Research Notes for June 17th

MARKET OUTLOOK: 

Worries remain in the headlines, but the buyers step in and put some money to work as analyst weigh out the Fed, Greece and the economy. As stated in last nights notes too much noise and not enough leadership for the broad markets. Thus, we continue the teeter-totter effect in the markets day to day.

The Fed meeting concludes today and that will put some questions in market again about interest rates, timing and benchmarks for the hikes. Look for rates to rise in anticipation of the blather that will come from the Fed in the announcement. The discussion on Tuesday was about the language used to push towards hiking rates. We will watch, listen and determine what actions if any to take on the release. Expect some volatility on either side of the announcement.

It¬†is imperative that we remember the overall theme of this market currently is a lack of clarity which leads to a lack of conviction. The offspring being volatility day to day driven by news as we saw Monday and Tuesday. Until the market gains clarity we will continue to experience this activity… nothing more or nothing less. As seen below not much changing, but there are some good move in fringe type trades and specific sectors like security software. Be patient and take the trades that set up well and keep your powder dry.

Have a great day.

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

  1. Software (IGV) is one of the attempting leaders in the market. If gets a positive push and then struggles to follow through on the upside. Tested the 50 DMA and bounced back near the highs. VMW (testing and moved higher), CYBR (nice break through the $67.80 mark), VDSI (cleared the $30.25 level and followed through on upside), SPLK (broke above the $70.25 mark) are some individual stocks to watch in the sector for upside opportunities.
  2. Semiconductors (SOXX) Tested $95.15 support, bounced, tested again on Monday and holding? This is the challenge for the NASDAQ currently. Within the sector we are seeing some leaders emerge worth watching.  QRVO (follow through upside), SIMO (back to the previous highs), AMBA, AAOI (nice move from the flag pattern). Others worth watching for bounce following the recent selling are FSL, NXPI, SWKS (positive move).
  3. Retail (XRT)¬†remains in a trading range, but managed to move to the top end of the range on Friday.¬†We were looking for a move above the $100.25 resistance level for entry point to¬†trade higher. Retail sales report on Thursday wasn’t stellar, but wasn’t bad either… watching how that unfold moving forward. Some stocks from scanning the sector to watch DPLO, JCP, CONN, TGT, BKS, CVX, MW.
  4. Emerging markets (EEM) attempting to build a bottom near the $40 level after a 10% decline on worries about the dollar. Yes, the dollar has been declining, but the fear of the Fed hiking rates later this year is playing havoc on the outlook for the sector as the dollar would rally in response to the Fed move. Bottom reversal is what to watch for now on the oversold technical conditions in the sector. Target on bounce $42. If not there is always the trade in EDZ again if downside resumes. (EDZ was the winner on Monday with the worries in place. Still need to clear the 200 DMA for the entry on the short trade.)
  5. Healthcare (XLV) remains a sector in a trading range, but the parts may offer more interesting setups as this unfolds. XLV did hit new high last week, but testing again and looking for upside clearance.
    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 $367.80 resistance level to take out. Added a small position at $366.50. Stop $355. Remains in range after brief move above resistance and willing to add on the move through resistance.
  6. Treasury bond (TLT) bounced off the low and watching today for trade opportunity on the follow through. The downside risk remains in the bond relative to the Fed, but oversold short term. $118.60 level of resistance is in play. IF moves above the rally may have some legs to go higher near term. FOMC meeting will set the tone for the bonds.
  7. Utilities (XLU) broke support at the $43.30 level last week and $42.15 is the next level of support to watch, but the question of interest rate impact on these assets seems to be overdone from my view and worth watching for bounce off the lows or reversal going forward.
  8. Midcap (IJH) like the small caps this sector has held up better than the other indexes. Why? biggest rationale would be the rally in the regional banks. They have helped the sector along with the biotech sector holding their own against the recent selling. Watching the upside opportunity if it can clear the $154.25 mark. Tested $151.15 support on Monday and bounced Tuesday.
  9. Vietnam (VNM) attempting a bottom and trend reversal. The ETF cleared the $17.90 mark to end the week and held the move on Friday. This sets up a trade opportunity on the follow through above the $18 level… watching for 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) Still testing the support near the $207.50 mark and the level to watch currently. Keep your stop on positions at the $204.50 level. Leadership is lacking with technology and healthcare stalling of late. Financials have the banks moving higher, but still needs leadership if the upside is going to resume.

NASDAQ 100 Index (QQQ) Another bounce off support and not much has changed. Our stop remains at $104.40 on short term positions (3-9 month horizon). Large cap tech remains the reason for the uncertainty in the index. The SOX index is the biggest struggle for tech currently. $106.74 is the next level of support to watch.

Russell 2000 Index (IWM) The index moved back above¬†the¬†$123.75 level bounced closing Tuesday at the $126.42 mark. The¬†stop at $122.50 on trades (0-13 week)¬†holding. Don’t assume anything as this unfolds… expect volatility short term. Holding¬†the short term¬†support and the upside continued. $126.53 level to clear for the sector.

Volatility Index (VIX) Closed at 14.8 with some anxiety relief, but still in position to move higher if the FOMC meeting disappoints on expectations. The index 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 elevated anxiety in the process. Watching to see how this unfolds as we approach the FOMC announcement on Wednesday.

Transportation (IYT) Bounced off the $148.50 support again and looking for another attempt at a bottom reversal, but that failed again. 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. This remains a negative indicator for the Dow Industrial Average.

Dollar (UUP) Oops… the dollar¬†remains under pressure as things attempt to resume a¬†normal outlook. The $24.88 level of support¬†is still in play. News is driving and not willing to trade emotions for now. Dollar index (DXY) is attempting to hold the 94.70 level of support¬†with 93.25 the key level to watch going forward.

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… failed to¬†break higher at resistance and closed the day¬†at $59.92. The inventory data last week¬†helped the upside, but still lacks in conviction.¬†News driven on OPEC, supply, demand, rig counts, etc. etc. It is a moving target and high risk trade. Patience.

SECTOR STORIES: 

Gold miners (GDX) they broke lower on the price of gold drifting lower. DUST cleared the $15.20 entry, stop at $15.20 and watching to see how it unfolds with follow through. Nice gains Tuesday and raised stop. Could look at taking half off on the 10% gain.

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 $19.20. Small test Tuesday. The target of $20.75 short term.

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. $30.40 is the level to clear on the upside to break higher.

Regional Banks (KRE) – broke 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. Small pennant pattern at high… attempting to continue the move higher now.

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. 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 $32 adjusted higher.

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 to breakout.¬†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.

  1. BAC – Bank of America trade on the upside entry at $17 on confirmation of the reversal. This is one of the large cap banks and the upside opportunity is to $18.20. Stop raised to break even or $17.

Healthcare (XLV) РHeld support at the $71.25 mark and reversed and headed towards a new high, but has stalled near the $75.50 level. Short term $74 level to watch for support. Stop $73.50. Still one of the better sector long term as we move forward.

Industrials (XLI) – The sector hit the stops and failed to materialize on the upside opportunity. Still watching, but would have to validate the upside turn should it materialize. $56.40 is level to watch on the move higher. Trading range and downtrend off the February high are the key issues for entry.

  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. Nice bounce higher, but not follow through on the move Friday.

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