Support Give Way on The Major Indexes… Downside In Play

Tuesday, October 23rd

Earnings and Spain get the blame for the selling on Tuesday. Sometimes it sounds like a broken record when you read analyst reports or media pontification of what happened in the broad market from day to day. Yes, the earnings data from some key Dow components set the tone for the trading day. Yes, Spain was downgraded relative to their debt… again. Neither of these reports are unexpected, they are simply creating the reality of what was discussed almost a year ago. The reality phase is what I causing the action over time. What we thought to be true over twelve months ago is becoming a reality for investors. The bigger question is not what happened today in trading, but is it a trend? If so, how far down does the index drop? Is there room to develop short positions? If so, where do we get into the positions and what is the target for the position? Very logical questions relative to the transition that is in play for investors.

Looking at the chart of the S&P 500 index there are indications of a triple-top pattern breaking lower. The move below support at 1430 and 1420 on Tuesday leaves the follow through on Wednesday as the only obstacle. 1400 is the next support and then the 200 day moving average. The uptrend line is broken and the outlook is still very cloudy at best. The fundamental data is not improving and that is a big negative going forward. Only time will tell how this all plays out, but the damage short term has been enough to raise cash, institute stops and manage the overall risk short term. When the data starts stacking up you have to determine the risk/reward of holding positions in the face of more selling. There is always room to buy the positions back if they reverse and find momentum on the upside.

The NASDAQ chart shows a downtrend development with a sequence of lower highs and lower lows. The break of support at 3043 last week was the negative catalyst for the downside on the index. The 200 day moving average is now in play after a break of the 50 day moving average. The technology sector looks very similar to the NASDAQ chart with an established downtrend line in play. In fact, the tech sector has been the catalyst for the downside in the major index.

Bottom line… things could 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 the downside warnings… it is never too late, set your stops and manage your risk looking forward.

What am I watching?

NASDAQ 100 Index on the downside. The break lower is looking for support? 2659 in play from Tuesday.

Gold fell through support at $1710. The downward shift is in play $1670 is in play. GLL is the short ETF (Added to ONLY ETF Model on Tuesday).

China has been moving higher as investors like the outlook. Tuesday falls 1.8% in sympathy with the US markets. Watch for a test of the $36 level currently. If we hold, establishing a position is the goal.

KBE – watch the banks for a short term bounce? Fell lower early in the trading day and managed to bounce back. Watch for the support to establish itself prior to putting any money to work short term.

Gasoline РUGA РSelling off with crude and economic outlook. I would say the election, but that would be outrageous.  Short side still in play as the fund fell 1.1% on Monday & 1.5% on Tuesday. Now down 12.3% from the high two weeks ago. $54.25 and then $53 support opportunities. Raise your stop on the short plays.

Apple – (AAPL) Sold off 3.2% as markets shift to downside again and their product rollout meeting today was not overwhelming according to the analyst. Earnings are Thursday.

Commodities are selling and the indications are more downside to come.

Below we address the asset classes looking forward:

1) US Equities:

S&P 500 Index / Sectors-to-Watch РThe index moved below the 1420 support. This completes the break lower from the consolidation pattern in play. We will need a confirmation on the downside on Tuesday, unless there is some big rally or catalyst on the upside the downside is in play. The key is a shift in belief that has built over the last two weeks. The downside is gaining  traction as investor worry about the US economic picture worsening.. The chatter is growing and it has the making of a pullback or test of the long term uptrend. 1400 is the next level of support.

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. However, the last three trading days shows a shift to the downside by all ten sectors. The biggest loser has been the technology sector at the bottom the last week. The pick up in selling activity is reflected in the chart as all 10 sectors are pointing down.

The downside shift from the high on 10/17 shows basic materials (-4.6%), energy (-4.4%), technology (-3.8%) and telecom (-3.5%) leading the downside as the inex is off 3.2% from the same peak. We will watch how the downside unfolds relative to the current high.

 

Financials – Banks sold, regionals were the worst (KRE). The current market environment is testing and could break lower. The sector remains one of the better performers thus far in the selling off the 10/17 high. We continue to watch how this will play out short term. SKF is also worth watching if the selling accelerates.

WATCH: XLF – Entry $16.10 – Stop $15.85 (HIT STOP)

Energy – Broke support as crude continues to move lower and towards the next level of support.

WATCH:¬†DUG – short play on the energy sector broke through resistance on today’s move. Watch for a play if the selling continues. Entry = $21.35.

Telecom – Weakness in the big cap stocks continues to drag the sector lower. Broke uptrend and establishing the downside currently. Not interested.

WATCH: IYZ

Healthcare – Broke support today! The 200 day moving average is just below the close. We hvae to establish support before being willing to be long the sector.

WATCH – Establishment of support

NASDAQ Index РThe index has been under pressure from the large cap technology stocks selling, and that expanded with Google and Microsoft earnings. The shift lower brought the QID trade back into the picture on Friday at break of $66.60 on QQQ. The selling resumed today after bounce on Monday. Manage your stops and let this play out.

WATCH: – QID hit entry point at $28.90 on Friday. $31.05 target. Stop – $29.30.

2) Currency:

Dollar РThe 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 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. Watch to see how this plays out short term. Potential trade to $124.40 is the move. Risk/Reward.

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 in play… Watch for short plays to pick up. 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: OIL – The short play in crude has been the play. We stated this was building momentum and the break below $21.35 on Tuesday opens more downside in crude. Watch the $87.50 level on crude as a short term target. DTO or other short oil plays picking up momentum. DTO cleared $45.60 entry point on Monday. (ETF ONLY MODEL)

WATCH: UNG – Start the week down nearly 4%, but manage to get half of it back on Tuesday.

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 – Moving higher again. $54.75 Entry — Stop $$53.80 (HIT STOP)

WATCH: EEM – Heading lower and testing the 20 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. Sitting on support at $63.90 on IYR.

WATCH: IYR  РAttempting to break lower through support?

WATCH: REM – Downside back in play after the short term bounce.

WATCH – NLY – Downside back in play after the short term bounce.

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: 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!