Research Notes for August 11th

MARKET OUTLOOK:

“When the horse dies, dismount.” Theodore Roosevelt

All of the negative sentiment spent the last week building and worrying about disappeared it one bold comment from Vice Chairman Fisher of the Federal Reserve. How much truth there is in that comment is up for debate, but nonetheless is stirred the juices for owning stocks if it were true. First and foremost I would like to state trading speculation and pontification is not the best strategy from my view. The question for me is sustainability of any news or events that take place in or around the market. This comment is conjecture and until the Fed Chair or the voting FOMC members vote in September and confirm they will delay hiking rates until inflation is back at the level that concerns the Fed in relationship to their mandate, this remains conjecture.

The rotation we discussed from last week reversed today as technology, healthcare and consumer related sectors all moved higher on the day. That move doesn’t change the trend, doesn’t change the fundamentals, and served as a bounce at this point off the current lows. We now watch for follow though on the move and as stated above, sustainability of a reversal and follow through on the upside near term. If we get it, we trade it. If we don’t the downside will accelerate faster on the failed move. Patience remains a key ingredient of our strategy now… but, we will focus on the outcome more than the news.

NOTE: The following are things to watch and evaluate as we progress forward.

  1. Biotech (IBB) took it on the chin to end the week with a break below the $368.70 support. The 50 DMA was broken as well and the long term uptrend is coming into play currently. The sector has broke down before, but has managed to snap back quickly. A failure to do so in the coming week will invite more selling as speculation will build around the downside. BIS hit the first entry at $28 mark Friday. $29.40 is the next entry point as we start the week. Healthcare (XLV) in same downside move… $74.73 break, 50 DMA break, and $73.85 exit point or short entry.¬†Healthcare bounced on Monday to track the markets. Biotech bounced and gave up the gains. Overall nothing decided on the day and watching how it continues to unfold.¬†
  2. China (FXI) is a mixed bag of nuts. The government intervention versus the free markets for stocks? Not clear which is winning? For now the government is with outlawed selling stocks. $41.50 entry point on FXI as possible relief bounce. I am still leaning towards the downside based on the economic data. Watch and see. Bounce as the government is expected to step in with more stimulus as the export data was weakers and the country indexes were up 5% on the day. $41.70 FXI entry is of interest or YINN for leverage ETF trade. ($31.40)
  3. Emerging Markets (EEM) attempting to hold support near the $36.30 mark. Attempted bounce, but no conviction. Watching to see if there is a upside trade above the $37.25 mark or a downside resumes with break of low at the $36.30 mark… patience is key.¬†Willing to take the short trade here as well on the break lower.¬†Bounced off the lows with solid move on Monday. $37.25 is still level to clear for upside trade opportunity.¬†
  4. Semiconductors (SOXX) broke $87.20 support and looking for a base to build if this is going to bounce. If the downside accelerates the short entry is $85.30. SOXS $57 entry. up 2.5% on the day as the bounce impact was on the positive side of the ledger. $88.70 level of entry to watch on SOXX. 
  5. Dow Jones Average (DIA) Broke the 17,450 support level to end the week. 17,265 next. Trading below the 50 and 200 DMA and the 50 is close to crossing below the 200 DMA which is technical death cross. Short side trade is there we need look at the entry and risk this week. SDOW entry $20.35. Shift back to the upside on the day. $176.50 level is positive for the index as possible entry trade on the upside move. 
  6. S&P 500 Index (SPXS) hit the $18.25 entry mark on Friday. Watching for follow through and trade if the downside continues this week. Big wedge pattern at the end of the chart on the short ETF. Opposite of how it set up on Friday. $211.90 is level to watch. 
  7. Cyber Security Software (HACK) The support at $29.75 is breaking lower. This is a short trade setup for the sector. Remember you must borrow the shares prior to selling the position short. Watching for the entry and 4-6% move lower. Patience with the entry. Bounce with Fed relief. $30.70 is of interest on the reversal upside. Not how we look at this to start the week. 
  8. Treasury Bonds (TLT) rally on as the rates decline on more speculation the Fed will not hike rates in September. The selling in stocks has pushed money to the bonds as well… perfect storm short term for bonds to rise in price. The downside is still the trade of choice as this all unfolds. Watching for the downside trade to set up.¬†If the rally in stocks sticks we need to look at where to exit the long bond trades. Watching how tomorrow unfolds.
  9. Soft Commodities (DBA) consolidating at the current lows. Looking for the opportunity if it can bounce. Short side would be by individual commodity versus the whole. BAL, CORN (big move higher on Monday), SOYB (follow through on Friday move higher), JO (nice break higher), WEAT (completed the reversal)…¬†Got the reversal with positive news in China helping the soft commodities rally. Patience as they confirm with $21.85 entry. Watch how the move lines up today. Weather for SOYB is positive.¬†

MAJOR INDEX STORIES:

S&P 500 Index (SPY) 200 DMA and $206.10 are the support levels to watch this week. Moved back above the $208 entry point to add. Stop is $204.40. The¬†triple top is still an issue relative to a ceiling on the index currently.¬†Not sure who is in ¬†control near term and willing to let this play out on either side for now. Selling returned last week and we are now on watch relative to the stop and the trend.¬†Held the 200 DMA and news is driver… needs validation. Still in the trading range for now.

NASDAQ 100 Index (QQQ) Managed to break below the $111.10 level for short term trade on the test lower. SQQQ is downside trade entry at $22.50. Stop $22.05. The index has been subject to the large caps selling and some the leadership made some negative turns to end the week. Patience is the key to see how this unfolds short term. Nice bounce back and holding the uptrend in play off the February lows. 

Russell 2000 Index (IWM) Managed to break below the $121.25 support level along with the 200 DMA. Short side trade setup with TZA entry taken (see below). The internals are bad a move below the $118.80 mark will make matter worse for the index. Not seeing much in terms of love for the small caps. Patience. Managed to move back above the $121.25 level, but the downside is still in play off the June highs.

Volatility Index (VIX) made the move to 14.1 Friday. The volatility has shown up modestly on the selling, but nothing to write home about. The VXX trade entry at $16 triggered with the stop at $15.80 for now. No acceleration on the VIX, but there is a worry in the air. Moved back below 13 and fear evaporates on a few works from the Fed. 

Transportation (IYT) Moved back to the $148.50 level on sector earnings and the brake through resistance. Entry at $149.50. Stop $147.50. Still need to see the upside resume short term, but this is a positive for the major indexes. Selling knocked the sector back near the $150 level still has work to do if the upside is going to resume. The test of the breakout is now in place. Reversal on the upside breakout could offer opportunity to add the position on the move. Held $148.50 and offered some upside opportunity if you are willing to trade the news. 

Dollar (UUP) The dollar technically is attempting to break from a double bottom pattern, but reversed to the end the week. We are watching how this responds to the employment cost speculation around the Fed. I still like the upside for the dollar near term. Moving back to the $25.66 resistance. Buck reverses on the Fed comments which are seen as negative. patience on the speculation is required. 

Crude Oil (OIL) Crude continues to¬†be downside bias commodity. Despite the drop in supply data there is still plenty on the horizon. In fact, Congress is considering allowing US oil companies to export oil… that should say something. The price fell to $44.25 on Friday and remains in a downtrend. Short side trade¬†remains for now. See trade below.¬†Bounced off the lows as commodities rally. China seen as positive for sector.¬†

SECTOR STORIES: 

Japan (EWJ) in position to break through the downtrend line and move higher. The $13 mark is the entry point and level to watch as we progress. Cleared the $13 to break the downtrend on the gap higher. Stop $12.85. Hit the entry on the day. 

Small Caps (TZA) short side of this trade is setting up to be traded again based on the activity the last few days. Entry at the $10.45 level is attractive for the short side trade. HIT entry $10.45. Stop $10.15. Followed through on Friday and looking at how this unfolds to start the week. Rally on the Fed speculation pushed index higher and towards stop for short trade. 

Energy Sector (XLE) modest bounce on the short lived rally in crude. Ended with the earnings and drop in crude. Short side trade in play again. ERY at $26 or lower if we get a test early in the week. Nice short side trade and follow through as stock fade again. Stop $26.25. Watching to see if oil finds room to bounce off recent selling to lows. Bounce in oil, bounce in energy stocks. Stop HIT.

Apple (AAPL) tested the low at $112 level and bounced. That is worth watching for a follow through bounce and trade back to the $122.50 level. Entry $116. Stop $117.60. Consolidating near the low and looking for the upside to bounce back. Big follow through on the rumored iPhone meeting in September. Watching and raising our stop. 

Crude Oil (OIL) short term rally as the supply data shows bigger drop than expected. Then the sellers returned as earnings in the sector put a damper on the outlook along with warnings from the companies. Short trade back on? SCO at 88.90 entry on renewed selling. Sellers remain in control of the commodity with break below the $45 mark. Stop $95.  Rally on? Watching how the news impacts the near term. Buyers or Sellers? 

Regional Banks (KRE) Held the test of the 50 DMA and bounced. Took some selling on Friday from the employment cost speculation stating the Fed may put the rate hikes on hold. Holding XLF below and here we are looking at KRE again as opportunity $43.90 entry. Patience as the news unfolds. Hit entry, stop $43. Still need some upside momentum near term. Modest upside follow through, but plenty of work to do. 

Utilities (XLU) Not an exciting sector, but one that is paying a 3.7% dividend and offers some upside as all the noise around the dividend stocks subsides. The bounce and test off the low is now in position to offer some upside opportunities. Entry of $43.50 is Hit the entry managing the risk of the move with Stop $43.50. Nice bounce to move higher on Friday. Watching how the worries rotate and if it hurts the sector. 

Real Estate (IYR) REITs are moved off the low in June. Hit resistance at the 50 DMA and looking for the downtrend to break as well. That means catalyst to break through the resistance. Watching and looking for entry near the $74.75 level. Hit that level on Friday and added the position. Stop $73.40 for now. Let this unfold and if the rate hike rumors return the downside may return. Stuck in range at resistance for now. Rally on? No more consolidation as news front shifts the sentiment for the day. 

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.¬†Holding for now and will manage the trade.¬†Nice move higher on the Fed comments.¬†

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 (entry) helped for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $77.30 exit point raised stop.¬†Now we look for the retail data for July as more insight into the consumer.¬†Speculation on the earnings from Disney has pushed the sector lower.¬†Nice bounce on Monday… let it unfold and the stops are in place.¬†

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