Research Outlook for Week of August 24th

MARKET OUTLOOK:

What week for investors as the saw the bid/buyers disappear and the market indexes essentially go into a free-fall. The bigger question; is it justified? Will it continue? Is the negative sentiment sustainable? There are all kinds of opinions on this matter, but the reality lies in the forward outlook and belief. That outlook shifted this week with the FOMC minutes and China. The belief is turning towards no rate hike, slower than anticipated growth globally, and the ripple effect to the US economy negative. Throw in the further drop in oil and the markets dive lower.

The S&P 500 index lost 5.7% on the week. The Dow was down 5.5%. NASDAQ off 6.8%. Russell 2000 lost 5%. Put this in perspective to the analyst comments last week that the market would not see a 10% correction in 2015. That may still be true, but this week put some fear into investors and that could be a bigger negative than anyone measured as possible.

As you know I am not good at nor do I like speculation. What I know from past experience is protect your principle in the event that the unimaginable happens. I would classify Thursday and Friday as unimaginable 10-20 days ago by many investors. One thing is certain… the market (being investors) hates uncertainty and when that is expanded upon like the FOMC and China events, investors tend to sell first and ask questions later.

I stated on Thursday’s post:¬†The question now is how low do we go? 1973 is logical from my view. The truth will be in what investors believe now. Do they believe things are getting worse? Is this just a temporary move based on mounting fear and the buyers step back in? All good questions, but I am voting on the downside and have been since the test of the 2042 level in late June. It takes time for the trend to shift when you have the Fed on one side and the facts on the other. Easier to believe the Fed. Downside is in play.¬†We closed Friday at 1970. Now watch how we open on Monday.

I like to measure the market by tallying the trends of the ten sectors for¬†S&P 500 index. The shift has been interest this week which started with five downside, four upside and one sideways trend. We end the week with seven down, one¬†up and two sideways trend (micro term – 0-13 weeks).¬†This clearly puts the downtrend in play short term or the sellers have control of the direction. After Friday it would take a significant sentiment shift to right the ship near term. Based on the data there isn’t anything on the horizon with a catalyst big enough to change it near term. But, we still have to be aware of a possibility arising.

Europe (IEV) sold lower 6% for the week. China (FXI) fell 9.3%. Emerging Markets (EEM) fell 7.6%. Japan (EWJ) was off 7.3%. The global markets continue to put pressure on the US markets as the outlook remains weak economically around the world.

Commodities are challenges by all of this as seen with crude oil (OIL) down 5.7%, base metals (DBB) fell 2.2%, and accelerated gold (GLD) rallied 4%, Silver (SLV) up 0.1%. The precious metals took on a role of alternative asset. Others continue to decline on the negative outlook.

Running the scans shows¬†the acceleration in the short side trades with the inverse ETFs dominating the results for Friday¬†and the trailing ten trading days. The results¬†shift to the downside and put the sellers in control… for now.¬†This week will be of interest relative to how it plays out.

We are heavily allocated in cash with the moves lower hitting stops. We posted short opportunities in the trading notes for those willing to accept the higher level of risk. The key is having a disciplined approach as it takes the guessing out of the equation and allows you to implement based on what is happening and managing the risk of the markets currently.

Being in cash is not a bad thing! Holding cash as this unfolds is not a bad thing. Staying focused and disciplined is the key going forward. Patience please.

Monday will set the tone for the trading week and we will be there watching as it unfolds.

NOTE: The following are things to watch and evaluate as we progress forward.

  1. Markets dump lower on the week. We added the short trades and we watch to see how this unfolds going¬†forward. Monday is a key for how it unfolds moving forward. Do the buyers step back in or has fear taken control?¬†Still expecting some buying at one point. Never showed up on Friday as the¬†VIX jumped to 28.¬†Fear could¬†lead to more selling as it did on Friday… thus, we watch.
  2. Treasury Bonds (TLT) rally as the rates decline on more speculation with China and the Fed.¬†The resistance at the 200 DMA cleared with the help of the selling last week. The consolidation at this point is holding the upside move off the July lows. If it reverses on belief the Fed doesn’t hike rates¬†could rally further for now. Watch and be patient.
  3. VIX index (VIX) hit the highs from January. I would expect some relief soon and a move low in the anxiety. SVXY offers the trade against the move lower in volatility. Trade setup would be test of the $69.30 support and reversal. Entry would be $72.70. Be patient and look for event to create tradablity of the VIX.
  4. Natural Gas (DGAZ) short natural gas is setup to break higher from the consolidation pattern. $6.20 entry for the trade. Trading in sympathy with the other energy commodities.
  5. REITs (SRS) short REITs ETF made a reversal as the selling accelerated in the sector. Entry would be move through $50.85 level.
  6. Municipal bonds (MUB) at breakout level of cup and handle pattern. Watch $109.30 entry mark.
  7. Homebuilders (ITB) it is of interest on the test of support at the $28.35 mark. Sold in sympathy with the broad market indexes. Watching to see if the upside returns or more selling? Willing to add on the test of support.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) Broke below 200 DMA$206,¬†$204.40 and $198.50 support levels. The¬†triple top and wedge consolidation technically showed the downside break then acceleration confirming the move lower. The close on Friday brings the $190.25 level of support into play? It ain’t pretty, but sell offs like this never are. Watching and managing the short side trades.

NASDAQ 100 Index (QQQ) Equally ugly broke 200 DMA, uptrend line and $106 support. The next level is $100.50. This is not a pretty picture technically and it will take some hard work for the downside to stop at this point. Manage the short positions and look for a catalyst or reversal moving forward.

Russell 2000 Index (IWM) Ugly is the one term that comes to mind for this sector. $118.80 support, 200 DMA and confirmation of the downtrend line short term. The downtrend line remains in place off the June high. $113.50 is the target or support level now. Manage short positions if you added and let this unfold for now.

Volatility Index (VIX)¬†Thursday I stated it could challenge the 23.5 level from January… close at 28. That should put the fear escalation in perspective as well as the power of fear in the markets. I would expect some easing on the climax run higher Friday. SVXY could offer trade for those willing to take the risk.

Transportation (IYT) So much for the bounce off support! Sold back below the $143 support and $137.70 next level to watch. Downtrend still in play. Oil, global economics and the dollar are playing hell with the sector outlook.

Dollar (UUP) Broke support at the $24.80 mark. Remains in the sideways trend, but trading near the low end of that range and testing. Closed below the 200 DMA and I am  sure major corporations and export related businesses are happy. The dollar index fell below 96 and near the 200 DMA. Watching how this unfolds in light off everything that transpired last week.

Crude Oil (OIL) Crude continues to be downside bias commodity. Closed Friday at the $40.29 mark and could test the 2009 lows. Still no signs of recovery in the technical or fundamental data. Watch for a base to be built first and then any trade resulting. Short trade remains in place.

SECTOR STORIES: 

Biotech (IBB) broke support at $368 and testing $339.50 support. Broke the short term uptrend and the 200 DMA. Can if bounce back? Possibly, but we took the downside trade last week and we will manage the outcome going forward. We are looking for the downside to unfold and take the trade if develops. BIS entry is $29 (Hit on Thursday). Stop $30.90 currently. 

S&P 500 index (SPY) short side trade set up. $206.50 entry point for the short side. SPXS $18.25 entry. Added on Thursday and stop is $19.25. Raised the stop and watching how this unfolds.

Russia (RUSS) short side trade is consolidating and in position to break higher. $42.10 is the entry if the breakout occurs near term. Hit the entry with the move higher in the short ETF. Oil prices continuing to weigh on the country as well as currency currently. Stop at $47.55. Raised stop and watching how it unfolds.  

Europe (IEV) sitting on support at the $43.75 level. A move lower sets up the short side trade. EPV entry at $53 if the support gives way to move lower. Stop $55.70. Raised the stop and watching how it plays out.

Semiconductors (SOXX) broke $87.20 support again and looking for a base to build if this is going to bounce. If the downside accelerates the short entry is $84.70. SOXS $57 entry. HIT entry. Stop is $67.75 for now. Raised the stop and managing the risk. 

Housing (ITB) Nice break from the consolidation on the upside. Investor stuck their noses up at the worries over the Fed hiking interest rates. Test of the $28.35 level would offer a reasonable entry point if it continues to gain momentum.  $28.50 entry. Stop $28.50. Uptrend breakout reversed on the broad market selling.

Gold (GLD) the metal has been pushing higher as the uncertainty surrounding the yuan and China’s actions. Take it for what it is… a trade opportunity going forward. Hit the entry at $105.65. Resistance at the $108.40 level ahead cleared. Testing the big move higher could happen this¬†week. Raise stop to $$108.50. Manage the risk of the trade short term.

Crude Oil (OIL) Short trade remains on with the downside in place. SCO at 88.90 entry on renewed selling. Sellers remain in control of the commodity with break below the $43 mark on crude. Stop $114 adjusted. Watching how it starts the week. 

Utilities (XLU) Not an exciting sector, but one that is paying a 3.7% dividend and offers some upside as all the noise around the dividend stocks subsides. Entry $43.50. Stop $44.75. Trending higher and we will watch the outcome. Testing the 200 DMA on close Friday. 

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