Small Gain Not Enough To Shift Direction

Thursday, October 25th

Earnings start the indexes off on the upside, but they struggle into the afternoon. Looking at the sectors on the day we don’t find much in the way of changes. Energy (XLE) bounced back 1%, Healthcare (XLV) gained 0.7%, Consumer Staples (XLP)were up 0.6% and Industrials (XLI)¬†up 0.55%. The markets posted a small gain on the day as a result, but the downtrend remains in play for now.

Silver (SIL) and Gold (GDX) miners were up better than 3% to lead overall. Moves of note were banks (KBE) up 0.8% to hold support. China (FXI) gained 0.8% to hold near the current highs. Europe (IEV) gained 0.6% to hold the 200 day moving average. Still holding support in key areas and worth our attention moving forward.

Apple earnings tonight $8.85 per shares estimates with the number reported $8.67 per shares… You decide, good or bad? Trading was halted following the release tonight, but when it resumed the selling wasn’t very aggressive.¬†Watch to see how this story unfolds tomorrow.

Amazon reports a loss on the quarter… revenue was in line, but the loss was much bigger than the 7 cents per share estimate. The stock sold off more than 10% on the news, but has bounced back to down 2% as I posted this update. Watch the impact tomorrow to the broad markets.

Expedia jumped 10% after hours on better than expected earnings. At least some good news to go with the bad.

Economic data a mixed bag. Durable-goods orders were up 9.9%? The jump came from aircraft orders as autos and other large items fell 0.4%. Thus, without the aircraft orders jumping the news was more on the soft side. The jobless claims moved back to 369,000 and in line with expectations. The pending home sales were up 0.3% versus -2.6% last month. Nothing great, but we still have to pay attention to the direction short term.

Oil closed at $86 with a small gain on the day. Gold was up $12 to $1714 and the dollar was slightly stronger against the euro. Commodities remain in a downward trek for now, but they are looking for support. Base metals are attempting to hold near $18 on DBB, DBA tested lower, natural gas was up 0.3% and gasoline (UGA) bounce 1.6%. No clear change of direction for now in the sector.

Speaking of commodities the food costs continue to rise. One report shows the cost doubling since 2002. The partial blame is being given to derivative trading. However, population growth and the rise of the middle class in developing countries have done their share to the cost of agriculture commodities. This is a long term problem that will have to be addressed going forward. Thus, there are opportunities for those who are patient investors in the sector longer term. Start digging to find the winners relative to food production.

Bottom line… things could still get worse before they get better. Scanning the sectors and the headlines shows negative sentiment building for the broad market. If you have not been focused on protecting against the downside warnings… it is never too late, set your stops and manage your risk looking forward.

What am I watching?

Short term support… Or holding steady for the next wave of selling? Earnings are helping again as some positive news hits the wires. Watch and be patient as this plays out.

NASDAQ 100 Index on the downside. The break lower is looking for support? Watch the 200 day moving average. The indicators are reading oversold short term which puts the bounce opportunity in play. Watch QQQ on the upside.

Gold and Silver bounce? Miners were up on Thursday and we watch to see the outcome.

China has been moving higher as investors like the outlook. Watch for a test of the $36 level currently. If we hold, establishing a position is the goal. Thus, far no follow through test on the downside, but looks ready to move higher.

KBE – watch the banks to hold support and bounce? So far holding and worth looking at the trade opportunities.

Gasoline – UGA – Bounced off the $53.60 mark as support? Watching the reversal short term for a trade on the upside.

Apple – (AAPL) Watch the impact of their earnings announcement on the downside of the stock. Test $585 or 200 day?

Amazon (AMZN) Рdownside in play on earnings.

Technology – More downside building off the earnings reports.

Below we address the asset classes looking forward:

1) US Equities:

S&P 500 Index / Sectors-to-Watch РThe index held below the 1420 but above 1400. The break lower from the consolidation pattern is now in play, but the selling has stalled for now. The key is a shift in belief or volatility which has built over the couple of weeks. The downside gained traction as investor worry about the US economic picture worsening, and the consumer being challenged on the outlook. 1386 is the number we posted for support based on the break lower from the pattern.

The Scatter Graph below is run from a starting point off the high on 9/14 following the FOMC meeting rally and the current high. It also reflects the trading range of the index during this period as well. The leadership has been Healthcare, Consumer Staples and Utilities. The selling that started on October 18th found some buyers today, but the move lower is still intact . The biggest loser has been the technology sector shown at the bottom of the chart in blue. Watch now to see if the move off the low on 10/23 is the next pivot point to follow.

 

The activity on Thursday showed some sectors bouncing off the lows. XLV, XLE, XLP and XLI each bounced nicely off the low. Watch how healthcare, financials and the consumer sectors to respond by bouncing off the near term low.  We remain patient for now and take it one day at a time.

Breaking the Sectors Down:

Financials – The index is attempting to hold the uptrend, but the negative sentiment and actions taken by the government aren’t helping matters. Earnings were ok for the quarter and the large banks should continue to benefit from QE3 stimulus. This is still one of the leaders and you have to watch to see how it plays out near term.

WATCH: XLF and KBE on the bounce off support.

Energy – Broke support as crude continues to move lower and towards the next level of support. We established the short play on the drop lower.

WATCH: DUG – short play on the energy sector broke through resistance on Tuesday’s move. Manage the risk of trade.¬†¬†¬†¬† Entry = $21.35¬†– Stop – $20.84

Healthcare – Broke short term support on the index and looking to hold the 200 day moving average and bounce back.

WATCH – XLV – Established support – Entry $40.60

NASDAQ Index РThe index has been under pressure from the large cap technology stocks selling, and earnings on Thursday were no different. The shift lower brought the QID trade back into the picture on Friday at break of $66.60 on QQQ. Manage your stop on the downside play. The index caught some support on the 200 day moving average. Watch for the upside bounce potential if the buyers step in. Thursday earnings may prevent the upside short term.

WATCH: – QID hit entry point at $28.90 on Friday. $31.05 target. Stop – $29.45.

2) Currency:

Dollar – The dollar, like stocks, is being pushed up and down based on the daily sentiment towards Europe and the global economic picture. The downside pressure on the dollar abated as fear has crept back into the global markets. Watch the bounce in play on the buck.

WATCH: UUP – back to the top end of the range.

3) Fixed Income:

Treasury Bonds – Another attempt to make break above the downtrend line off the July high failed again. Watch to see how this plays out short term with $120.80 support. Investors still can’t decide the direction.

WATCH: TLT – Downtrend line off the July high.

4) Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. The downside shift is in control and the break below the 200 day moving average on DBC is not a good sign overall. Remains a mixed bag of volatility based on the data and speculation.

WATCH: GLD – $167 support broke and short play emerged. GLL breakout. (ETF ONLY MODEL)

WATCH: SLV – Broke lower took out support and open the short play. ZSL breakout. (ETF ONLY MODEL)

WATCH: DBB – The downside or short play of DBB has been the winner! Watch $18 for support.

WATCH: OIL – The short play in crude has been the play. The break of support at $87.50 and is sitting at the next level of $85.50. DTO cleared $45.60 entry point on Monday.

WATCH: UNG – In trading range and patiently working through the lack of direction short term.

5) Global Markets: The global markets are starting to trade in sympathy with the US markets. Watch and let this play out short term. If you have not set your stops it is key to do so.

WATCH: EFA – Testing support at the 50 day moving average.

WATCH: EEM – Testing support at the 200 day moving average.

6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). Watch your downside risk if you still own this sector.

WATCH: IYR  РAttempting to break lower through support? Closed below 63.90? Short opportunity?

WATCH: REM – Downside back in play after the short term bounce. Held $14.45 support.

WATCH – NLY – Downside back in play after the short term bounce. Held $15.70 support.

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80 which it hit today for an entry. $11.81 Entry – Stop $11.74 (Watch for the stop tomorrow)

WATCH: Emerging market bonds (EMB) – testing the move higher with a pullback.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing and pulling back near the breakout point.

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 downside risk determines your long term results. Trade Smart!