Research Notes for May 1st

MARKET STORIES:

Did the sell in May memo get read this year? With Thursday being the final trading day of April… it was time to head to the Hampton’s for the summer. The sellers finally gained enough control to take out support and raise concern with the VIX index moving to 14.8 and the 200 DMA. The last three bars on the chart show the rise in intraday volatility and¬†that means¬†the overall volatility could rise further if the concerns are big enough. This brings the VXX trade into play with the move above $21.70. We will add that to the watch list for tomorrow.

Be aware today… it is the first trading day of the month, new money. The indexes sold through some key support lines on Thursday and we could see buy on the dip money. The futures are pointing slightly higher as I update this. Don’t make assumptions, let the first half hour play out and see where the sentiment stands for investors. The short trades have set up, but don’t forget the trendlines are still pointing higher short term (3-9 months). If the selling confirms… by all means place the trades and manage the risk accordingly.

Earnings story line shifts gears to the negative as more companies are missing revenue and earnings. Expenses are rising and the consumer is stalling. The cries to raise minimum wage to $12 per hour are working their way into Congress and that could cause even more havoc for company profits if it makes to the light of day. This is what all the warnings were about relative earnings growth showing negative forecasts and here they are… Question is: will anyone believe it this time? Time to start protecting the downside risk in light of the first levels of support being broken.

Wednesday the GDP data was rationalized by the Fed in the notes from the FOMC meeting with weather, port strikes and strong dollar. Taking that for what it is I am more concerned about what opportunities there are in tracking the current trend of events.

  • Yields should¬†rise if the Fed really does raise rates near term. That means TBF or TBT as a short trade on treasury bonds is worth our attention. Both gapped higher Wednesday in response to the worries. However, the market fears on Thursday reversed some the gains and we continue to watch and let this unfold. TBT entry was $42.50. A test of this level will offer an entry near $43.50 currently.
  • Dollar is falling again and that may help the cause for the Fed. Watch the long euro trade (FXE) if this continues and commodities will benefit as well. GLD, SLV, OIL, UGA, UNG, SLX, DBB, JCC.

Today the first day of May and we start reports on the economy with the ISM manufacturing data, Market PMI and consumer sentiment for April. It will continue next week with more¬†data for the month of April to review. If there are no signs of improvement following the winter excuses the sellers may well exert their authority as we saw on Thursday. You should already have a plan for where the exits are should stocks sell aggressively.¬†Longer term positions have to be evaluated in light of what is unfolding and exit point determined now in the event the selling accelerates. This is not speculation, but planning in the event things don’t continue on the upside. It is far easier to execute a plan that is in place than creating one under fire. Thursday was a warning shot…

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

  1. Crude Oil (UCO) the upside in oil resumed on Wednesday and is now in position to take the next leg higher. Watch for the entry if we break this resistance point.
  2. Treasury Yields (TYX) thirty-year bond jumped to 2.75%¬†… follow through breaks the downtrend line and could push rates even higher as a result of¬†the news from the FOMC meeting. TMV, TBT, TBF… But, what if stocks start to sell off? Does money rotate to safety? Saw signs of that in afternoon trading Thursday.
  3. Energy (XLE) inventory data moved oil higher and the break above $82.50 on XLE is a positive. Looking to add to positions if we confirm the break higher.
  4. Software (IGV) leading tech. Watch the micro term pattern setups. Breakout for the sector¬†reversed Thursday… watching to see how it unfolds going forward.
  5. Social Media (SOCL) weakening on FB and TWTR earnings testing lower… LNKD missed after-hours Thursday and down 15%? $20.11 key support.
  6. Base Metals (DBB) breakout and momentum in the metals micro term (0-13 wk). Big follow through on Thursday on the upside gaining 2.4%.
  7. Retail (XRT) weakening sector… watching how it unfolds on the downside near term.¬†Short positions are building in the sector.
  8. Got the end of the month posturing and ‘Sell in May and go away.’ Follow through today to start the new month? Or do the buyers show up again?

MAJOR INDEX STORIES:

S&P 500 Index (SPY) the index has taken on some volatility as it attempts to break to new high. We traded this position and thus we have to manage the risk accordingly. Stops at the $209 mark hit on Thursday. The news above has an impact obviously and we let it unfold.¬†Fed is back, weak economic data is back and worries from investors about earnings are all in play. SDS short trade is setting up as a micro term trade… Entry $21 if follows through.

NASDAQ 100 Index (QQQ) Broke¬†the $109 support level falling to the 50 DMA. The index is struggling with earnings from FB, TWTR, and LNKD after-hours… Short trade? Could be a test of the next level of support type trade, but the longer term trends are still in place. Posted the short trade to the ONLY ETF strategy list.

Russell 2000 Index (IWM) The index broke down on Monday with the biotech’s leading the way lower. Testing the trendline and broke with gap lower on Thursday.¬†Fell to the next support level of $121.24 off 2.1%… If it breaks here the short trade has to be looked at a trade opportunity. TZA posted on the ONLY ETF strategy.

Volatility Index (VIX) Intraday volatility is the new game in town. The close shows some small moves higher¬†and Thrusday was the first day to hold the move higher into the close.¬†Anxiety early sent the index back to 15.29… it closed at 14.56. Is the concern gaining support? Watching to see this unfolds and add trade on the ONLY ETF strategy.

Transportation (IYT) Transports need to move higher if the broader index is to sustain a move higher. Broke the $154 support intraday and closed at $153.98.¬†Still building the base, but the support level at $154 is in trouble. Patience… break below support opens the short trade with September 154 puts on IYT.

Dollar (UUP) is shifting gears on the downside with the break of support on Monday and progressive follow through. Why the shift in sentiment? Speculation about the global economies looking better than the US. Oil moving back near the $60 mark. Breaks $24.88 the short trade works with UDN.

SECTORS OF INTEREST: (IN PLAY) Manage the Risk.

Consumer Discretionary (XLY) broke higher on Friday from the trading range… needed to follow through, but gave up the gains… weakness back in the retail stocks (XRT broke lower).¬†Need to hold support at the $74.50 level if the upside has a chance of keep the trend moving higher. Consumer is not spending and it is showing in the retail data.

China (FXI) holding near the highs and watching to see how it unfolds. Stops should be at $49.50 currently on the reentry at $51.50. Upside remains in play, but there is still plenty of speculation on the horizon. Patience as the consolidation plays out. (side note of Japan dropping 2.6% on Thursday was of interest.)

Russia (RSX) Showing some topping currently and testing the resistance of the 200 DMA as overhead. $18.75 support. $18.70 stop. Patience.

Emerging Markets (EEM) Made solid break from base at $41 and the upside remains in play. Stalling near the highs with some selling on Wednesday and Thursday. The emerging markets have benefited from the rotation into the global markets and away from the US markets. Stops at $43 hit on Thursday. Also looking at how the dollar will impact this trade going forward?

Crude Oil (OIL) The break from the trading range bottom above $53.85 remains in play with oil closing at $58.64. Currently  there is more speculation than logic as the rational and justifications are pontificated. The inventory data on Wednesday sparked interest in the commodity again. OIL hit entry at $12.15 Wednesday. UCO at $9.45 entry.

Energy (XLE) Broke higher and stalled as the broader indexes tested lower.¬†Next level to clear is $82.50, managed to close above this level on Wednesday and that offers upside continuation trades.¬†Move has been the¬†value buyers stepping in and the stall is the lack of traders traders interested short term. Do they step in now…¬†$80.50 support level and stop.

Solar (TAN) test of the move higher and broke support on Thrusday at the $47.80 mark. Manage the risk and hit our stops at¬†$47.50. Willing to watch and add this back on test and reversal. 56% run higher off the February low… it earned a rest.

Biotech (IBB) Sold off 4% on Monday and the test continues. The drop below $342 exit and now we watch to see how this unfolds. Move on Thursday breaks the October low trendline. Aggressive selling.

Brazil (EWZ) Рcleared a double bottom pattern entry at the $34 mark. Looking for test and follow through on the reported improvements in the country. Finally got the move higher we were looking for and now we manage our gains. Entry $34.60. Stop $34.75. Manage the risk as we deal with the $37.40 resistance.

Other sectors in the process of rotating and we will watch how Friday unfolds.

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

Unfolding Stories in Sectors Currently:

Retail (XRT) Рthe consolidation at the highs showed some weakness and it broke support ($100.25). The retail sales data for March was okay, but below expectations. Money flow showed less interest and some key stocks break down. BBY, KSS, JWN, KR and TJX. This is a sector to watch with interest as the consumer is key to the US economic picture. $98.50 stop hit Wednesday. Short trade is possibility with $95 Sept Puts XRT at $3.50.

Bonds¬†(TLT)¬†broke support at¬†$129.20 and triggered the exit. The testing to move back above this level failed on Wednesday with the confirmation move lower. Rates rose and bonds sold. Fed is back in the trade.¬†TBF, TBT or TMV are now is play… (see the table for entries.) Choose the level of leverage you want. Selling is on for now.

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 one worth our attention as we move forward. Selling back to support as broad indexes come under pressure.

Semiconductors (SOXX) it is a messy chart, and the break lower only makes it worse. This puts the short side in play potentially, but it would take a move below the $92.50 level to gain my interest to short the sector. Looking at SOXS at $12 if holds the downside move. Hit entry on Thursday.

Healthcare¬†(XLV) – Failed to¬†reestablish the previous leadership. Downside¬†did some damage to the chart and watching to see how it unfolds. Negatives from all sub-sectors as well. Did get slight recovery on Tuesday, but sold¬†lower again. $71.26 support must hold or the shorts will exert some near term pressure. Looking at the Sept 71 Puts XLV — $2.75.

Utilities (XLU) building bottom (triangle pattern). Nice gains, but they sold¬†off the following day. Still in range… watching how it reacts to overall markets today. Interest rate worries? Duke energy is a stock in this sector I am tracking was well.

Base Metals (DBB) broke through $15.50 resistance and has followed through. Steel (SLX), Copper (JJC) and ZINC are moving higher off the recent low in March. This has set up some trading opportunities across the sector. FCX cleared $21.70 entry point as well. $15.65 stop on original entry, $16.05 is next entry point. Hit the entry point with 2.4% gain on Thursday.

Global Energy РThe US is only one of the largest oil producing country thus there are other opportunities globally relative to the recent bump higher in oil prices. The bump is still only a trading opportunity from my perspective. The trend will develop, but there are too many obstacles still in the way short term. With that in mind ENY is a Canadian Energy Income ETF to watch. EWZ is Brazil ETF which benefits from the recovery in a oil dependent country. PBR is a key stock in that recovery big gain on the week. RSX is Russian ETF as they are the second largest producer of oil globally worth trading. Watching this story line unfold. (FILL, MLPX, IXC, PBD)