Research Notes for May 27th

MARKET STORIES:

The markets start the week with a sour taste towards stocks. The merger news, earnings, and economic data didn’t matter the sellers were in the house¬†and¬†they were going to push stocks lower. Small bounce in the last hour of trading left some hope for the buyers that all is not lost. The diamond pattern on the S&P 500 index we discussed in the update last week played out on the downside Tuesday holding true to the pattern tendencies… we raised our stops on the index over the weekend and took an early exit as a result. This isn’t over and there is plenty to watch on both sides of the equation.

Tops on the list of worries… Europe with Greece set to default on their loan payments. BIG SHOCK… right? Why the reaction from the global and US markets? Uncertainty plain and simple. Once it is done and the cards are on the table everyone will play the hand they are dealt and the markets will move forward. Interest rate talk continues from the Fed with Fisher out blathering today about the impact of rates. Get it over with already! Just rip the band-aide off and let’s move forward.

Elsewhere it was the dollar moving higher and that shot commodities in the foot. Stronger dollar pushed oil down nearly 3% and you can throw is worries about supply data not showing a drop and demand is not on the rise. The merry-go-round keeps turning making everyone dizzy relative to the commodity.

Last, but certainly not least the transports (IYT) broke support last week and now the 50 DMA is crossing below the 200 DMA and the infamous death cross. This is a negative sign technically for the transports and the industrial (DIA) average. The Dow theory is in play and we will see how many traders/investors act on the theory.

Plenty of worries, some old, some new. The challenge for me is the lack of improvement in¬†any of the areas discussed above and beyond… earnings, sales, etc. It is a slow grind and investors are getting antsy about the outcome near term. We will continue to focus one day at a time and let it all unfold.

Below I address the sectors and broad market indexes as we see it now… there is plenty of global news in the making and we have to aware of what could impact the markets short term.¬†Stay focused and maintain your discipline.

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

  1. TLT bounced off the $118.50 support and now looking at the upside trade. TMF is leveraged ETF. entry $74.95 watch on Tuesday. HIT entry at $75.20 early. Put stop at $76 currently.
  2. EWG – move higher failed… now looking for the recovery bounce off support at the $29.30 level. Weakness from Greece story.
  3. India (PIN) bottom reversal trading opportunity. The long term view is positive for the country, but the selling short term is overdone? Watch with $21.90 entry.
  4. CPI spiked 0.3% on the core and it is credited to the rising cost of HEALTHCARE? What about ACA (affordable care act)? Not working… prices are only going to go higher as we move forward with the full implementation of the bill. This was the projection and no one wanted to listen… Better buy healthcare stocks if you want to afford healthcare. IHF, XPH, XLV are rising.
  5. SOCL – attempting to regain upside move. $20.60 breakout.
  6. FDN – tech moving and internet is part of the move higher. Breakout at 67.70.
  7. FXI – China made nice reversal move on Friday and looking for the follow through upside. Got the move higher and watch how global markets react to the US.
  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.
  9. XLE Рenergy moved below support at the $80.50 mark and a breakout for the short trade in ERY. $18.25 entry point. $19.75 target. Watch how this unfolds with the negative sentiment building in crude short term.
  10. Downside risk is always present and we have to be aware of what is around us. The issues geopolitically, politically, economics, jobs, consumer, Fed, etc. The wall of worry is definitely in play… proceed with caution and know where the exits are in the event of a fire.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) index fell 1% and back below the $212 mark. Hit the stop on trade positions and keeping our stop on the older positions at the $204.50 level. Damage done on the day, but the trends are still intact on the upside. Watching… and letting it unfold patiently.

NASDAQ 100 Index (QQQ) held above the $109 support, but forfeited the nice gains. Keep stops at $104.40 on short term positions (3-9 month horizon).¬†Volume divergence to the trendline over the last two weeks.¬†That showed the downside selling on Tuesday. Jury still out short term… Micro term the selling was ugly.

Russell 2000 Index (IWM) The index moved back below the¬†$123.75 move. The¬†stop at $122.50 on trades taken on that move held barely. October trendline not recovered and that panned out to be a negative. Downside below $118.80 is stop on previous trades. Don’t assume anything as this unfolds.

Volatility Index (VIX) Was at¬†12.1 on the index showing¬†the lack of concern relative to the uncertainty in the markets. That changed on Tuesday with the jump to 14.5.¬†Now we see if the buyers step in on the dip?¬†VXX nice move off the lows, but don’t assume anything on the reversal… need to confirm the move and the anxiety are bigger than one day event.

Transportation (IYT) Closed below the $154 support to¬†end the week… followed through on the selling to start the week… 50 DMA crossed below the 200 DMA as technical sell. Is this a self-fulfilling prophecy?¬†Just study politics and you understand theory becoming reality.¬†Airlines and railroads have been weak link in the sector. Short trades are in play.

Dollar (UUP) shifted gears again back to the upside as worries in Europe return over Greece. Throw in some speculation about the global economies and the bond buying program in Europe. $25.10 level cleared on upside to the dollar. EUO nice trade follow through to short the euro.

Crude Oil (OIL) Selling is back as the worries over a stronger dollar and prices back above $60 did little to curtail production levels. Rig counts are down, but not showing enough decrease in supply to stimulate further buying at this point. Willing to watch and let it settle before making any decisions.

SECTOR STORIES: 

Alibaba (BABA) upside gap on earning is holding. Still plenty of debate on the outcome, but the consolidation on the move higher gives entry for trade at $88.60. Watching how it unfolds following the volatility. Breakout and entry at $88.60. Stop $90. Let it unfold. China is doing well and adding to the story line. FXI up 3% on Friday.

Regional Banks (KRE) – breaking higher from the trading range short term. $41.85 entry level¬†hit¬†and I like the upside if rates hold the move higher. $40.70 is the stop… Still not a picture of¬†strength short term, but we will let it play out.

Software (IGV) leading sector for tech. Watch the micro term pattern setups¬†as the break higher¬†for the sector and¬†moved above the $100 level.¬†Keeping the uptrend in play… manage positions. Selling Tuesday is to be watched and stops in place at $100.

Consumer Discretionary (XLY)  Need to hold support at the $74.50 level to keep the trend moving higher. Consumer is not spending (April report lower than expected and still no clarity for the sector overall). Sentiment is declining (consumer sentiment report May). $74.50 exit point on the downside.

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. Maintain longer term view for sector. Tuesday sold lower 1.1%?

Healthcare (XLV) РFound support at the $71.25 mark and cleared $73.25 resistance Heading towards new high as the confidence returned to the sector. Watching the selling on Tuesday? $73.50 needs to hold micro term. Short term $71.25 level to watch.

Bonds¬†(TLT)¬†We bounced off the $118.50 support last week? The upside follow through on Thursday would say yes… Watch $120.50 for upside trade. Hit the entry for trade and stop moved to break even on the move higher Tuesday.

Energy (XLE) Broke support at the $80.50 mark. Again the negative sentiment returns to the sector. We have not added positions yet, but we will watch for the next opportunity as this unfolds. $77.70 now the support level to watch.

  1. Tesoro (TSO) breaking through resistance at $90.40 and testing the move. Entry on test or $92 continuation upside (ADDED Monday). Stop at $88 and looking for target move of $104.
  2. BP РBounced off the January low and has been working higher. I like the move above the $42 resistance and the 200 DMA. This is a long term view for growth. If we hold support near this level ($41.25 adjusted for the move Tuesday) and moves higher I am willing to add the positions with a 18+ month outlook. 5.6% dividend payment. Nice follow through to the test and hold of support.

Retail (XRT) – Data isn’t helping, revenue, earnings, you name it has not helped build confidence in the consumer. Let it unfold… $99.60 is resistance… move back above the $100 mark gets interesting. Stock pickers sector as the earnings are hit and miss driving direction. Sold lower on Tuesday?

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.

Semiconductors (SOXX) this is still messy charts, but turning into a trading range and looking for the break higher ($96 for entry hit).¬†Manage the risk of the volatility in the sector. Watching how it plays out out to start the week. $95 stop on noise. Tuesday… held up better than the indexes on the selling… patience for now.

  1. INTC – $33.50 is breakout for the stocks and willing to add again for the upside move.
  2. NXPI – nice move to break from the trading range (entry $104.50) and test the March high. looking for follow through and opportunity. stop $101.

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