Research Notes for August 14th

MARKET OUTLOOK:

 

Is China still a problem? What about the US economy? The Fed’s desire to hike interest rates? The questions and speculation are becoming endless. It is of interest to me that just when things were sorting themselves out China drops a big turd in the pool. Everyone has to get out and hazardous waste team has to remove it. Then the chemicals are applied and we have to wait to several days to get back in the pool… if we dare. Of course that is from the scene in Caddy Shack where it turned out to be a Baby Ruth candy bar. Maybe we can be lucky enough for that to be true about China… but then most of the damage is already done.

Thursday was a back and forth kind of day. Started slightly lower, moved to positive territory and then drifted slightly lower to end the day. Not unusual following two days of wild speculation about the China devaluation of the yuan. Not much has changed in the charts, but plenty has changed relative to the investor psyche about the markets currently. I am of the opinion patience is a key item we all need to practice moving forward. Today ends the trading week and we are now at the midpoint for the month. Good time to take inventory and determine what is the best course of action to take relative to our portfolio. We will do just that in the weekend update.

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 watching how today responds. Watching to see if the head and shoulder pattern follows through with a break lower today? BIS $29.10 entry if the downside materializes.¬†
  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. Still consolidating for now. 
  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 and it has not bounced. The currency issues were not the total blame for the decline, but then they didn’t help.¬†No entry on the Gap lower Wednesday… but watching.
  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. Like the markets lacks clarity on either side of the trade currently. Patiently awaiting some clarity. 
  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. Still not showing a upside bounce in the index, downside is still on my watch list. 
  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. Still lack clarity on direction, but I am still leaning lower? Chart will tell and I am willing to be patient. 
  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. No clear decision yet. Watching how it unfolds today. 
  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.¬†Yields rose on Thursday as confidence was restored to the markets. The $123 level is a exit point for me currently on the move higher or break of the 10 DMA would be negative. TBT trade will setup if this turns around.¬†¬†
  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. Testing the big move higher on Wednesday… $105.65 exit for trade. Break even stop and watching.¬†
  10. Housing (ITB) Nice break from the consolidation on the upside. Investor stuck their noses up at the worries over the Fed hiking interest rates. Test of the $28.35 level would offer a reasonable entry point if it continues to gain momentum.  $28.50 max entry on a trade.

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 reversed on the intraday move on Wednesday and Thursday digested the news and events. Today? Watching. 

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 move higher into lunch, but failed to hold the upside. Closed slightly negative and still looking for some guidance in direction. Today? Watching. 

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? Still a sector without conviction. Downtrend remains off the July highs. Watch and see with the $118.80 support level next to hold. 

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. No real change on the close, but intraday there was some modest volatility or swings. Nothing showing anxiety levels growing at this point. 

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.¬†Narrower range version on Wednesday with the same result. Closed at the $148.50 mark… Watching how it unfolds today.¬†¬†

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 holds steady without much fanfare on the day. Still in the range, but watching how if play out with China.  

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.¬†Broke the $43 support and closed at $42.17 down 2.6% on Thursday. Watching to see how low we go on oil currently.¬†

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 sector cannot find direction. Hold and manage the stops at $10.40 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 $100.¬†¬†Selling back… still holding the short trade… I was looking to lock in gains if we held support at the $43 level… that didn’t happen with the move to $42.17 on Thursday. Raised stop to $100 and watching.¬†

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. Held the break higher on Wednesday, but made little headway. 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. .Still attempting to make the break higher and holing for now.  Need some momentum.  

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