Sellers resume the first leg lower

OUTLOOK: February 9th

The first leg of the move lower is obviously not done after Thursday showed the sellers push to November lows and retest the resolve of the buyers. I am not surprised based on the activity Tuesday and Wednesday… the buyers never really showed any resolve… the sellers likewise didn’t produce a climax selloff. Was Thursday the answer to the climax selling short-term? Maybe. Watching how today unfolds and we may get some answers. I don’t want to beat the drum of the downside and don’t want to speculate… you can turn on the confused neurotic broadcast company (CNBC) if you need to hear any of that… I do want to look at the key level of support we are at on the close Thursday… I do want to see the volume on any buying and I am very interested in the last hour of trading daily to get a feel for what is taking place. With that, we move to Friday and see how this all plays out.

Thursday started higher, then forfeited the gains with some accelerated selling at the close. It was a negative day as it relates to the bounce off the low. Emotions remain in full swing with the VIX at 33.4 well elevated from normal levels. No sectors were positive on the day as money moved to the sidelines and the index tested the next level of support. The downside came from financials (XLF) and technology (XLK) giving up bounce on Tuesday and then some. The move didn’t follow through on the upside from Tuesday and keeps the direction clearly lower for now as the first leg of the downside unfolds. I remain cautious as it relates to adding new positions short or long-term based on the current activity. I have been around these types of moves and the scenario seems to repeat itself with different themes. We did add some short side trades on the move and will manage them aggressively as this move unfolds. The rebalancing of  ETFs and ETNs is causing some extremes in the last hour of trading. Watch your stops on this as it can create some false moves. We will always take what the market gives and exercise discipline in executing our trading strategies. The news is reactionary, beliefs are trend building… watching what belief rises out of the short-term activity currently.

The S&P 500 index closed down 100.6 points at 2581 and failed to hold above the 50 DMA as we test the next key levels of support at 2576. We have clearly closed the gap on the 200 DMA (2538) and could move below that mark with the current momentum. The chart is now in line with the long-term trendlines off the January/February 2016 low. The uptrend remains on the long-term charts and I state that as a matter of reference for this move as it impacts the short-term trend lines. This a balancing act for the irrational move higher in January.  For the day the upside was led by COTY (gap higher from reversal bottom), VIAB (gapped higher in the trading range), FISV (break higher from bottoming pattern), K (gapped higher in the current trading range), and CAH (attempt to bounce off lows). Technology resumed the downside along with energy impacting the index. The downside came from HBI, NLSN, KORS, GT, and NFX. There is still volatility in the broad index as the downside unfolds. The last ten days all the sectors are posting negative returns with energy, basic materials, and technology leading the downside moves. The last month is the same with the exception of consumer discretionary. Plenty to watch, listen and learn as this unfolds in the coming days.

Gold (GLD) continued lower after breaking support at $126.03 and watching $124.45 level and how this unfolds on the short side trade opportunities. There is some indecision in the metal near term as seen in the topping pattern. Held on Thursday… but not convincing. The dollar (UUP) worries abound, but it did manage to bounce off the current lows and establish a bottom reversal pattern. $23.65 level to watch for resistance. Treasury Bond yields moved to 2.85% and continue to rattle interest-sensitive stocks. Crude oil (USO) breaks support at $61.60 mark. This is the first negative sign from the commodity… dollar impact? The emerging markets (EEM) dump lower breaking $47.90 support and testing the November lows. The Volatility Index (VIX) closed at 33.4… still showing obvious anxiety present in the markets as money heads to the sidelines. There is plenty on the table relative to dynamics and agendas from the government, traders and investors alike, but the emotions injected into the markets now raises questions about the downside and the level of correction that will transpire and/or the opportunities that exist in the bounce and recovery. The economic data is lost in the news with positive results the last few days. It will play a role in the rebound when it occurs so don’t lose sight of the good in the bad. The goal is to manage money, not markets. Manage your risk and stay focused on the horizon, not the rear-view mirror.

(The notes above are posted daily based on the activity of the previous days trading)

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. The sector has taken on an emotional ride of ups and downs based on the current belief and market trends. Thus making it more of a trading sector than investing. The current move off the November/December bottom is testing with a move back to the $112 mark… which hit our stops on Friday. Entry $107, Stop $112.02 (Stop Hit). We watch and see what develops on Monday… in response to why not having tighter stops on this position… simply put volatility is higher in the sector and we need to give room… Bounced off the lows and back above the $107 support, but reversed and established a new low near term.

REITs (IYR) The sector broke the $79 level of support and continued lower. The rise in interest rates continue to worry investors and in turn, the selling has expanded. Entry at $75.75. Stop $76.25 (Stop Hit). SRS hedge entry $30.25. Stop $32.10 (adjusted) we added to protect our principle short term. The Break of $77 level was negative. We hit our stops intraday on Friday and we remain short with the hedge. We did collect the 4% dividend achieving part of the goal and if the downside expands we will gain our equity gain with this trade. Money management is key with all positions.  Below $75.75 support and watching. Hit stop and letting the hedge run its course. Modest bounce after early test lower. 

Treasury yields (TNX) moved to 2.85% last week gaining 20 basis points. That is enough to solidify the move higher in yields and the short side trades in the bond. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping, and neither is the comments from the new Fed Chair, Mr. Kaplan. Watching how this unfolds, but for now, rates have moved higher and the short side of the bond remains the trade with worries of yields rising further. TMV holding entry $18.50, stop $19.25 (adjusted). Watching how yields react to the selling? 2.85% and holding.

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last six months. The volatility of the trend is speculation and news driving money. The selling speculation on the Fed hiking interest rates broke the $120.45 support, but the weaker dollar led to the rise currently of the December lows. Entry $120.70, Stop $125.30 (Hit Stop). Long term view is positive and the short-term boost from the weak dollar is helping the commodity. There is plenty to account for relative to gold and the gold miners (GDX). Broke support and watching how downside unfolds today. GLL entry $67… watching $68.56 as next opportunity for short trade addition. Testing the move lower on Thursday. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $60 (adjusted). The price accelerated on a weaker dollar and remains in the uptrend… let it unfold and manage your risk. Some rattling about the price being overextended… let it unfold as the upside is still in control.  Broke support… watching how this unfolds. The dollar rally is impacting the psyche… if buck finds footing the downside would play out. Moved to the 50 DMA broke $61.60 support. 

Energy stocks (XLE) was stair stepping upside off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $72 (adjusted). We hit our stop on Friday as the price of stocks follows the market versus oil. Why? The simple fact that oil prices have stalled and investors are willing to lock in gains relative to the markets versus and underwhelming support for higher oil prices. It is simply a matter of choosing which speculation theme to follow. Reacting with stocks lower… watch the price of crude… it has moved to the 50 DMA. Broke the $67 level again and now it needs to bounce with some effort to hold or $63.72 is next. 

Volatility Index (VIX) The negative week for stocks pushed the index above 17.3 on Friday to close at the high of the week. The worries are building and they are speculation driven… the key concern is the volume of buyers backing away and the sellers taking control near term. Watching how this unfolds moving into the new week of trading. Watching how the anxiety unfolds the renewed selling? Close at 33.4 and looking at 27.5 as level of decision. 

The S&P 500 index closed the week down more than 70 points or 3.8% erasing nearly half of the gains for the year. The drivers last week were interest rates moving higher and supporting speculation the Fed would raise rates as well. That puts speculation in overdrive as the impact of higher rates will slow the economy initially as consumers have less spendable income. The belief is tax cuts will offset the loss and longer-term create a stronger economic growth versus the stimulus given by the government over the last eight years. All the moving averages were negative on the week and volume was above-average on the selling. There is plenty to ponder as we start the new week… not the least of which is the move in interest rates, the dollar, and comments from the Fed. The questions to ask, how low will the dollar fall? How will earnings impact the current leg higher? Will interest rates move to 3%? Will inflation raise its head to disrupt? We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Patience is required with this market overall as news leads the parade. Economic data remains mellow to start the year. Plenty of talk on the table concerning inflation as interest rates move higher. One day at a time is all we can do… Erased the gains and gave a half-hearted bounce and the selling resumes on the first leg lower. How this unfolds will be of interest for short sided trades. I don’t want to speculate or say I knew anything would happen… All I want to do and say is what is happening and how to navigate the market. Watching response to the current activity as we have defined the initial downside move. I didn’t expect the Tuesday bounce to hold but I did expect more effort from the buyers. The first leg lower has been impressive and now comes decision time as we hit key levels of support. Watching for bounce and some consolidation near the current low. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results: 

THURSDAY’s Scans 2/8: More downside following the bounce on Tuesday. This is not surprising, but it’s interesting that there was no real buying on this selloff. As stated yesterday the modest selling on Wednesday was a bad sign for the buyers and that held true on Thursday. The charts are now in correction mode. The push lower on higher volume shows the lack of interest from the buyers and the buzzards are circling. Take it one day at a time, but the bias is now on the downside.

  • NASDAQ – Broke 6793 support… 6601 could be the level of this leg lower? QQQ $149.01 target and short side trades are on with the move below Monday’s close $158.17. We hold SQQQ currently with a stop at $20.20.
  • S&P 500 Index – Sold lower as well breaking 2591. SPY failed to hold $259. Short side in play along with stops. Bounce is possible, but the reality of sellers remains in play. All eleven sectors closed lower on the day.
  • Small Cap Index – Sold back to the 200 DMA support. Testing the November lows. The short trade is in with stops at the $147.98 mark.
  • Technology (XLK) – Moved below the November lows. Semiconductors (SOXX) are leading the move lower equally testing the November lows. FB, AAPL, AMZN, NFLX, GOOG all leading the move lower and look ugly. TECS trade in play with a stop at $6.52.
  • Financials (XLF) – Moved back to the Tuesday intraday low and held. Not pretty as FAS trade came into view at on break below $27.70.

Bottom line the first leg of selling is not really over. Was Thursday the climax selloff we needed? Maybe. Do we get a real effort towards a bounce? Maybe. Do we know anything more after Thursday’s selling? No. Patience is the name of the game now as we let this all unfold.

We added some short trades, but the real push will be on the bounce and the next leg down.

WEDNESDAY’s Scans 2/7: Up and down day that closes negative and leaves the door open for more downside. Watching today’s activity for more data and input to the decision process. The scans show the indecision is alive and well along with the intraday activity. Down to up activity was expected, but the closing lower again states more downside could be the decision near term. Patience as today offers more data.

  • China (FXI/YANG) the chart shows the interest from the sellers the last two weeks. $5.13 is level to watch if the downside is to take root and offer trading opportunity.
  • Oil and Gas Exploration (DRIP/IEO) bowl bottoming pattern for the short ETF. $15.69 is level to watch for the trading opportunity if this unfolds.
  • Emerging Markets (EEM/EDZ) China is the driving factor for the sector and the volatility of the last four days isn’t helping. $9.14 for the short ETF is the level to watch. Don’t assume… let it unfold and present the opportunity. Leaders don’t die easy.
  • Natural Gas (UNG/DGAZ) sellers are still engaged with the entry at $24.50 we continue to manage our short side trade. Raise stop to break even on the trade.
  • Crude Oil (USO/SCO) first break of interest on the current uptrend. $22.40 entry on break. Downside needs to confirm, but the weakness in the dollar was the reason for willingness to take the downside trade. $20.15 stop on trade. Watching how it unfolds.

Other moves on Wednesday to watch… RUSS, DUST (added to the entry at $24.40), ZSL, TMV, WEAT, SOCL, and LABU.

TUESDAY’s Scans 2/6: Buyers step into the early gap lower. Take the markets on a ride higher for the day. Now comes the challenge… how does it unfold. Typically you get the bounce off climax selloff. Not sure Tuesday qualifies, but close enough. The test lower followed by a bounce and then a retest of the lows will set the stage. There will be plenty of opportunities as we go forward. Patience and strategy are the keys to finding the trades. Watching the scan list from Friday and Monday… watch how the broad markets react first then dig into the opportunities… Tuesday’s scans showed some other moves of note.

  • Brazil (EWZ/BRZU) Bounced to regain the losses from Monday… inside day and looking for the break upside from this move.
  • Homebuilders (ITB/NAIL) Tested the 200 DMA and bouned. Watching for upside opportunity to resume.
  • Semiconductors (SOXX/SOXL) Tested the December lows and bounced. $151 level to watch for upside trade as this unfolds.
  • Emerging Markets (EEM/EDC) upside bounce after climax selling. $139 level to clear on the upside.
  • Technology (XLK/TECL) bounce following test of the December lows. $116.20 level to clear on the upside.

Watching LABU, DUST, TQQQ, EURL, GREK, YINN, FAS, TNA.

There is plenty happening and willing to be patient.

MONDAY’s Scans 2/5: Selling accelerates and the buyers sit on the sideline. I am not going to try and rehash the warnings and the need for stops and, and, and… I only want to look at where we are and where we may go from here. My beliefs are simple at this point… evaluate how the buyers respond to the last two days of selling. If they don’t hold support, more selling is on the way. Take what it gives and evaluate each day looking forward. I am only looking at the broad index in these notes to give a broader perspective of what is taking place. There are plenty of short trade opportunities that set up Thursday and Friday. They have to be managed based on the move Monday… the bigger question here is what happens moving forward. IF you added short positions… adjust your stops, bank some gains, and manage the risk. 8% downside in five days presents the opposite risk of a bounce erasing those gains if you were short. Take it for what it is and manage your money accordingly.

  • S&P 500 Index (SPY/SPXS) Confirmed the downside move in spades. Broke $267.38 support. Erased the gains from January and then some. Short side entry hit at $274 and stop is now $268. Watching how the day unfolds with the futures negative.
  • NASDAQ 100 index (QQQ/SQQQ) $157.55 level to hold. Futures are below that currently. Short side trade $163 entry. Don’t chase the downside… let this test and fail for entry if you are not already in a short position.
  • Small Caps (IWM/TZA) $148 support. If it fails more downside to $144.60 and the 200 DMA. $154.90 short trade entry and risk of that trade needs to have a stop at $150. Let this unfold.
  • Emerging Markets (EEM/EDZ) Broke $47.90 support erasing the vertical move above that level. The downside risk remains, but looking for a bounce back from the emotions and then a resulting directional move.
  • Transportation (IYT) Broke $191.70 support and held at the $186.50 mark. A key sector for direction of the broader markets overall. Watching how it unfolds in this current selling. The sector was already moving lower… a good indication of what transpired.

Plenty to evaluate and plenty of damage to evaluate in the broad market as well as key sectors. I continue to dig through the rubble and look for the value and opportunity… up or down.

FRIDAY’s Scans 2/2: Sellers take control of the direction for the week and leave us with plenty of questions to ponder. Monday will key for the follow through if the downside is to accelerate. Evaluation of the bounce, if it happens, will be key relative to breadth and volume. Now is a good time to watch, listen, and be patient.

  • S&P 500 Index (SPY/SPXS) downside move of 70 points opens the door for sellers. Watching how this unfolds and what is leading the downside. REITs (SRS) and utilities (XLU) were the leaders for now. However, all eleven sectors lost on the week and it will evolve if the downside becomes the trend.
  • NASDAQ 100 (QQQ/SQQQ) cleared the $17.25 entry level for a speculation short trade on the index. This was on my watch list and I did add a position based on the technical move and sentiment. The bigger perspective is the large caps sold the most as they were the upside leadership. Watching how they progress in the coming week. $157.50 (QQQ) is the key support level to watch.
  • Small Caps (IWM/TZA) This was a laggard on the upside despite the modest gains in January. The drop this week erases the move above the key level of $155. The key level is $152.50 and a break lower would be a bigger negative for the sector. TZA hit entry at $11.42 on Friday as the bottom reversal created technical trade. We are watching how this unfolds near term.
  • Semiconductors (SOXX/SOXS) Broke the 20 DMA and $181.60 support levels. Still not in bad shape and watching how the leadership of this sector impact technology (XLT) near term. Not enough here to interest me in a short last week, but looking forward and watching the 50 DMA as a key level of support.
  • Treasury Bonds (TLT/TMV) interest rates move to 2.85% and cause havoc in the markets. This is a key example of how investors can override the reality short term. The economy is improving… interest rates should tick higher… except when the Fed intervenes more than it should. Thus, the delay in rates rising is now coming to roost (as my mother used to say.) I don’t expect them to fall unless the economic picture shifts to negative again. The last two quarters have seen 3% plus growth… that is a good reason for rates to rise. Watching and staying short bonds at this point.

Closes like Friday tend to cause havoc in the early week trading. Will there be a sympathy bounce? Will there be more selling? Either way, the likelihood of more downside is the greater probability moving forward. This is a time for caution and not speculation. The trend will validate and the opportunities will be clear. Patience, however, is the key.

 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation: 

  • XLB – Materials topping pattern breaks lower hitting our stop and threatens the trendline for the sector. $60 is the next level to watch on the downside and the trend needs to hold that level to remain in place short term. Erased December and January upside testing the November lows. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. Now that rates are pushing above 2.85% look for more pressure on the sector. Looking for support and the next opportunity as the fear evaporates and reality settles in. Erased the bounce off $50 and tested it again on Friday… breaks lower from the bottom range and added to the fall Thursday. Looking for support again. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Some consolidation. The bounce was positive and we added a position on the upside move… $28.55 entry. Stop break even $28.55 (Stop Hit). Stalled at the $29.50 level of resistance in a trading range the last nine weeks.  Broke lower from the trading range and now below the November lows.
  • XLP – Consumer Staples remain in an uptrend despite the dump lower on the week. Not pretty and it closed at support as one of the downside leaders for the week. Entry $54.80, Stop $57.25 (Stop Hit). Let it unfold and then we decide any action to take moving forward. Downside move was ugly and tested support and bounced one day and back to the lows. decision time. 
  • XLI – Industrials moved higher and they accelerated to a flag pattern… which broke lower on Friday… watching how the week starts with our stops in place. The long-term uptrend remains in play. Stop at $77.50 (Stop Hit).  A big move lower and tested support again?  
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. The cards have been dealt a straight with the climb higher as a result of the rise in crude oil. Entry $65.20 with a stop at $72 (Hit stop). Divergence in oil prices and stock prices again as the speculation in stocks overall is pushing them lower. Watch and see how it unfolds. Sold back to $67.75 support and bounced… sold below $67 and now decision time for the sector as it breaks key support. 
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 bounced and followed through on the break higher. Entry $83.85, Stop $87.75 (Stop Hit). Last week it moved lower as the sellers took control. Watching how it unfolds and the next opportunity in the sector. Sold back to the November lows and watching how this unfolds. 
  • XLK – Technology breaks the flag pattern lower on Friday. The uptrend is still in play as we watch to see how this unfolds. Entry $48.50. Stop $65 (Stop Hit). Semiconductors (SOXX) created some angst last week with the selling below $181.60 support. Watching how the parts unfold near term. Sold back to the November lows and bounced. Needs to follow through. 
  • XLF – Financials remain in an uptrend as money flow remains positive in the sector. Moved above the $28.25 level adding upside and current trend. Entry $26.40, Stop $28.75 (Stop Hit). Interest rates benefit the sector on a move higher… but, too much and it will act as a negative for the stocks. Watch how this unfolds. Sold back to the previous lows at $27 and decision time for the sector. 
  • XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $104 (Stop Hit). For all the positives the sector has offered over the last three months it is now decision time for traders. Speculation on interest rates, dollar, and spending impact the sector. Sold back to the breakout at $99 again to retest the lows. Today is important to the chart. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. The longer-term view clearly shows the trading range and the move near the December 2016 lows as support. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. This is a sector to watch relative to higher rates. Broke lower and bounced… sold lower, short side still in play. 

Finished the week with the S&P 500 and NASDAQ indexes forfeiting nearly 1/2 of the gains for the year. The market environment is volatile with speculation on many fronts impacting the near-term direction. Last week interest rates move to 2.85% was enough to ruffle some beliefs and the sellers took over. As a result, stops were hit, stops adjusted and views questioned. We have been taking some money off the table as it relates to specific positions and activity. We keep some invested and let it run, but hit stops on Friday for many of the remaining positions. Our mindset is one of risk management as we look for the next opportunity. Some rotation into safety and cash last week. The outlook is patience to let the next opportunity unfold along with the short-term trend. The sellers had the upper hand last week and now comes the decision point with a follow-through move. Eight sectors are trending higher, two trending lower, and one moving sideways… The moves last week put all of that in question and we will watch patiently for confirmation of bounce. We have to remain disciplined in our approach to investing our money. The goal is risk management as the story-lines continue to unfold. Charts reflect the damage done the last week. The sellers are in control for the first time in several years… what direction they take this is now in their control. The negatives to investors now outweigh the positives… psychologically. The emotions are high with the VIX well above 30 and volume on the selling well above average. We do have some short side trades and we will manage them aggressively relative to the activity. Patience as the next trend is being defined. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Downside week for the market raises questions. Traders are driving the short term swings and opportunities with news as the catalyst along with a pinch of speculation. The week was filled with questions, speculation, and selling overall. Volume was above-average with the selling accelerating on Friday. The focus remains on the impact of the tax cuts, earnings, and interest rates. The speculation relative to the highs being to0 high to continue became a self-fulfilling prophecy. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. Positive employment data Friday was lost in the speculation relative to interest rates. The market trades looking forward and evaluates based on past data. They ignored one piece of data in exchange for another that led to the selling. There are plenty of short-term trading speculation I have little interest in, but the long-term remains in an uptrend overall. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly. 

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.