Research Notes for June 3rd

MARKET STORIES:

Another day of fighting it out for the buyers and the sellers. Nothing changed in trading Tuesday, but we did see the energy sector move up in response to the price of crude climbing to a new near term high. $51.26 and climbing… What happened to the supply worries? We will see how it unfolds tomorrow with the weekly inventory data. OPEC meeting starts June 5th and that will shed more light on how this will all unfold near term. The expectation is for Saudi Arabia and others to defend their market share going forward… thus more supply. Unless demand rises this move higher is speculation and therein lies the challenge for trading the commodity short term.

The modest move higher for small caps, transportation, regional banks, retail, and biotech. Something to be said for the basics of the market holding steady for now. The semiconductors which are part and parcel of the basics sold on the day after a strong run higher the last week. Overall still in decent shape should the buyers find their courage and want to push the indexes higher. If not, we continue to meander along with intraday volatility and a lack of overall direction.

As stated in the weekly outlook post, I don’t want to get into all the issues facing the markets fundamentally all I want you to do is look at the trends… keep in perspective that the trend rules until it is¬†broken. There has to be a catalyst in place (not just speculation) that will confirm the trend is broken and allow the sellers to control the trend and then short trades will take precedence. Respect the noise, don’t get caught up in it, and trade/invest according to your disciplined strategy. Nothing more nothing less. I am attempting to remind you to stick to what you know and don’t get sucked into the hype surrounding the markets day-to-day. There will be plenty of opportunities as we move forward… there is no need to force anything… let the market come to you and follow the trend. Monday posted reinforcement to the upside bias. How it plays out is still undetermined, but we will stick with the trend for now.

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

  1. RUSS hit stop on short Russia trade… the bounce in crude pushed the stocks higher. RUSL¬†watch for bottom reversal… watch for confirmation on the trade higher with entry at $29 mark.
  2. China (FXI) is back in the headlines relative to the US being involved in the US and threats of war. That is speculation… stimulus is fact and the outlook for further stimulus on the way all eyes are on the buy side? Watching for the bounce to confirm off the the near term low.
  3. Japan (EWJ) has established a technical wedge of consolidation near the highs. The break higher would be a positive short term for the country ETF. Watching how this unfolds short term.
  4. Kansas City Southern (KSU) shows why the transports continue to struggle. Put in a low on Friday with a reversal¬†Monday… looking for follow through and possible upside trade technically. Tuesday follow through and $93.75 entry today if upside moves.
  5. Dow (DIA) remains under pressure from the sellers. A break below the 50 DMA would be the point to watch for a downside trade setup for the index. SDOW is the leveraged short ETF and would offer a higher risk offering. Watching to see how it unfolds.
  6. UUP – dollar fell out of bed on speculation with Greece and the EU. Watching to see if $25.10 holds as support.
  7. FDN – tech moving and internet is part of the move higher. Breakout at 67.70. Hit entry and stop at $66.75.
  8. 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 short side trade opportunity. Look for entry near $29.50 short if this falls lower.
  9. Healthcare (XLV) remains a positive sector overall and hitting against resistance short term. The providers (IHF) broke higher on Friday taking a leadership role. 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.
  10. 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. Large cap ETF XBI moved above resistance on Friday at the $237 mark and held on Monday. Watch the upside trade on the follow through.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) index isn’t acting well based on the current indecision from investors. The 10 DMA has formed a resistance over the index the last four days. Close below the¬†$211.90 mark again as we continue to watch¬†how this unfolds near term. Keep your stop on positions at the $204.50 level. The trends are still intact on the upside.¬†Don’t rush to any conclusions on the downside yet, let it play out. Patience is ugly thing, but it is usually the right thing. Tuesday we looked at the scatter chart of the ten sectors and they show little leadership and some conviction will be needed to move higher.

NASDAQ 100 Index (QQQ) held above the $109 support, but the downside risk is being tested intraday. Uptrend is being tested off the March low, but remains in place and we keep stops at $104.40 on short term positions (3-9 month horizon). Trust the trend until it breaks for now.

Russell 2000 Index (IWM) The index moved back above¬†the¬†$123.75 move. The¬†stop at $122.50 on trades (0-13 week)¬†holding¬†barely. October trendline not recovered and still watching. Downside below $118.80 is stop on short term¬†trades. Don’t assume anything as this unfolds… expect volatility short term.

Volatility Index (VIX) Closed at 14.2 after hitting a high of 15 intraday. The discrepancy in pricing from Monday started to level out Tuesday, but still has work to do. No anxiety in play for now, however the intraday movement in stocks is showing the lack of trust or traders activity due to the indecision. Watching to see how this unfolds. Watching how it unfolds today.

Transportation (IYT) Broke support and continued¬†lower last week.¬†The bounce on Monday brings the question of a reversal on the selling… but we will have to watch and see how it unfolds. Tuesday was looking good, but didn’t confirm enough for me to want to take the risk. 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¬†Dow Theory says this is negative for stocks going forward… Words to watch.

Dollar (UUP) Oops… the dollar gets a thump in the head pushing it back to the $25.10 support range.¬†The rumor of Greece working out a deal again helped the euro on the day. I am still not convinced the deal is done. Watching the dollar as this unfolds.

Crude Oil (OIL) Big bounce on Friday to recover from the selling and closed at a new near term high of $61.26. New speculation trade added on Monday. The upside is playing out off the doji bottom from last week. (ONLY ETF Strategy)

SECTOR STORIES: 

Crude oil (UCO) was the story on Friday jumping more than 3% and back above the $60 mark? IF (big if) trade through the top of the trading range sets up a trade opportunity in the commodity. Dollar fell on Tuesday and the price moved higher.$47.50 entry on UCO if as the upside trade is in play. Stop $47.

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. sector found some support on Tuesday and stop should be $28.90.

Regional Banks (KRE) – breaking higher from the trading range short term and now it has reversed. $41.85 entry hit¬†and the upside was in favor of rates moving higher… but, that is being questioned and the stocks have moved off the highs and testing lower again. $40.70 is the stop… Still not a picture of¬†strength short term, but we will let it play out. Too much noise, but still place to be longer term view. Nice bounce on Tuesday back to the previous highs.

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.¬†Holding for now.

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. May report showed slight move higher, but nothing great. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside. Patience is necessary near term.

Financials (XLF) This sector is all about Fed speculation. Will they raise interest rates¬†or not. Manage the risk and look to see how this plays out near term. 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. Testing $24.50 support again.

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.

Bonds (TLT) We bounced off the $118.50 support and followed through clearing the $121.50 mark on a bottom reversal. We hit our stop on Monday and the selling continued today. Small gain on the trade, but now we are looking at the downside. $118.50 level is the key break point.

Industrials (XLI) – if (and that is a big if) the global economies continue to recover and growth takes root… industrial stocks should rise from the dead. This story will take time to validate, but it is one worth our attention as we move forward.¬†Trading range and downtrend off the February high are the key issues for entry. ($56.80 level to watch.) Hit the entry point with move higher… still plenty of long term opportunity. Stop $55.20. Big negative day on Friday moving below the 50 DMA… honor the stops if the downside follows through.

Semiconductors (SOXX) this was one messy chart, but it developed into a trading range and broke higher ($96 for entry hit). The follow through to end the week was a positive and it has established itself as one of the leaders near term. Manage the risk of the volatility in the markets accordingly and raise your stop $98.85 to start the week. Tuesday fell back after solid rise higher.

  1. INTC – $33.50 entry on breakout for the stock and willing to add again for the upside move. This is one of the old leaders rising off the lows and the fundamental outlook is positive… Stop $32.50. Acquisition of Altera (ALTR) sent the stock lower… watching.
  2. NXPI Рnice move to break from the trading range (entry $104.50) and broke above the March high. looking for follow through and opportunity. stop $107.50. Tested on Tuesday and watching.

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