Research Notes for June 10th

MARKET OUTLOOK: 

Interest rates continue to be the headline causing the heartburn for investors. The selling early on Tuesday did find some support and bounce… but, couldn’t hold the move into the close. Did this change anything is the primary question to ask as we start trading today? I am going to go out on a limb and say NO! Same worries and not enough fundamentally to shift the sentiment towards confidence in the future growth of the markets. Simply put, too many unknowns about the market remain in place.

No changes in the Greece vs the EU fight over lending… Greece exits the EU is the odds on favorite. More warnings from the EU about acceptance of a deal and Greece continues to bury it’s head in the sand. The untimate impact of this is unknown, but to the US market they are not huge… but, the initial response in the markets will cause a ripple.

Federal Reserve is feeling the pressure to raise interest rates on the October timeline and bonds continue pricing in the event with the ten-year bond now at 2.41%. Interest sensitive assets remain under pressure short term. IYR, TLT, BND, TLT and XLU are being watched as this unfolds near term.

News and headlines continue to be the driving factor for stocks and the balance of the investment markets. Caution is the word of the day and know where your exits are is the pending action item we have to follow.

If you trade or invest in these events approach them with a defined strategy and risk management process. Don’t assume anything and always understand where you stand relative to an exit plan…

NOTE: The following are things to watch and evaluate during¬†the trading day…

  1. Semiconductors (SOXX) have managed to give back all the gains from the break above the $97.50 mark. They proceeded to move towards $95.15 the next level of support to watch. Small reversal intraday and we will see if this support. Could offer short term opportunity if support holds.
  2. Small Cap (IWM) the index is holding up well to this point and it is the one sector that offers a glimpse of hope on the upside short term.¬†Holding the trend for now. Watch…. test of $123.75 support.
  3. Retail (XRT) moved lower and holding above key support levels We were looking for a move above the $100.25 resistance lever for entry point to trade higher. Not panning out, but a bounce off the $97.25 support could offer trade.
  4. China (FXI) is back in the headlines relative to the US. The banter over nothing continues, but there is plenty of speculation… the outlook for further stimulus on the way has all eyes are on the buy side?¬†Still testing support at this point ($48.70) and looking for direction on direction.
  5. Japan (EWJ) has established a trading range of consolidation and is moving back near the lows of the range. Watching how this unfolds short term on the downside move. EWV at 47.05 entry. Hit the entry and manage the risk with stop at $47.05.
  6. Healthcare (XLV) remains a sector in a trading range, but the parts are interesting.
    1. Pharma (XPH) starting to confirm the reversal off the May lows. Sector is of interest looking longer term as a hold and manage the risk. Entry $125.50. Some give back in trading Tuesday.
    2. Biotech (IBB) attempting to move higher again with $366 level of resistance level to take out. Use that as level of entry for s short term trade on the break higher, added Friday $366.50. Stop $355. Some selling on Tuesday to be watched today.
  7. Transportation (IYT) was attempting a bottom reversal, but that failed as we are retesting the previous low near the $148.50 currently. Watching for opportunity to unfold in sector or stocks. Selling was back and short setup is there for the sector.
  8. Banks are moving higher and we own KRE as position… the individual stocks are moving obviously and Bank of America hit an entry on break above $17 on Friday. Watching this to see what opportunities is produces short term. Scanning the ETF gives you more opportunities to look at as well.
  9.  China (FXI) testing support, but individual stocks are moving again. WUBA, SFUN, JD, SOHU, etc. digging for the opportunities within the country.
  10. Gold miners (GDX) they broke lower on the price of gold drifting lower. DUST cleared the $15.20 entry, stop at $14.60 and watching today to see how it unfolds with follow through.

Below I outline the major indexes, sector¬†stories¬†and management of existing positions.¬†Stay focused, stay disciplined and don’t chase rabbits down a hole.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) index isn’t acting well based on the current indecision from investors. The break of the 50 DMA confirms in trading Monday. The next level of support near the $207.50 mark which we traded against on Tuesday.¬†Keep your stop on positions at the $204.50 level. The trends are still intact on the upside, but they are being tested near term.¬†Don’t rush to any conclusions on the downside yet, let it play out.

NASDAQ 100 Index (QQQ) broke¬†the $109 support¬†and the April trendline short term.¬†Our stop remains at $104.40 on short term positions (3-9 month horizon). Tested lower on Tuesday and bounced… watching today for follow through on the upside. The SOX remains¬†the weak link along with technology overall. XLK moved¬†to the $42.40 support¬†tested lower and is still not a picture of strength on the daily chart.

Russell 2000 Index (IWM) The index moved back above¬†the¬†$123.75 level. The¬†stop at $122.50 on trades (0-13 week)¬†holding. Nice gain on Friday as index is bucking¬†the selling in other indexes. Don’t assume anything as this unfolds… expect volatility short term. Holding¬†the short term¬†support and looking for the upside to continue.

Volatility Index (VIX) Closed at 14.7 with no anxiety showing up in the index despite what we are seeing day-to-day? That is truly a great picture of what is going on the broader markets. Sellers fighting it out with buyers on direction, but the VIX shows no anxiety in the process even when the index moves lower intraday. Watching to see how this unfolds. Close above the 15.3 mark would be of interest relative to the downside in stocks.

Transportation (IYT) Broke support,¬†attempted¬†a potential bottom reversal, but has resumed selling to previous lows. 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term and looking at the sub-sectors we still don’t see any leadership.¬†Short trade setup in place on move below the $147.50 level.

Dollar (UUP) Oops… the dollar gets a thump in the head again as things were turning normal. The $24.88 level is next for support to hold. News is driving and not willing to trade emotions for now.

Crude Oil (OIL) Tested support again at $56.75 and bounced. We stated Tuesday the¬†close¬†of¬†$58.26¬†is positive with holding above bottom of the range and if you are so inclined to trade the news and risk… good setup for upside trade. That played out on Tuesday with a 3% gain. More risk than I am willing to stomach, but you can see how the news is pushing the price and volatility. News driven on OPEC, supply, demand, rig counts, etc. etc. It is a moving target and high risk trade. Energy stocks broke support and are in position to test the March lows. This shows investors sentiment towards the price of crude near term.

SECTOR STORIES: 

Energy (XLE) the short side has set up and now is a good time to add to the positions on break from consolidation at the $19.20 level (ERY). Hit the entry point and watching how it unfolds. Stop $18.80. Moved higher Tuesday despite the bump higher in oil prices.

Telelcom (IYZ)¬†telecom moved to support at the $29.70 mark. Bounce or break lower? The break lower takes out the trendline from the October low and offers a downside trade opportunity. In a four week trading range near support… watching for the opportunity if it develops.

Internet (FDN)¬†tech moving and internet is part of the move higher. Breakout at 67.70. Hit entry and the stop is at $66.75 and 50 DMA.¬†Tested lower with tech selling on¬†early on Tuesday. Bounced and held near the stop… watching today.

Emerging markets¬†(EEM) breaking lower opens short trade opportunity if you are willing to take the risk. EDZ is the ETF on short side with 3 times leverage… you can adjust your trade size to account for the leverage and allow for more volatility in the trade. Entry hit at $29.60. The stop should be $31.53 on move higher in EDZ.

Regional Banks (KRE) – breaking higher from the trading range short term and this time nice follow through.¬†After a small test back towards the $41.85 entry hit¬†and the upside was in favor of rates moving higher… questions answered for now on upside direction.¬†$42.85 is the stop. Manage the move accordingly.

Software (IGV) leading sector for tech is testing support at the $100.50 level currently. Keeping the uptrend in play needs some help… manage positions. Selling is to be watched and stops in place at $100. Tested lower on Tuesday and closed near the stop… watch how it unfolds today. Watching the near term opportunity.

  1. HACK – the software security stocks are running on the breach in government systems. Watching and letting it run for now. Don’t get greedy and ladder your stops on the upside move. Stop $30.60.

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 would be of help for the trend to continue upside move. Hasn’t played out according to plan… watching the stop and looking for upside on the intraday bounce from Tuesday… patience here as it unfolds.¬†Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside.

Financials (XLF) This sector is all about Fed speculation. Will they raise interest rates¬†or not. Jobs report puts more pressure on the Fed to hike rates soon. This is one sector in favor of higher rates.¬†If that is true, we would want to hold long term positions… wide stops and ignore the volatility based on speculation¬†from analyst. Focus on what you believe. Stop $23.80. Tested $24.50 support again, but bounced with banks leading he way.

Healthcare (XLV) РFound support at the $71.25 mark and reversed and headed towards a new high as the confidence returned to the sector. Short term $74 level to watch for support or move above the $75.25 level of resistance. Stop $73.50.

Industrials (XLI) – The sector hit the stop on Monday and failed to materialize on the upside opportunity. Still watching, but would have to validate the upside turn should it materialize. Trading range and downtrend off the February high are the key issues for entry. $55.50 exit point hit on Monday.

  1. Kansas City Southern (KSU) shows why the transports continue to struggle. Put in a low and¬†a reversal… looking for follow through and possible upside trade technically. bought the follow¬†through and $93.75 entry on the bounce. Stop $90.40.

Dow Jones Industrial Average (DIA) selling returned to the index and broke $179.75 support offering trade on the short side with SDOW. $18.60 entry on the leveraged ETF and stop at $19.05. Adjusting stop on shift Tuesday afternoon? Watch and manage the risk accordingly, worst case stop at break even. Aggressive short trade, but the set up was the way I like to see when adding a short play.

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