Research Notes for June 11th

MARKET OUTLOOK: 

Welcome back to the buyers who had been missing for the last two weeks. The move on Wednesday erased half of the losses on the index and raise more questions on direction near term. We discussed the intraday bounce on Tuesday as a possible sign of the upside returning and it did exactly that. The news credited the slide in the dollar and a possible solution to the Greece/EU stale mate on bailing out the financially strapped country. Neither, my opinion, justify the bounce on Wednesday. I am willing to state that it was a technical bounce off support with some positive news as a catalyst. How long and how high it will bounce is like calling the number the pearl ball will land on in roulette. We will take it in stride and determine how to manage our risk going forward. As always… take what the market gives and adjust accordingly.

It is important to take it one day at a time for now and let this all unfold. We didn’t get the spike lower this week that¬†was setting up in the charts. We did get some selling lower to support levels and then the modest recovery on Tuesday, followed by a jump on Wednesday. The challenge is being patient enough with a position on either side to allow it to unfold. The downside trades in the Dow or SOX indexes were reversed today in one fell swoop back to the upside. Thus, the need to be patient, allow for broader volatility, and wider risk tolerance than normal. We can say that easily enough, but when the emotions kick in it becomes a challenge¬†to follow our own strategy or advice. Be Patient, focused and discipline with each position.

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

  1. Semiconductors (SOXX) 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. Small reversal intraday Tuesday with modest reversal on Wednesday… is the upside back in play? 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 held and moving back towards the previous high. Break on upside would be positive for the sector.
  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 with¬†plenty of speculation… the outlook for further stimulus on the way has¬†kept investors¬†on the buy side, but for how long when the data continues to show slowing?¬†Broke¬†support at $48.70 and looking for direction on direction. FXP is attractive, but the downside lacks conviction… watching.
  5. Japan (EWJ) has established a trading range of consolidation and is moving back near the lows of the range. Held support at the $12.75 level and remains in trading range. Sets up a trade back to the top of the range.
  6. Healthcare (XLV) remains a sector in a trading range, but the parts may offer more interesting setups as this unfolds.
    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 consolidation currently.
    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. Remains in range after brief move above resistance.
  7. Transportation (IYT) was attempting a bottom reversal, but that failed as we are retesting the previous low near the $148.50 currently. Held the low and now setting up a double bottom pattern on second attempt for reversal.
  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. Nice follow through Wednesday on this move. 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. All made nice moves on Wednesday for trade opportunities.
  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) All the worry was erased today (at least that is how it traded). 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 reversal on Wednesday puts the index back above the 50 DMA and holds the upside trend for now. $211.90 next resistance to capture.

NASDAQ 100 Index (QQQ) Moved back above¬†the $109 level¬†and the April trendline to maintain the uptrend in play.¬†Our stop remains at $104.40 on short term positions (3-9 month horizon). Tested lower on Tuesday and bounced on Wednesday… watching today for follow through on the upside. Large cap tech was the reason for the test lower and the move higher again.

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 as follow through as the index has held up better than the others.¬†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 13.2 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. Watching to see how this unfolds.

Transportation (IYT) Bounced off teh $148.50 support again and looking for another attempt at a bottom reversal. 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 of support broke on Wednesday. News is driving and not willing to trade emotions for now.

Crude Oil (OIL) Tested support again at $56.75 and bounced. Yes the bounce played out with a push back to the upper end of the trading range… needs to break higher this is the end of the consolidation. The inventory data on Wednesday helped the upside persuasion on the day.¬†News driven on OPEC, supply, demand, rig counts, etc. etc. It is a moving target and high risk trade.

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. Watching how the bump in oil prices changes the convictions across the sector.

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. Wednesday moved back to the top end of the range.

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. Hit stop on stronger dollar.

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. Validates the move back to the upside on Tuesday with follow through on Wednesday.¬†Watching the near term opportunity and a move back above the previous highs at $102.88.

  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… got the move higher and still looking for the upside move.¬†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. Back near the December highs.

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. Bounce for bottom reversal setup on Thursday.

  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. HIT STOP today and lost the weight.

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