Research Notes for July 29th

MARKET OUTLOOK: 

Slow start to the day erased the gains and then the buyers stepped in and slowly pushed the indexes to a one percent gain plus in some areas. But, did it really change anything? only the five day streak of selling from my view. There was not catalyst other than the cry that technical data showed the market as oversold. Some indexes found their way to the 200 DMA again and use that as a pivot point for the buyers to step back into the markets. I am not defending the buyers nor am I defending the sellers… neither side has made a convincing argument that is sustainable based on the data/facts. Still plenty of work to do and plenty to deal with going forward. The traders are enjoying the increased volatility and long term investors are bored. The rest of us are waiting patiently for the trend to be determined and the direction defined.

Today we start with Twitter beating estimates on earnings after-hours which should help tech. Biotech showed some resilience gaining 2.5% on Tuesday. Energy found a bottom with a 2.9% gain. Gold is basing. Oil bounced off the lows. Small caps found support after falling below the 200 DMA and closed up one percent. Some good found in the day… but, we have to confirm all that took place and the buyers will need to engage in the face of the FOMC meeting concluding today. Focus, Patience, Disciplined Habits, and Facts are all we need to make it through another day of trading.

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 at¬†the 2o0 DMA, but managed to reverse and close in positive territory on the day… short trade setup is still alive…if the sector breaks lower with short entry at the $95.50 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.¬†Bounce from the financials to negate the short side trade this morning. Watching for follow through on financials if the upside is going to resume near term.
  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. No break, held support and put in nice upside gain on the day. Held the 50 DMA and watching how it plays out today. 
  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. Still need to push higher if the entry point is going to be established for the sector. 

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.¬†Nice bounce on Tuesday to keep the trading range in play and willing to wait this out for a direction that is tradable.¬†

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. Held the support on Tuesday and back above $111 level… watching for the right opportunity with some follow through today.¬†

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. Moved below it interday on Tuesday, but managed to move back above the $121.25 level as positive? Watching to see how it unfolds. 

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.¬†Hit stop on Tuesday and now we watch to see how SVXY will unfold as the volatility evaporated as quickly as it came. $88 entry for the brave today on the reversal.¬†

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.¬†All hail UPS! The beat on earnings fueled the sector to run back to the $148.50 resistance. This is a positive not just for the transports, but for the broad markets as well.¬†

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.¬†Small bounce. 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. Did bounce on Tuesday and looking for a follow through if a trade develops. 

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. Soft landing Tuesday with modest gain. Hit¬†our stops¬†on the move… watching as the story isn’t over.¬†

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 $38.90. 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. Sold half on Tuesday at $39.50 and raised stop on balance. 

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. Crude bounced helped as buyers stepped in… honor the stop and lock in gains if this moves lower.¬†

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 up¬†big banks.¬†Bounced off¬†support and looking for new¬†opportunities.¬†

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. Thus why we set the stops… big reversal in energy stocks and hit our stops on the trade took the exit. Now we watch how this unfolds.¬†

  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.¬†Hit stop and took the exit… watching how it unfolds short opportunity may not be done yet.¬†

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. Some selling in bond Tuesday… big question it the FOMC meeting today.¬†

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.¬†Recovered from the selling on Monday… watch and let it unfold.¬†

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