Tariff fears subside and buyers return

OUTLOOK: Week of April 5th

Everything is a negotiation and the tariffs are only one item being discussed in Washington and China. The overnight reactions to China’s proposed 25% tariffs sent the futures lower Wednesday, but as with most news events, there is always perception versus reality. The markets are dealing with the perception of what will happen if the tariffs go through… in reality, there is still plenty of negotiations that will play out before we know the end result. Thus, welcome to the world of speculation that has been driving the markets since January. The markets gapped lower at the open but managed to move higher throughout the day with buyers stepping in as news and talking heads put the world at ease for now on the topic of tariffs happening immediately. The economic data remains okay with ISM data slightly lower than expected. The jobs data will be out today and Friday and earnings are on the horizon. Plenty to ponder as we continue to deal with the ups and downs of emotions driving direction. The Volatility index dropped to near 20 gain as the fear and anxiety dropped in trading on Wednesday. It is important to note the volume in the buying on Wednesday was lower than Tuesday… and both were below average. One day at a time as we look for the opportunities in the swings.

The S&P 500 index closed up 30.2 points at 2644 holding above the 200 DMA after an initial drop of more than 30 points accounting for more than a 2% swing intraday. The chart is testing the long-term trendlines off the January/February 2016 low. The double bottom pattern could unfold or the downtrend could be reestablished. The whipsaw action has been a challenge for establishing positions. The downside cleared 2765 for the short side interest and SPXS hit the entry level at $28.20… added a position at $28.50 as a hedge. Now we watch to see how it unfolds with an adjusted stop at $28.50.

The NASDAQ index moved below the 7103 and 6909 levels of support, but Tuesday closed above 6909… 6941 and confirmed the bounce on Wednesday closing at 7042. The up trending channel off the Feb 9 low broke the bottom channel line confirming the near-term direction as down and with the current activity sets up a potential double bottom pattern. The last two weeks have shown big swings as the buyers and sellers fight for direction. The buyers pushed for control on Wednesday putting money to work at the opening lows. The China issues are back in the headlines and plenty of dynamics in place as the White House makes moves that rattle investor confidence. Patience is required along with a strategic approach to managing money. SQQQ entry $17.85, stop $17.85 (adjusted). The downside is in play and watching the February lows as we manage the risk.

Small Cap index had been weaker on the bounce off Feb 9 low, but finally produced a move above the $154.90 resistance. The bounce reversed and the downside has momentum and the next level of support  $150.11 gave way to the selling Monday… bounced on Tuesday… added to the upside on Wednesday. TZA entry hit at $11.42, stop 11.75 (Hit Stop). Watching how the possible double bottom plays out near term.

Gold (GLD) moved back above the $126.02 mark after selling off last week. Tested on Tuesday. The trading range is in place and watching how this unfolds short term. The metal is a trade on news nothing more. The gold miners (GDX) tried to move back above the $21.92 mark from the bottoming pattern in play. Base metals (DBB) moved lower in the downtrend and gapped below the 200 DMA on Wednesday keeping the downtrend in play.

The dollar (UUP) bounced off the lows with some buying keeping the bottoming pattern in play. The negative tone from the FOMC pushed the buck lower as we continue to watch for clear direction. Bounced higher on Mr. Trump’s comments, but remains in the bottoming range. Looking at a possible move above resistance $23.65.

Treasury Bond yields moved to 2.78% as they continue to deal with a rolling top and moving below the bottom of the range despite the rate hike. The move lower the last week is showing a flight to safety from stocks breaking lower from the bottom of the range as bonds rallied. Interesting battle of money rotating into bonds on worries relative to stocks. The short side trade hits stop on move higher in TLT. The negative bias has given way to stocks selling and money rotating near-term. If the bounce works look for bond yields to bounce and bonds decline as money will rotate back to stocks. Watching TMF on the chart as it hits entry point ($18.52) and follows through. Testing the move the last two days.

Crude oil (USO) moved back above the $61.60 mark and the move higher tested the January highs. The upside follow-through had the commodity above $65 but failed to hold the move on the dollar bounce and is testing the 50 DMA. The news is driving and oil remains in a broader trading range. The dollar relationship remains in play influencing the price of crude along with worries of ramping up production in the US on the price move above $60. Trading commodity at best for now.

Emerging Markets (EEM) dump lower breaking $47.90 support and testing the short side. The dollar, tariffs, trade wars, and interest rates are all playing into the volatility of the sector. Now is time for a decision on direction as China talks action on tariffs and the sector tested lower on Wednesday but recovered with US talk. We will let the market speak and we will decide what trend to trade.

The Volatility Index (VIX) closed at 20 as investors show interest on the buy side Wednesday following the initial dump lower. We sold more of our position in the first hour of trading as the buyers came to the aide of stocks. FOMC meeting, tariffs, antitrust lawsuits, Mr. Trump, etc. all adding to the investor anxiety. Watching how this unfolds near term. VXX trade entry at $44.55. Stop $48 (adjusted). Sold half off Thursday, as recommended to lock in profit @ $50 or better. Sold half of remaining (Wednesday) at $52 on gap open. Stop in place if the buyers show up again today. 

There is plenty on the table relative to dynamics and agendas from the government, economic data, traders and investors alike, but the emotions injected into the market now raises questions about direction and momentum. The ABCD pattern broke to the downside and retest of the February low last week followed by more volatility and testing this week. The key is patience and taking what the market offers versus our emotions. Simply put there is plenty to ponder about what will and will not impact the markets both short and long-term… My goal is to manage money, not markets. Manage my risk based the current environment coupled with my strategy for each position. The key is to stay focused on the horizon, not the rear-view mirror.

Issues with Chinese tariffs lead the headlines… Wednesday the down open was handled by investors buying into the drop. This is all news related or speculation of who will do what when. Let the emotions drop and look for the resulting opportunities. If you don’t like trading hold tight with long-term stops in place and let the dust settle. Otherwise, there are short-term opportunities in the emotions of the swings. 

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

KEY INDICATORS/SECTORS & LEADERS 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. The downside is in play again as we break the $105.30 support and the February lows in clear sight. A short signal on the break of the $107 level and the 200 DMA. LABD entry $34.00. Stop $37.30 (Stop Hit). Modest bounce with the downside still in play. Watching how it responds in early trading today… locked in gains as suggested on part of the position at $42 (half) and hit stop on the balance later in the day to lock in a nice gain on the short trade. Watching how the bounce unfolds today. 

Semiconductors (SOXX) bounced off the low at the $166 level and established a new high. It has retreated on the selling in Facebook and Apple news sending the sector lower… It did manage a positive day on Friday as we watch how Monday unfolds relative to the downside playing out further. Selling confirms the short side trade entry at $12.30, stop $11.80. Watching how unfolds with bounce. 

Software (IGV) hit new highs and closed below the $171.11 support on the test lower. Watching how this sector holds up near term… Some downside, but leadership remains in place for now as it tests support. Selling Monday added to the downside pressure and exits hit. Bounce back to the $171 level on Wednesday has my attention. 

REITs (IYR) The sector remains in a trading range as it continues to build a base. Interest rates have been the challenge overall… looking for the opportunity to add a position and collect the dividend long term. Moved back above $75 and holding. Selling pressure back, but remains in the bottoming range. 

Treasury Yield 10 Year Bond (TNX) moved to 2.74% this week as money find safety more attractive. The rolling top activity moved below the 2.79 support and watching how this impacts the bond sector. TLT moved above $119 and held… Trade currently nothing more at this point. TLT cleared $120.30 entry. TMV $18.84 entry. Flight to safety remains but a modest bounce to 2.78% on yield and watching… 

Energy stocks (XLE) The sector tested the $67 level of support again and remains in the bottoming range. Entry at $68.85 is of interest if the upside validates the move. The short side is a big question as oil continues to hold above $65. Watching patiently for direction.  Sold lower, but buyers stepped in to keep it in the range. 

Natural Gas (UNG) forming a bottoming pattern currently after falling more than 19% off the January highs… watch for the next opportunity in the commodity. The downside continues breaking below the next support retesting the lows and keeping the downside in play. $21.50 level of support held and small bounce. Some buyers week in the commodity? Needs to clear $22.69 for now. 

The NASDAQ tested the 6909 support and closed at 7053 in a volatile week. The S&P 500 index tested the 200 DMA again and closed at 2640. The bias is negative and volatility is alive and well. Leadership is testing the downside move as financials and technology lead the downside moves. Short trade entries hit and testing with the volatility daily. News on Facebook rattles the privacy issues cage again. Tariffs are still in the picture. The President is attacking Amazon. VIX index remains above 20. Money is rotating with some headed to the safety of bonds and some to cash. There is no shortage of speculation and news. The key is to keep your focus on your trading strategy and not the emotions of the day to day swings in the market. The downside bias remains and a break of the February 9th lows will only serve to accelerate that bias.

Sellers back as the indexes close below support retesting the lows on Monday. Some modest buying on Tuesday kept it interesting, but the storyline Wednesday was China. The buyers stepped in as the White House eased fears with more rhetoric about tariffs. Taking it for what it is and managing what we see not what we hear. Short positions in place along with tight stops… letting this play out one day at a time. 

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

Daily Scan Results:

WEDNESDAY’s Scan 4/4: The buyers held their ground despite the proposals by China to add tariffs… it got help from the White House stating there were still ongoing negotiations… of course there are. We continue to take it one day at a time and look for the opportunities as they are presented. No addition to short positions as the buyers stepped in… we did lock in some gains early as the buyers showed interest. There is no reality just disciplined approach to managing the risk presented currently. The buyers will need to put more volume behind their efforts if the bounce is to have any hope on the upside follow through. Patience is key for now.

  • See added notes in red below on Tuesday for the outcome today on Wednesday.
  • Homebuilders (ITB/NAIL) big bounce off the lows on Wednesday… still in bottoming range.
  • Biotech (IBB/LABU) big bounce off the lows Wednesday… Needs to clear $77.05 and confirm.
  • NASDAQ 100 (QQQ) solid bounce off the lows. Double bottom? Cleared the 200 DMA on the upside.
  • Healthcare (XLV/CURE) bear flag pattern in play… watching how that unfolds with the downside bias in place.
  • Financials (XLF/FAS) bottoming pattern remains in play as hold above the 200 DMA.

Leaders… they returned to form, but still plenty of questions. IBB, QQQ, XLK, XLF, SOXX, XRT

Patterns… bottoming patterns everywhere… XLV, ITB, QQQ, SPY, XRT, EWW, IYR, XLY…

Charts to Watch… ITB, IYR, XLU, TMV, SCJ, FAN, FAS

TUESDAY’s Scans 4/3: The buyers attempt to show up, but the volume was on the weak side. There were some positive movement in the leaders, but not enough to give the upside outlook momentum. The market is testing mode relative to the February lows and key support levels. The key is to let it unfold each day and establish the trend. The overnight news with China has already shifted the outlook on the day, but it still has to play out. For now, we go with the bottoming process and watching how it unfolds.

  • NASDAQ 100 (QQQ/SQQQ) tested resistance at the $23.03 mark and retreated. Watching today how it unfolds and if it can clear this level on the close. If not, look to take some gains on the trade above $16.65. Sold half at $19.65 in AM.
  • Volatility Index (VXX/UVXY) not enough buying to move the VIX below the 20 level. China is adding to the anxiety overnight and a move to the $54 mark would prompt taking some more gains on the position and letting the balance run with stops at $49. Sold more of position. (see notes above)
  • China (FXI/YANG) tariff issues escalate as China imposes tariffs on $50 billion in goods. The downside to the country ETF is of interest as it will accelerate the short side trades. Sold half of the short position at $52.50.
  • Energy (XLE/ERX) bounced off the lows in the trading range and looking for upside follow through. Crude has traded higher and the stocks have lagged… watching how this unfolds today. $29 level of interest on the upside.
  • Semiconductors (SOXX/SOXS) the bounce off the 200 DMA is a positive from the selling… but, the downtrend remains in place. Watching how it responds today and willing to add to the position if we close below the 200 DMA. Bounced off support and watching how it unfolds with stop in place. 

Leaders… all bounced off support on Tuesday… still plenty of question marks and in need of a follow through on the upside. The overnight news from China could make that a bigger than the normal challenge. Watching how the buyers respond to the initial selling.

Pattens… all most all of them are bottoming patterns near term. Letting them unfold based on the news and data pushing stocks up and down. Today it is about the first hour of trading and the response to the initial drop… do the buyers step in?

Charts to Watch… GLD, GDX, XLF, IWM, QQQ, SPY, TMV, WEAT, EWM

MONDAY’s Scans 4/2: Welcome to April showers… the selling resumed to start the new month and the short side of the market remains the trade for now. Adjusting stops and managing what is one big emotional rollercoaster for investors. Today will be a key day for the major indexes as they test a key level of support. Taking it one day at a time for now.

  • Biotech (IBB/LABD) downside breaks hard and the selling resumes. Short position established (See above) and we will watch how the $40.21 mark holds on the short ETF.
  • Semiconductors (SOXX/SOXS) downside clears support and the short ETF breaks through $12.27 offering a short entry (see above). $13.52 is next level to clear on the trade… stops in place.
  • Volatility Index (VXX/UVXY) trade on the volatility is working out well with the VXX trade up 9% on Monday… sold half… looking to exit more of the position if the buyers show up.
  • NASDAQ 100 (QQQ/SQQQ) downside accelerates with the selling on Monday. Break of support a negative and the sentiment has shifted to the downside short term. $20.03 next level to clear on the short ETF.
  • Small Caps (IWM/TZA) sellers are in control short term with the negative sentiment taking root. The short side ETF cleared $12.14 and watching how it unfolds… stops in place.

Patterns: trading ranges and double bottom setups. The challenge is the sellers taking control on Monday again and sending the sentiment more on the negative side of the equation. Letting this unfold and not making any predictions. We established some short side positions as well as exiting some long-term positions.

Leaders… rolled over on Monday with semiconductors, biotech, NASDAQ, technology, and consumer all moving below key support levels. Do they bounce? Do we move lower? Good questions… let the market decide… not your emotions.

Charts to watch… UVXY, LABD, SOXS, SQQQ, TECS, FAZ, all breaking higher on the short side. YANG, ERY, EDZ, NUGT, EUM, and SLV all remain in trading range.

THURSDAY’s Scans 3/29: Small bounce to keep support in place for the long weekend. There is plenty of activity both up and down… it is only creating more consolidation with support in place along with resistance. The indecision has whipped us in and out of positions, but we will stick to our strategy and let this all unfold. As a mentor taught me early on… “you have to crack a few eggs in order to make an omelet.” Losses are part of trading it is all matter of how you manage them and your emotions.

  • Technology (XLK) bounced off support and held with a solid gain on Thursday… watching.
  • Consumer Discretionary (XLY) bounced off support and held with a nice gain on Thursday.
  • NASDAQ 100 (QQQ) bounced off support at the 200 DMA and watching.
  • Financials (XLF) bounced off the 200 DMA and watching.
  • Europe (IEV) bounced off support and holding for now.

Patterns… double bottom setups, descending triangles, trading ranges, all are setups for the market to continue the downside or find a rationale to reverse and move higher again. SPY, DIA, QQQ, IWM all show tests of support within a consolidation pattern… looking for the catalyst and the trading opportunity that unfolds.

Leaders… SOXX, IBB, XLF, IWM, IGV, XLK, and others are all consolidating for the next move.

Charts to Watch… SOYB, EWZ, CORN, JJG, EWW, MOO, SIL, SCJ…

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

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials moved below the February low and the 200 DMA… downside in play and looking for support to hold near the $56 mark.
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. I have been looking for support and the next opportunity as the fear evaporates and reality settles in. $48.55 entry. Stop $47.50. This does pay a 3% dividend and willing to stick with the slow-moving sector for now.
  • 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? The downside accelerates with stocks selling on the week. Short side in play. Confirms break lower and bounced. 
  • XLP – Consumer Staples broke the February lows and finally found support near $51. Hit stop on short trade at $52.50. Bottom reversal pattern in play and watching how this unfolds with $53.15 resistance in place. retesting the lows. Bottoming pattern.
  • XLI – Industrials moved to support at the 200 DMA and bounced modestly… watching for upside confirmation, but the downside is still the trend.  Testing the 200 DMA. 
  • XLE – Energy sold to bottom of the range at $67 and remains in a bottoming trading range. No traction despite the gains in crude oil prices. Sold lower and closed back in the range on a bounce. 
  • XLV – Healthcare has been up and down following the Feb 9th low. ABCD pattern broke to the downside offers short side trade. Watching how it unfolds along with the broad markets as it bounced off $79.50 support. Back to the lows. Bounced. 
  • XLK – Technology tested $64 support, bounced, and made positive progress. Large-cap tech challenging the downside with SOXX and IGV breaking support. Watching how the week starts.  Breaks support. Moves back above support. 
  • XLF – ABCD pattern breaks with downside bias… tested the February 9th low and held. Letting this unfold and then we will take what the market offers. Testing the lows. Bottoming. 
  • XLY – Consumer Discretionary sold to support at $99.40. Bounced on Thursday and watching how we progress in the new week. Broke support. Bounced. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. Bounced off the $82.75 support and moved above $85.65 resistance. bottoming pattern in play and looking for the opportunity to buy and collect the dividend longer term. Positive signs in the trading range. 

News of progress in trade wars and tariffs with China brings buyers back to the table… needs to become a reality or the sellers will have their way. Tuesday the sellers were back as we retest the lows from Friday… Wednesday was balancing day with some down some up… Thursday the buyers were back on hope there will positive news from the first quarter earnings. Watching how it unfolds in the new week as we adjust our stops and let this all unfold one day at a time. 

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

FINAL NOTES:

The ABCD pattern broke with a downside bias and caught support. The question remains about direction as the upside wants to return, but the sellers are still lurking for the next opportunity to take stocks lower.  Split decision on the week with six sectors closing higher and five lower. The S&P 500 index closed lower on the week overall. The bounce off support on Thursday leaves the question of direction in play and volatility is alive and well with the VIX index at 20. The key is to focus on the strategy you want to take during the current market environment. News and speculation drive the short term while fundamentals drive the long term. I trade both and have specific strategies for both. Short term we are in a process of testing the February 9th lows. A break of that level would signal a big negative technically for the broad indexes. Leadership is rolling over and the sentiment has shifted near term. We will start the week with economic data for the March and the first quarter… we will set the stage for first-quarter earnings to begin in the two weeks and it will have an impact as well. The goal remains money management, not market speculation… our downside bias has been confirmed and we will take what the market offers and manage the risk.

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.