Research Notes for May 6th

MARKET STORIES:

Markets turn lower again after one day bounce. The sellers are still willing to engage, but they lack conviction as much as the buyers. It is time to step to the side and let this unfold short term. The volatility and uncertainty are enough to raise the level of frustration on short term trades. Longer term holdings are fine as the story unfolds. Give room and set the downside risk limits, otherwise play some golf or travel.

Some rotation to the value side of the equation as well as the large cap stocks. The Russell small cap index forfeited the leadership last week and growth sectors like technology have struggled on earnings coming up short in the internet, social media and internet¬†stocks. It is still undecided what the outcome will be and thus… let it unfold and take what the market gives.

Economic data for April has been on the positive side for now and we will see if that changes anything going forward. Jobs report out on Friday and it will keep it interesting depending on the outcome. Again news is driving more than than conviction about direction.

The dollar is attempting to bounce off support again, but at best has just stemmed the selling short term. The new currency wars are a race to devalue currency as a form of stimulating the economic picture. Never has worked, not likely it will start now as a sound strategy.

The trade deficit surged thanks to big imports and that could reduce the already pitiful GDP report for Q1. Bonds sold for the seventh day and this could get worse before it gets better short term.

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

  1. Crude Oil (UCO) the upside in oil resumed last week¬†and is now in position to take the next leg higher (double bottom pattern). Watch for the entry if we break this resistance point. Opened higher on Tuesday and held the breakout… added and looking for upside as this unfolds.
  2. Treasury Yields (TYX) thirty-year bond jumped to 2.9%¬†… broke the¬†downtrend line and is pushing¬†rates even higher as a result of¬†the news from the FOMC meeting. TMV, TBT, TBF… short bond is playing out as noted.
  3. Energy (XLE) needs to¬†break above $82.50 on XLE is a positive. Looking to add to positions if we confirm the break higher. Gave up the move on Tuesday… despite oil prices moving higher… fear creeping in the broad indexes near term.
  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. Tuesday tested the $98.50 support levels.
  5. Semiconductors (SOXX) bounced off the low and acts like it wants to now move higher (Monday). The charts are still a mess, but we have to go with the results… patience¬†going forward. Tuesday sold lower and testing the $92.50 support? short trade is still a consideration (SOXS). $12 entry.
  6. Social Media (SOCL) weakening on FB and TWTR earnings testing lower… LNKD missed as well… is there a bounce in the sector or more downside to come? holding on Monday… lower on Tuesday… short setup?
  7. Base Metals (DBB) breakout and momentum in the metals micro term (0-13 wk). Big follow through on the upside gaining 1.7% and heading higher for now.
  8. Retail (XRT) weakening sector… but bounced Friday? Follow through anyone?¬†Tuesday returned to selling? Still weak outlook on the retail side. ¬†Be patient and let this unfold further.
  9. Biotech (IBB) sold off last week and then managed to recapture the previous support, but failed to hold it on Tuesday. $334 exit and short trade setup short term.
  10. Small caps (IWM) looking for bounce back into the trend. Failed again and sellers are taking control as money rotates to safer ground. $118.80 target.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) the index has took on volatility as it struggled to hit new high. Hit stop on Thursday at $209 only to watch it bounce back to the $210 mark on Friday? Held above the $211.60 mark on Monday only to retreat again on Tuesday. Can we just say that defines indecision and the current attitude of investors?  It will require some upside conviction that is still lacking to get the investors interest. Short side still watching as well. For now we will breath and watch.

NASDAQ 100 Index (QQQ) Broke back above the $109 level again? The index is struggling with earnings from FB, TWTR, and LNKD short term selling? Could be a test of the next level of support type trade, but the longer term trends are still in place. Needed to move back above the $109 mark if the upside is to rectify the damage. attempted in on Monday… gave up the gains. continued to give up the gains on Tuesday down 1.6%.

Russell 2000 Index (IWM) The index broke down week and bounced on Friday and early attempt to continue higher on Monday before giving up most of the gains. Testing the trendline and broke below it last week and remains below it now. Moved below the next support level of $121.24  and $118.80 is next.

Volatility Index (VIX) Intraday volatility is the new game in town. The close puts the index at 14.3 which is still in the relative range, but the upside may gain some traction as the sentiment shifts. Close above 14.75-15 level would be a negative for the broader indexes especially if the fear factor steps in.

Transportation (IYT) Transports need to move higher if the broader index is to sustain a move higher.¬†They moved back above the $157.50 mark Monday and Tuesday closed at the¬†$154.12 level. Still hanging in, but acting like the broader index and not showing any direction or conviction… just indecision.

Dollar (UUP) is shifting gears on the downside with the break of support. Why the shift in sentiment? Speculation about the global economies looking better than the US. Oil moving back above the $60 mark. Bounced on the $24.88 mark Friday and held to start the week.

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

Consumer Discretionary (XLY) attempted to break higher, but remains in the trading range for now. Some leadership in the sector would go a long way to helping the broad indexes. Need to hold support at the $74.50 level (held last week) if the upside has a chance of keep the trend moving higher. Consumer is not spending and it is showing in the retail data. Clear $77 on the upside.

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. Down 3.5% on Tuesday as indecision and news sours investor appetite for risk.

Russia (RSX)¬†Showing some topping currently and testing the resistance of the 200 DMA as overhead.¬†$18.75 support. $18.70 stop. Patience. Up 1.7% as crude climbs higher Tuesday… let it unfold an keep your stops in place.

Emerging Markets (EEM) Topping and under watch after hitting the stops last week. support is $43.60 and break would be $41 next. upside needs to clear the $43.75 level to gain enough confidence.

Crude Oil (OIL) The break from the trading range bottom above $53.85 remains in play with oil closing at $60.72. Currently  there is more speculation than logic as the rational and justifications are pontificated. OIL hit entry at $12.15 Wednesday. UCO at $9.45 entry. Watch the news around the fracking companies they may be back in play on the rise above $60 and speculation.

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, but failed to hold it despite oil prices rising. Move has been the¬†value buyers stepping in and the stall is the lack of traders interested short term. Do they step in now…¬†$80.50 support level and stop.

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. Manage risk of the trade as yields are rising towards the 3% mark on the 30 year bond.

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. Looks solid for now with solid move higher on Tuesday.

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

Unfolding Stories in Sectors Currently:

Retail (XRT) – the consolidation at the highs showed¬†some weakness and¬†it broke support ($100.25).¬†Data isn’t helping, revenue, earnings, you name it has not helped build confidence in the consumer. Bounce off the low is in motion and $100.25 is level to clear for the short term.

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.¬†Need to break the downtrend line off the February highs. Attempted on Monday, but failed to hold.

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. Still leaves the mess in play as traders are not in sync.

Healthcare (XLV) РFailed to reestablish the previous leadership. Downside did some damage to the chart and watching to see how it unfolds. Found support at the $71.25 mark  and bounced and sold. Negatives from all sub-sectors as well. Biotech (IBB) did the most damage and the pharma (XPH) added to the downside as well. Letting it unfold near term for direction.

Utilities (XLU) building bottom and still in trading or bottoming range… watching how it reacts to overall markets. Big negatives on Tuesday down 2.2% and keeps the index trapped in range. Break from range will define the outlook and direction near term.