Research Notes for May 8th

MARKET STORIES:

It is only fitting that a company named Alibaba gets credit for turning the futures around on Thursday morning with better than expected earnings. It was like they pulled a genie out their… hats. Pure magic. Crude fell 3.2%, treasury yields receded from the rapid assent the last two weeks, and the economic data continues to show modest improvements for April. All is good in the wonderful world of Oz.

Stemmed the selling at least for the moment¬†on Thursday. Still not out of the woods and the market does lack clarity. Until this improves we will continue to bounce in both directions without much in terms of accomplishments. Today is the last trading day of the week… the focus is pre-market with the jobs report. A weak number could be a positive for investors as the belief is the Fed will hold off on raising rates. All said, we continue to practice patience and raise cash as stops are hit. We are not deploying much as the risk/reward relationships is too cloudy for my taste. There will be plenty of opportunities as we move forward. Sticking with the theme of one day at a time.

It is important to note that the charts are not in bad shape. The major indexes are struggling, but there are sectors and stocks in good positions to continue higher. The talking heads like to get into our heads and that is the challenge. Clear your head, look at the facts and let the charts decide how this unfolds. We have cash as a result of hitting stops and that will allow us to take advantage of the opportunities presented.

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 $59 on Thursday as supply worries return. The upside in oil resumed last week¬†and¬†broke to take¬†the next leg higher (double bottom pattern). Entry was hit and stop was hit two days later… that is what I mean by risk/reward.¬†Watching the downside now.
  2. Treasury Yields (TYX) thirty-year bond jumped to 2.98% Wednesday and back to 2.9% on Thursday … TLT broke the¬†downtrend line. Shorts (TBT) remain in play and managing the stops. Watching how today responds to the move lower in yields… jobs report will play into the decision today.
  3. Energy (XLE) needs to resume the break above $82.50 on XLE after the test lower the last two days.¬†Didn’t get it as oil prices declined on Thursday. Tested $80.50 support and watching downside risk.
  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 and bounced Thursday.¬†Jury still out as we watch for upside to continue with our stops in place.
  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 with small bounce on Thursday. Short trade is still a consideration (SOXS). $12.20 entry. Upside SWKS, NXPI, SUNE.
  6. Base Metals (DBB) breakout and momentum in the metals micro term (0-13 wk). Big follow through on the upside and testing the last two days. Momentum has been solid, but keep your stops near the 200 DMA if this reverses and the sellers return..
  7. Retail (XRT) weakening sector… but bounced, then 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. Small bounce Thursday in the sector.
  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 above $350.
  9. Small caps (IWM) Broke the trendline off the October lows.¬†If we find support and reverse the selling could offer upside trade… if not the next support is $118.80.
  10. Volatility index (VIX) held at 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 and holding. 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 holding¬†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… jobs report in am.

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. Sold lower through the $24.88 level and 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 to support with a gap left behind on the way up… watch to see if it fills the gap? 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 $59. Big upside move early on Wednesday failed to stick with more selling on Thursday. OIL hit entry at $12.15. UCO at $9.45 entry and stop. Out of our trades and watching again.

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. Hit $80.50 support level and stop. watching.

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. Adjust your stops to manage risk of rally in jobs report for bonds.

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. move stop to $16.30 on DBB.

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

Unfolding Stories in Sectors Currently:

Emerging Markets (EEM) Topping and broke support of $42.50 as sector gives way as selling. If downside gains momentum we will look at the short side trade. Watching today how it unfolds.

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.