Short Covering OR Investors Believe ECB

Friday, July 28th

The market/investors have been holding up and refusing to sell below key support levels since March. They have been looking for a reason to buy stocks and ECB gave them a reason. A promise to defend the euro no matter what. Germany and France released comments backing the comments on Friday and that was enough to convince investors to buy. Throw in the FOMC meeting next week with anticipation of stimulus action by the Fed and you have buyers and some short covering leading the markets higher.

GDP growth for Q2 up 1.5%, but ahead of the 1.3% growth estimate help Friday’s rally! The buyers want to push this market higher so badly they are willing to take any positive news and turn it into gains. The ECB promise on Thursday started the upside, and what is perceived as positive economic data on Friday leads the question, how high do we go on the news? I am not negative on the market, but I am skeptical of any move driven by news versus sound fundamental data. Regardless we have to go with the market trend.

Treasury bond yields jumped on Friday. The economic data improving, ECB stimulus promised, Fed stimulus speculated for next week, and hope pushed bond prices lower with money willing to seek risk short term. This opens the opportunity for TBT or TBF to short the bonds. This was on the Friday Watch section of the update for today. $14.80 entry point on ETF is the post.

How much of the rally on Thursday and Friday was short covering? Looking forward you would have to believe a fair amount with the supposed coordinated effort of the ECB and the Federal Reserve. The thought of all this stimulus has money flow heading towards stocks versus away from them.

With that in mind we have to approach the market on the upside, but we do so with extreme caution. What if the Fed doesn’t provide stimulus and waits until September as some speculate? Not a time to blindly jump all in on a couple of reports. Watch, evaluates and manage your risk.

S&P 500 Sectors-to-Watch:

The S&P 500 index gained 3.5% off the low on Wednesday. For the week it close up 23 points overall. 1390 is resistance and the indexed tapped against that level on Monday. This was our near term target for the move higher two weeks ago. The challenge has been the volatility to get there. Volume was positive this week on the buying, but there is still plenty of issues to tackle going forward for the broad index.

Since the June 4th low there has been a constant rotation of leadership. The obvious result of that is an inconsistent trend or trading range and we have been in a bullish uptrend channel since this began. The creation of a new pivot points on the higher highs and higher lows brings with it new leaders and losers and we are seeing another rotation on this pivot off the July 25th low.

Telecom – Jumped back into the lead after selling. IYZ fell 4.6% over five days and has bounced 11.3% the last two days to hit a new high? Volatility anyone. The earnings were positive, but seen as negative over Apple. Bottom line is they are good and the stocks are now rising. We discussed this in the notes on Thursday.

WATCH: IYZ – Hold and raise your stops.

Energy – Taking on the leadership role as well with the bounce in crude back near the $90 per barrel level. The move back above $69 is positive for the sector and we continue to like the upside opportunity short term. Uptrend off the June low still in play.

WATCH: XLE – Entry @ 69.25. Stop 67.20

Financials – I am afraid to write anything positive on the sector for fear of jinxing it again. Holding above $14.40, but you are going to have to be patient and accept the volatility to own the sector near term. Cleared the resistance once again and we will see how it plays out.

WATCH – XLF – Entry @ 14.55. Stop 14 (have to use lower stop due to the volatility short term.)

Healthcare – Sold early in the week, but has rallied back near the previous high. Hold positions and let it go. 50 day moving average is a good stop for now. Expect the volatility to remain as we go forward.

WATCH – XLV – Entry @ 38.10. Stop 50 DMA

OTHER ASSET CLASSES:

Volatility Index – The index bounced back near the 21 level on the selling early in the week, but is heading back near the recent lows of 16. Easy come easy go. If the news is holding up and buyers come back to the market, look for the volatility to continue to fall short term.

WATCH: SVXY is the play if markets continue to rally. Entry $101.

Dollar – Hits new high Tuesday on renewed concerns on Europe. Thursday drops big on the news from ECB. Took the exit on the move Thursday and we will see how this plays out short term.

WATCH: UUP – Watch or UDN – 26.43 entry

Treasury Bonds – The yield moved up to 1.55%, up 15 basis point as the ten year bond in response to the ECB. Some of the worry is off the table short term is setting the tone for interest rates. Thirty year bond jumped as well to 2.64% up 18 basis points. This sets up the short trade in bonds with TBT or TBF.

WATCH: IEF – $108.80 Entry.  Stop at $109. WATCH: TBT – $14.80 entry. Stop $14.50

NASDAQ Index – The  test of support at 2850 held and bounce back above the 2900 mark… resistance and closed at 2958. I knew posting the short opportunity would bring the buyers back 🙂  Bounce is in play and we watch to see how this plays out. NASDAQ 100 index tested 2550 support and bounced off support to move back above 2590 resistance and closed at 2647. Watching the large cap index for signs of life and a follow through on the upside.

WATCH: – QQQ Entry @ $63.70 Friday

Small Cap Russell 2000 Index – Solid move higher at the open today held and made up some ground. Not looking good after the break of the uptrend on Monday. The downside has been a challenge and it still is in a downtrend. Watch for move higher if we play this move off the July 23rd low.

WATCH: IWM – Entry $79.10. Hit Friday.

Commodities: After some early week selling the commodities picked up the move again on the upside. Manage your risk as this sector has gained some volatility short term.

Crude Oil – Crude remains above the breakout level on OIL at $20.75 ($21.98 close). Closed at $90.06 today despite the worries. Watch and hold positions for now. Not moving with a positive response to the data or news. Watch the downside short term.

WATCH: OIL – Entry $20.75 – Stop $20.75

Gasoline – bounced back after some selling. Closed at $53.50. I expect the fund to return to the highs if oil continues to move or hold near these levels short term.

WATCH: UGA – Entry at $52.75 – Stop $52

Natural Gas – Holding above $20 on UNG. The trend remains to the upside with some volatility expected as it stalls on the move higher.

WATCH: $20.60 is stop on position – Entry $20

Precious Metals – Gold rose from the grave and above the downtrend line off the March high. GLD, $148.50 is support. Gold mining stocks jumped on move in gold. Move above $42.60 entry on Thursday.

WATCH: GLD – Entry $156 – Stop $155.   WATCH: GDX – Entry $42.60 – Stop $41.10

Global Markets: The global markets were moving higher in response to the ECB comments relative to the euro, Spain and Italy. The EAFE index has moved higher on the news and belief something with happen this time around. Watch and manage your risk in the short term.

China – Tested the lows bounced on the European news. Watch the consolidation wedge forming over the last 6-7 weeks and ready to break higher. This has been volatile based on the global economic issues and the economic slowing in China. Watch for a upside move on the improving data this week from China, but expect volatility short term.

WATCH: FXI – Entry $33.70 on breakout from consolidation.

Mexico – moved lower after a test of the March highs and bounced on Europe news. Got the bounce off the $60.50 support and closed above the 30 day moving average. Got the follow through and entry point on $62.25 Friday.

WATCH: EWW – Entry $62.25 Friday.

Singapore – moving back near the high at $13 tested back and bounced off support at $12.50, and we took the entry at $12.70 on Tuesday. Nice follow through to $13.12 and new high.

WATCH: EWS – Entry $12.70, Stop $12.88

LEADERSHIP:

Housing – Positive outlook for housing sector and the homebuilders going forward. The new home sales data on Wednesday didn’t go over well with a 8.4% decline bucking the positive news. The sector tested support near the $20.80 mark and reversal was the opportunity to take a new play in the sector. The upside is still in play with some stalling short term taking place. Watch and manage the opportunity going forward.

Watch: XHB – testing support at the $20.80 mark. Held support at $20.80 $21.90 entry opportunity on breakout from consolidation.

Energy – See Above – The sector is setting up to take a leadership role short term on anticipation of improvement globally. (thin ice)

Materials – solid bounce of the bottom of the up trending channel and looking for a move to resistance at $35.75 and this higher if the leadership is to follow through.

Financials – See Above – The volatility in the sector will give you motion sickness, but there is strength. JPM broke from the consolidation and look for a break above the $37 level as positive. BAC bounced off the low and worth watching. WFC retesting the highs $34.40. Follow through break above $14.85 on XLF is a positive. Watch for the leadership to return to the sector.

Retail – Sector is working off support and cleared $50.20 resistance. This is still a stock picking sector. AMZN looks solid and earnings were good along with guidance. Pushed to new high on the news. EBAY made solid move on earnings as well. RL ready to break back above the $150 mark. COH moved back above $61.30 and COST cleared another new high. TJX and TGT both in position to break higher as well.

MONDAY:

Fixed income adjusted for the move higher in yield on the Treasury opening a short opportunity on on bonds. Watch for a trade in TBT if the trend higher in the yield follows through.

Economic data was better than the ugly low expectations and that prompted a push higher on Friday. Plenty of data this week as the month comes to a close. Tuesday starts the parade with income, spending, home prices and Chicago PMI. Jobs data starts on Wednesday and ends Friday with the jobs report. Construction spending, FOMC announcement, Auto Sales, Factory Orders and ISM Manufacturing. Promises to be interesting.

S&P 500 index is at the resistance of 1390? Does it find the needed news or conviction to move higher?

FOMC meeting on Wednesday looms large based on the anticipation created for the Fed to provide stimulus and a joint effort with ECB to rescue the world.

Watch and play according to your risk tolerance. 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 downside risk determines your long term results. Trade smart.