Selling without conviction… cliff holds off buyers

Wednesday – Notes & Research

Markets creep lower on continued concerns relative to the fiscal cliff. That seems reasonable when you consider the focus shifts to the Senate and 60 votes to avoid a filibuster and pass some type of scaled down version of a budget plan. The President and Harry Reid are working on  scaled down plan to avoid the cliff. This is all getting to the point of frustration for both Wall Street and Main Street. We have to take a wait and see approach as we inch closer to the cliff.

Below I cover the movers for now and the balance of our outlook.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index breaks the 1430 support and moves to 1420? A move below 1413 would impact the current trend by establishing a lower high. Or simply put the string of higher lows would be broken and the uptrend would be in question short term. It would also break the 50 day moving average.

Investors are still looking for some answers relative to the cliff, but that is becoming a bigger obstacle than originally thought. The first two days of the Santa Rally haven’t been good and we look to the balance of the week to provide some answers.

The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. The leaders have been financials, consumer discretionary, energy and technology. Today the leadership is being questioned as the downside remains for the third straight day. Consumer Staples and Utilities are leading the downside move. Basic Materials made a solid move higher on the day as crude oil pushed above $91 per barrel. Downside is starting to build a following and we added SH to our S&P 500 Model today. Watch and manage your risk short term.

The VIX index jumped above 19 and held today. This is a big negative for the index and shows the current anxiety building from investors. VXX gained more than 5% on the day. The clear break higher is a negative sign for stocks and something we have to watch looking forward.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index – Stalled in a trading range of 3030 on the upside and 2960 on the downside. The attempted move higher last week was negated by the move back into the trading range. Still not certain about the near term direction on the index. The downside risk remains in place, but let it confirm to the downside for now.

Dow Jones 30 Index – Similar to the NASDAQ the index tested the top end of the trading range at 13,300. The support is 13,080 short term. Watch to hold support as we test near the lower end of the range today. The industrial stocks are still tops on most investors shopping list. Watch to the pullback as a potential opportunity…

Small and Midcap Indexes hit stops last week and we are still interested in the upside, but for now they have to hold support and make an attempt to offer some upside leadership.

Financials – XLF made a solid move higher support at $16. The upside remains in play as we attempt to move above the September high. Banks (KBE) are key to the catalyst and are testing the gains from last week. Exited to protect gains on Friday, but the upside is still in play. Looking for re-entry if the upside resumes.

Basic Materials – XLB made a solid move back to the $36.85 resistance. Tested the $36.80 support and bounce back near the high on Wednesday. The outlook is positive, but the risk is high overall.

2) Currency:

Dollar – Downtrend remains in play, but a bounce off the low has my attention short term.


Euro – The euro breaking above the $130 resistance mark on FXE. Testing the $130 breakout on Friday.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds – The yield on the 10 year fell to 1.75% and the 30 year to 2.92%. The downside risk in Treasury bonds remains, but you have to respect the current fear factor. TLT broke support on the downside, but bounced back to the $122.50 level.

High Yield Bonds – Testing the highs and resistance near $94 on HYG, but the selling started along with stocks. Look for support at $92.75 for now.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. Look for a bounce off the lows near $18.70 short term? We did get a small reversal, but it is now set up to rise higher. Watch for upside play on a move above $19.75? Testing lower again.

OIL – Oil has been stuck in trading range, but on Wednesday moved above the top end of the range to $91. Still looking for clarity in trading relative to the price of crude. The upside is in play,  but there is still not any conviction. The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70.

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. This is not what many expected, but the bounce and move has been a solid trade short term.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months. Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds. All of this is finally setting up on the down side for gold. GLL moved above the $62 entry point and holding. Got the break lower Thursday and set up a possible short play in the metal. The bounce off the selling is now in the third day of attempting to move higher? Watch the downside play opportunity.

Silver – Short play continues to do well with ZSL. The downside momentum has stalled and the support at $29 is holding on SLV. Raise stop and manage the exit.

DBB – Base Metals failed to hold support at $19.10 after a positive move on the upside. This is an interesting development after the move in Steel. SLX has been the trade on the upside along with the mining stocks in XME. Watch the overall move in the based metals, but take the play in the leaders. The bounce keeps this interesting for now. Watching for plays in the sector.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. Setting up to break higher today.

WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now as it holds support.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range is a positive with a trade entry at $33.25. Manage your risk and raise stop to $35.40. Falling yen is driving the stocks higher.

WATCH: FXI – China gapped higher followed through on the upside. Clearing the $38.10 resistance on FXI. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage your downside risk.

WATCH: IEV – Europe continues to rally despite all the negative economic reports and sovereign debt issues looming. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently and putting a target of $45.60 on IEV.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.

WATCH: IYR – Look for reasonable entry. $64.90

7) Global Fixed Income:

Uncertainty about the sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range. HOLD.

Watch and play according to your risk tolerance on any position taken. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside losses.