Research Notes for May 7th

MARKET STORIES:

Ms. Yellen gets some credit for turning the markets lower following a higher open. The Fed Chair turned stock analyst on Wednesday and that rattled what little confidence there was in the markets. Throw in a not so great ADP private-sector jobs report and you get the emotions of investors stirred enough to prompt some selling to the next support levels. Of course the last hour of trading brought the buyers back and the indexes managed to cut the losses in half before the close. Does this suggest the buy on the dip campaigners are alive and well? Today will validate what happens short term.

Rotation remain a buzzword… unfortunately on Wednesday money was heading to cash as both stocks and bonds sold lower. This reflects the interest rate fear being generate by the Fed over pushing rates higher and withdrawing more of the stimulus currently still in place. If this rotation to cash continues it would be a negative for the markets short term and we would want to protect against the risk it presents.

The dollar broke¬†support again at the $24.88 mark on UUP. The dollar index broke support at the 94.50 level. Downside in the buck is creating a trend reversal and the implications that go with it are fully in motion. The currency wars are a race to devalue currency as a form of stimulating the economic picture globally now. Never has worked, not likely it will start now as a sound strategy. ¬†It is however, inflationary in nature… watch the commodities as a possible benefactor.

Tuesday the trade deficit surged thanks to big imports and that could reduce the already pitiful GDP report for Q1. Bonds sold for the eighth 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) hit a high of $62.83 on Wednesday and closed at $60.64. The upside in oil resumed last week and broke to take the next leg higher (double bottom pattern). Entry was hit and the volatility from the equity markets ensued. Manage the position relative to the volatility.
  2. Treasury Yields (TYX) thirty-year bond jumped to 2.98%¬†… broke the¬†downtrend line and is pushing¬†rates even higher as a result of¬†the talk¬†from the FOMC heads. TMV, TBT, TBF… short bond is playing out as noted.
  3. Energy (XLE) needs to resume the break above $82.50 on XLE after the test lower the last two days. Looking to add to positions if we confirm the break higher. Gave up the move 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… watching to see how it unfolds going forward. Wednesday¬†tested the $98.50 support levels. Need to upside validation for the trend to continue higher.
  5. Semiconductors (SOXX) bounced off the low last Friday and acted like it wanted to move higher. The charts are still a mess, and the bounce sold back to support at the $92.50 mark. Still in the process of testing the $92.50 support. Short trade is still a consideration (SOXS). $12.20 entry.
  6. Base Metals (DBB) breakout and momentum in the metals micro term (0-13 wk). Big follow through on the upside and heading higher for now with test on Wednesday.
  7. Retail (XRT) weakening sector… but bounced Friday? Follow through anyone?¬†Tuesday returned to selling? Still weak outlook on the retail side and testing support at the $96.25 level. ¬†Be patient and let this unfold further.
  8. 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. If support holds worth looking at the upside trade.
  9. Small caps (IWM) Broke the trendline off the October lows.¬†If we find support and reverse the selling could off upside trade… if not the next support is $118.80.
  10. Volatility index (VIX) rose to 15.1 as investors remain modestly nervous and the outlook is uncertain relative to direction. We will watch to see how this unfolds. VXX trade above $22 is of interest.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) the index took on volatility as it struggled to hit new high. It remains in the trading range and to this point no real damage has been done. The noise is louder than the activity for the index. Technology, telecom and utilities are leading the push lower, but we are going to remain cautious and look for the next opportunity going forward. Short term position stops remain $204.40.

NASDAQ 100 Index (QQQ) moved to the $106.70 support on Wednesday. The index is struggling with earnings from FB, TWTR, and LNKD and short term selling in technology and biotech. Could be a test of the next level of support type trade, but the longer term trends are still in place. Patience and stops at $104.40 on short term positions.

Russell 2000 Index (IWM) The index broke¬†below $121.20, tested for two days and is still near that level of support for now. October trendline is broken on the downside. Watch and see how this unfolds… bounce and/or reversal could produce an opportunity… downside below $118.80 is short look.

Volatility Index (VIX) Intraday volatility is the new game in town. The close puts the index at 15.1 which is still in the relative range, but the upside may gain some traction as the sentiment shifts. Confidence is shaken by the Fed and the uncertainty with economy. Watching to see if the fear factor comes into play near term.

Transportation (IYT) Transports need to move higher if the broader index is to sustain a move higher.¬†They have now established the $154 –¬†$157.50 range currently.¬†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 break we are out of the dollar. The impact to the commodities and other issues is worth tracking.

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

Consumer Discretionary (XLY)  Need to hold support at the $74.50 level if the upside has a chance of keeping the trend moving higher. Consumer is not spending and it is showing in the retail data. Clear $77 on the upside.

China (FXI) Testing the move higher with more selling hitting our stops at $49.50. Upside remains in play, but there is still plenty of speculation on the horizon. Down 5.5% last two days with indecision and news souring investor appetite for risk.

Russia (RSX) Broke higher on Tuesday, but the reversed after big open on Wednesday to give up the gains. $18.75 support. $18.70 stop. Patience and what how it unfolds today.

Crude Oil (OIL) The break from the trading range bottom above $53.85 remains in play with oil closing at $60.38. Big upside move early on Wednesday failed to stick, but the upside is still in play. OIL hit entry at $12.15. 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… 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:

Emerging Markets (EEM) Topping and under watch after hitting the stops last week. support of $42.50 gives way as selling continued Wednesday. If downside gains momentum we will look at the short side trade.

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.¬†Could set up reversal back to the upside or short trade on break of $96.50 level.

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.

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.