Research Notes for July 28th

MARKET OUTLOOK: 

Another negative day for the broad markets. China get the bulk of the blame, but the dollar, commodities, earnings and economic data all added their share of concerns. The durable goods orders weren’t exactly stellar when dissect the data. Oil prices at the $47 level again is adding concerns again… FOMC meeting staring tomorrow has the thoughts of what will the Fed do stirring. Anxiety is running high as seen in the VIX index moving back above the 16 mark. VXN, Volatility index for the NASDAQ moved back above 17.6. As we all know too much anxiety ends poorly for the indexes.

What is in store going forward? More data from earnings and the economy. More challenges globally both geopolitics and economics. I would like to say more clarity, but at the current rate of progress that isn’t likely and in the end that could be the major stumbling block for investors.

We continue to take it one day at a time. More details below.

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

  1. Retail (XRT)¬†was on our watch list, but it failed to hold the move and managed by week end to close at the key support levels near the $97 mark. The 200 DMA is just below at $96 and a break of these levels would bring out the short sellers for the sector. Watching how this unfolds to start the week. Break lower short trade is on. Bounce we watch to see if it can recover the upward trajectory.¬†Broke support and is sitting on the 2o0 DMA… short trade setup on the break lower with short entry at the $96 mark.¬†
  2. Financials (XLF) breaking lower as the banks continue to react negative to new regulations from the Federal Reserve on large banks and reserves. You have to love government regulations… they are good for two things… stopping growth and raising taxes. Both impact the markets. FAZ entry $10.65 if downside continues.¬†Gapped at the open Monday… looking for test and entry point. If move higher from here you must manage the risk of an entry. $10.95 entry if upside resumes. Stop $10.65.¬†
  3. Biotech (IBB) Testing the $368 support level on the recent selling on earning guidance from BIIB. Looking for this to hold support and the upside to resume near term. $376.50 is level to watch for upside trade. Break of support would empower the short side BIS.
  4. Real Estate (IYR) REITs are moving 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.

MAJOR INDEX STORIES:

S&P 500 Index (SPY)¬†Stopped from positions last week and now watching how it unfolds near term. 200 DMA and $204.50 are the support levels to watch. Move back above the$208 mark is resistance. Uncertainty mixed with volatility… not good situation and it has resulted in a triple top currently on the index. Downside bias in play near term.

NASDAQ 100 Index (QQQ) Negated the break to new high above the $111.12 level. In fact we closed at that level on Friday. How does this play out? Flip a coin as the lack of conviction continues to negate the upside movement and then the worries show up along with the sellers. Stops hit on positions and now watching to determine how this unfolds near term. Patience is the key. $109 is support and looking for it to hold near term.

Russell 2000 Index (IWM) Managed to bounce back above the $123.75, but failed to hold the move. The move on Friday confirmed the break below the $123.75 mark and now is testing the $121.25 support level. This is the next level of support and a move lower raises the short flag for investors. TZA is the short ETF and entry was $9.85. Short side in play with stops to protect the risk of the trade. Hit the 200 DMA for support on Monday. Watch how this unfolds with bias on the downside currently. 

Volatility Index (VIX) made the move lower to¬†11.95 last Friday and this Friday is back to 14.6… reflecting the increased volatility in the market indexes.¬†I stated 12.8 was the upside entry for VXX and we hit that mark on Friday with an entry of $16.80. Watch the downside risk as the weekend can reverse negative momentum. Stop $17.15¬†adjusted for the move on Monday. Still challenged near term… but, don’t assume anything.¬†

Transportation (IYT) Moved back to¬†the¬†$148.50 level, but can’t find any momentum above that level. The 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term. The break¬†above the resistance line at $148.50 failed to follow through on the upside and accelerated lower again to end the week at $144.34. Negative sign for the broad markets going forward.¬†Held the move lower to start the week… still looking for support and bounce.

Dollar (UUP) The¬†dollar technically is attempting to break from a double bottom pattern. It has stalled at the key resistance at the $$25.65 level. Euro (FXE) continues to struggle and the outlook remains weak currently… dollar strength is hurting the commodities overall.¬†Moved lower on rally in the euro Monday. Developing a trading range for the dollar.¬†

Crude Oil (OIL) Crude continues to move lower closing at the $48 mark to end the week. The break of support only added to the selling and now the next level may well be the previous lows at the $43 level in March. Short side trade is still winning. We still own SCO from the trade posted several weeks ago. (see table) Fell to support near the $47 mark on crude. Manage the risk of hte trade. 

SECTOR STORIES: 

China (FXI) broke support at the $42.30 level following the bounce off the aggressive selling the first week of July. Now the question is with the move lower does the selling resume? Based on the move Friday the answer is yes. Hit the entry on YANG at $82.65.¬†The debt currently held by Chinese companies could be the next shoe to drop… still looking for definitive move for the country. Stop $80.10.¬†Defined the downside for China on Monday with drop of 8% in Shanghai index. Raise stop to $89.50 on the move.¬†

Emerging Markets (EDZ) short side trade in the emerging markets showed upside momentum with move above the $35 level. Entry at $36 as the upside continues. Hit the entry point with the sector selling off further. The upside on the short trade in play and stops at $36.80. Downside risk accelerated with the stronger dollar getting the blame. The spike higher is good for the trade, but may want to consider locking in some more of the profit near term. 

Russia (RUSS) Short trade on Russia set up based on the continued weakness in crude oil and stronger dollar. The move above $34.20 was breakout. If we confirm above $35.10 short term trade opportunity. Hit the entry point on Wednesday and managing the risk as we go day-to-day. Stop $39.50. The downside risk remains in place with crude holding the move lower.

Cyber Security (HACK) Tested lower and bounced off support. The entry of $31.50 was taken on the move last week. The move above $32.25 failed and we closed back at the $31.65 support mark again. Stop on the trade is $31.50 Hit the stop Monday. Watch how it opens to start the week.

Social Networking (SOCL) Sold lower to support at $18.40 and looking at a potential bottom reversal with entry at the $19.50 level. The buying last week hit the entry point and added the positions. News driven, but trade the technical data. Stop $19.60. Testing lower to end the week. Worst case is a break even trade. Hit stop on gap lower and exit. 

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. Selling to end the week a big negative and raised stop to break even on the position.¬†Negative as concerns over the global economics and Fed wanting to break of big banks. Watching for support and the resulting opportunity.¬†

  1. Banks moved lower and hit our stops last week. However, the upside move in the sector is still on my watch list as opportunity. KRE at the $44.20 entry would be worth adding back if it shows positive momentum. Hit entry and it¬†followed through to start the week. Stop $43.50. Renewed worry, renewed selling… raise stop.¬†Hit stops and watching what’s next.¬†

Energy (XLE) failed attempt to¬†bounce… the one day of positive for the sector… sold lower again and broke the $73 support putting the downside back in play. ERY is the short ETF trade. $23.35 entry.¬†Hit entry and added to the position.¬†Stop $23.35. Let it run it’s course. Gone vertical on drop in crude. Stop at $26 now on positions.¬†

  1. Crude oil¬†– moved lower in response to the global fear. Short side trade remains¬†and watching to see how this plays out. Setup for a short trade on the commodity with SCO entry at $61.50. Raise stop to $84.90 on balance. Sold half of position at the $70.30 mark, let the balance run. End week lower and raised the stop… patience.

Treasury bond (TLT) The bond reversed off the low and cleared the $119 resistance and $120.50. The upside is fear driven… not enough fear to justify, but money has rotated nonetheless. I like the TBT (short trade still) play and we are watching for the entry to develop as the anxiety fades. Entry $47.15 as it stand now.¬†Another rally in bond as rates move lower on fear/anxiety.¬†

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 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 exit point raised stop.¬†Still plenty of work to do, but watching with suspect eye as the upside move failed to hold on Friday.¬†Another negative move to start the week where it left off… selling.¬†

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