Research Notes for August 12th

MARKET OUTLOOK:

We completed two days of trading that were news driven. I was left with the question on Monday about sustainability on the upside. Answered by the move from China towards the yuan… question, is it sustainable on the downside? News is news and until it has something that will project the trend forward with substance, it’s news. The China news is of interest because it can build traction. The first thought is it will keep the Fed on hold… and that was the reason for the rally on Monday? Maybe the market decides they are of common benefits. We will see how it unfolds.

The rotation we discussed from last week remains in play and money is rotating based on belief looking forward. The move towards bonds and out of tech again is of interest. Materials and industrial stocks fell as well on Tuesday. ¬†The last two days have no changed¬†the trend, doesn’t change the fundamentals, and served as a notice to the uncertainty in the markets currently. Note how much news is in control day to day and be aware of your surroundings. ¬†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.¬†Negated the gains on Monday and puts us where we were starting the week. Patiently awaiting clarity for the sector… up or down.¬†
  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. Yuan news puts the short side on the table again, but then the upside could be seen as a benefactor of the devaluation. Watching today. 
  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.¬†Downside back in play on Tuesday… watching to see if it follow through and short trade plays out?¬†
  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. Erased the gains from Monday and short side back on the table. 
  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. Selling brings the downside back into play. Watching today. 
  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.¬†Selling back on Tuesday and watching the same as we started the week… short side development.¬†
  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. Short side trade back on the table with the selling on Tuesday. 
  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.¬†Selling sent money towards bonds again. TLT clears the 200 DMA resistance?¬†
  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.¬†Some selling with the markets on Tuesday… watching for the opportunity.¬†

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. Selling was back in style and still worried about the short side gaining control. 

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. Downside leader on the day. Watching how it trades today and some clarity for direction.  

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. Back below the $121.25 mark again? watching to see. 

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 above 14¬†and fear¬†steps in… will it follow through with the uncertainty with China.¬†

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 still watching the news impact near term.

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 China actions relative to the yuan. holding support and watching the impact near term. 

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.¬†So much for the rally as the sellers hammer the commodity lower and testing the lows currently.¬†

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. Watch the stop as this unfolds on negative sentiment over China. 

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 for the short side again as the China news leads to selling. Hold and manage the stops. 

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.¬†China takes gains and hit the stop. Raised it after the gain… gratefully. Watch for this to unfold.¬†

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.¬†¬†Selling back… still holding the short trade… looking to lock in gains if we hold support at the $43 level.¬†

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.¬†Erased gains from Monday and testing support again… keep stop in place.¬†

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. Sold it all on the China news.¬†

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.¬†Selling back and managing the stops.¬†

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