Research Notes for August 13th

MARKET OUTLOOK:

Last night the ‘Notes’ addressed the issue with China and the markets reactions. Not going to rehash that issue this morning. We are looking at what happens going forward. The reaction to the devaluation of the yuan has been similar the Tom Brady deflate-gate in the Super Bowl. No matter what is said, they didn’t do it! Regardless, the impact is being felt as a news event. The question is how sustainable the news is relative to reality going forward. Therein lies the challenge for investors and that is where we have to continue to practice patience.

The intraday turnaround on the selling was a positive… for now. The question is now how to we respond today? How do the banks respond? Treasury bonds? All will unfold and all will be clear as to whether this is a news event or a sustainable event that takes markets through a correction phase. I don’t believe anything right now and thus… cash is at a very high level and I am willing to let this saber rattling subside and when the winner is declared we can put our money to work without¬†a¬†higher level of volatility or risk.

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.¬†Broke support tat the $368 level and bounced back before the close. Watching to see it the head and shoulder pattern follows through? patience.¬†
  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 with more selling. Move above $92.65 on YANG shows a breakout on the short side and continuation. 
  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¬†accelerated on Wednesday, but we did close with a doji and could see a reversal on the oversold sector. Gaps kept us from trading the downside.¬†
  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. Bounced again off the lows. SOXL $26.40 entry level to watch if the rally follows through off the intraday lows on Wednesday. 
  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.¬†Gap breakout, but it was erased as the intraday buying puts in back below the breakout resistance. Death cross of the 50 and 200 DMA is still a concern to watch…¬†
  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.¬†Gap breakout on the open, but it retreated and the index pushed towards erasing a 1.5% loss at the open. Postive day when you look at the intraday turnaround… but, we wait for how it plays out today.¬†
  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. Gap down and no short trade. We did see intraday reversal? Watching the doji left on the move. 
  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 only to retreat as stocks rally and nerves calm. Do we sell our TLT position? Taking some profit is advisable, but watching the open today. ¬†
  9. Gold (GLD) the metal has been pushing higher as the uncertainty surrounding the yuan and China’s actions. Take it for what it is… a trade opportunity going forward. Hit the entry at $105.65 and that would now be the stop on the trade. Resistance at the $108.40 level ahead.
  10. Stops hit in XLY, XLF, KRE and watching to see if they reversal on Wednesday offers another opportunity in the sectors. Gold miners rallied on rise in gold. The volatility is too much short term to keep positions in place. We will watch and continue to trade what we know… eventually the volatility gives way for direction. It take patience to trade in this environment… and we will be patient.

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. But, the intraday rally leaves some hope to see how the index will play out near term.

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, but it rallied back into positive territory! You have to love the nerves of investors intraday as they react to the news from China. Watching how it trades today and some clarity for direction.  Uptrend is still intact. 

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? Sold below the $118.80 support intraday and closed near the $120 mark. Sloppy, but the downtrend short term off the June highs are still in play. 

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.¬†Spiked above 16 as fear¬†steps in…¬†However, the buyers forced an intraday rally and the we moved back to 13.6 level. Intraday volatility at it’s best.¬†

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. Broke below the $148.50 mark intraday and moved back to it prior to the close. This has not been a good omen for the markets, but maybe now it is back on track to move higher. 

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. Moved below $25.20 on Wednesday? This could get interesting going forward. 

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.¬†Attempting to bottom again? $43 support is level to watch.¬†

SECTOR STORIES: 

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 $10.45. 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 at $10.45 break even for now. 

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.¬†

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 break higher on Wednesday unfolds. manage the stop as this unfolds. 

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. 

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 hit the¬†stops. Intraday turnaround of course.¬†

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