trade… shows the belief factor in the delays is just that, temporary.
  • Treasury Bonds (TLT) like gold fell early but managed to regain most of the losses intraday.

MONDAY’s Scans for August 12th: Downside is back in vogue. The pressure from interest rates and China leading the way on the day. This opens the downside trades again and we added those above in various sectors. Remember downside reactions move on average three times faster than the upside… meaning we have to manage our risk equally to the environment.

  • China (FXI/YANG) accelerated lower on the Hong Kong news Monday adding to our short side trade.
  • Volatility Index (VIX/UVXY) spiked higher on the selling and headlines.
  • Treasury Bonds (TLT/TMF) resumed upside move on the flight to safety.
  • Small and Mid-Cap (IWM, IJH) accelerated lower offering short side entries.
  • Watching on the downside for trade opportunities: XLE, XLF, IYZ, BZQ, DIA, QQQ, SOXX, EEM, EFZ

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials held support at the $55.95 level and hit resistance at $58.13.
  • XLU – Utilities remain in the trading range of $59-61.23. Collecting the dividend and letting it play out. Tried to clear the top end of the range… watching for follow-through.
  • IYZ – Telecom held support at $27.62. Watching for a bounce.
  • XLP – Consumer Staples held $57.75 support bounced and cleared $59.75 resistance.
  • XLI – Industrials moved back above the 200 DMA and watching.
  • XLE – Energy broke support at $58.19. Bounced Friday, but the short side is still in play. ERY.
  • XLV – Healthcare held $89 support and $91.67 resistance to clear.
  • XLK – Technology held $75 support and $78.90 resistance to clear.
  • XLF – Financials under pressure moved below the 200 DMA and $26.33 support. Close above both on Friday… watching.
  • XLY – Consumer Discretionary held $113.80 support and $118.80 resistance to clear.
  • IYR – REITs held $88 support and cleared the $90.80 resistance on Friday… Watching and letting it unfold.

There is currently one sector in confirmed short term uptrend. Eight sectors in consolidation or sideways trends. Two in a confirmed downtrend. The result is SPY in a confirmed sideways trend. This is a big adjustment based on the current market environment. Remember the parts make up the whole.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

Thursday was some downside at the open, but the comments from China led to a bounce. More selling would have been positive to clear out the emotions. Higher volume on the bounce would have been positive, but that didn’t materialize either. What we were left with on the close is the possibility of a bounce technically, but it has weak support for it to amount to much. Throw in options expiration and you may get a bounce with some volatility attached. It was relief day for traders and we will see how Friday unfolds.

Wednesday was ugly! Emotions hit their limits and the sellers emerged to take the major indexes back to last weeks lows. Before we throw in the towel and assume the markets are heading lower… we have some key levels to break in sectors. Watching how this unfolds and keeping the talking heads on MUTE! Plenty of news, speculation, and pontification on each and every matter facing the markets. That is of no use to me… the facts are all that matters and as stated in the opening remarks… “emotions are not facts”.

Tuesday was a bounce driven by the delayed tariffs on some items. The early bounce helped give some relief to the downside move on Monday. It was a suspect move for some sectors as seen above. It was a day of ignoring data such as the CPI jumping 0.3% and no response. Germany showed slowing growth again and could add to the stress globally for stocks. Facts versus News/Speculation is where the market finds itself… time is in favor of facts… short term favors the news… know what you are trading and where your risk lies.

Monday was not good news for the buyers. The downside renewed with a rise in volatility a spike in downside sentiment. The volume was below average if we want to find some good in the bad. Key sectors are testing and we have to watch, act, and manage our money accordingly. Opened some new short side trades and watching how the week unfolds.

Markets gapped lower to start the week and found support… sold… bounced and closed the week down one percent. This is currently a market controlled by headlines as each day holds movement related to the speculation of what might happen. My question is will the downside continue? Trade is a major issue… but, economic growth is the real issue at the end of the day. Focus on facts like economic data, earnings, and global data reports. The CPI rose 0.3% along with the 2 and 10-year bond inverting… inflationary or recession? Jobless claims climbed to 220k for the week. Retail sales were a bright spot up 0.7% in July and ex-autos were up 1%. Empire State index was flat at 4.8 and Philly Fed index fell to 16.8 showing slowdown in the region. Industrial and manufacturing output fell and factory utilization remained at 77.5%. My question remains, what is the Fed looking at? Why are they not more engaged? Trump is right on this front. Remember within all of this data lies the opportunities we are all looking for. Crude oil speculation remains in the news as the price has become volatile to the news. We remain focused on what is working and what is failing. Therein lies the opportunities. The balance of the market will eventually figure out a direction.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time. 

“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.