Tariffs, Interest Rates, and Russia define worries

OUTLOOK: March 2nd

The third day of selling for stocks was helped along by President Trump announcing tariffs on steel, a Fed that is talking again, and Russia talking new weapons with hypersonic speed. Add it all together and the worry meter jumped with the VIX closing at 22.4. The move higher at the open didn’t hold and stocks reversed to sell back below the 2695 level we were watching yesterday. Technically the reversal of the bounce and retest of the previous lows is a classic setup… trading into the ‘worries’ is a challenge emotionally for investors as they think it is only a temporary cause or rationale… the reality is the sellers were only looking for a reason to act and now it taking what the media and Washington are producing as a reason to dump stocks. A confirmation for the downside was the cross of support and higher volume. Stops were hit on long positions and we are now left with our short positions to let ride out the storm that is being driven by emotional reactions. This is just another way of managing money while managing risk.

The S&P 500 index closed down 36.1 points at 2677 and forfeiting the gains above 2695. The chart remains in line with the long-term trendlines off the January/February 2016 low. The bounce off the Feb 9th low is being challenged with the selling and in jeopardy of retesting the lows and then some. We added SPXS at $26.90. Stop $25.83. Target $32.

The NASDAQ index retreated breaking 7206 support on higher volume. Close on the 50 DMA may offer some help as we look to see how this unfolds. The move below support put the short side trade in motion for the index with SQQQ at $16.70 entry, $20 target, stop $16.25.

Small Cap index has been weaker on the bounce and failed to hold the $152.53 level of support, but did hold the $150.11 support on the day. The index led held up well on the day but isn’t looking good in the premarket. We added a short side trade in TZA on the move Wednesday with entry at $11.90, stop $11.35, and target $13.50. Interesting doji left on the close Thursday in TZA.

Gold (GLD) moving back to $124.50 mark of support and a double top in play. Short side trade added on the move below $126. Watching how it unfolds along with the gold miners (GDX) short side trade. The miners showed an intraday reversal off the new low. That could be interesting if it follows through on the upside today. Base metals (DBB) are showing some topping on the charts closing below $19.35 and produced an intraday reversal as well on the day. Watching if the bounce follows through.

The dollar (UUP) bounced off the lows with more buying establishing a double bottom pattern. Cleared the $23.65 level for the upside opportunities in the buck. The late day selling or reversal came on the talk from the Fed on hiking interest rates four times this year. Watching for the reaction today.

Treasury Bond yields moved to 2.80% as they start to confirm a rolling top and money rotates to the safety of bonds creating the move in yields lower. Thus, we remain undecided on the move towards the 3% mark for the ten-year bond… short side trade remains in place (TMV). Watch TLT as this ‘fear’ of stocks could create a rally in bonds.

Crude oil (USO) moved back below the $61.60 mark creating some angst in the commodity. The weaker dollar added an intraday bounce off the lows… worth watching how this unfolds. The dollar relationship remains in play along with the Fed chatter.

Emerging Markets (EEM) dump lower breaking $47.90 support only to bounce and sell at resistance ($49.90) on Tuesday… along with a stronger dollar. That continued on Wednesday and Thursday with a retest of the $47.90 mark. Short side entry offered with the move below $48.60.

The Volatility Index (VIX) closed at 22.4 clearing the 20.5 level as anxiety builds once again in the market… UVXY finds support and bounced… $17.50 entry level hit, stop $17.10. Manage aggressively as the index can move on any news worthy of investor interest. That was tariffs and Russia on Thursday.

There is plenty on the table relative to dynamics and agendas from the government, traders and investors alike, but the emotions injected into the market now raises questions about direction and momentum. The downside move gave way to the reversal, but I have not given up on the notion this is temporary and the second phase of selling will return. The question now is was Tuesday the start? That is what we look to validate today and the balance of the week. The volume on Friday and Monday were suspect. The selling volume on Tuesday was average not over the top… the jury is still out. The economic data continues to garner attention as the FOMC minutes confirm growth stimulating inflation fears. The Fed Chair comments to Congress on restated this fact. The reaction from investors is expected as the reality of growth and interest rates moving higher sinks in. 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.

The third day of selling and as I stated in the weekend update… the downside is still the direction of my current strategy… the confirmation on Wednesday and follows through on Thursday puts downside opportunities back on the radar and we will trade them accordingly while managing the exit of our long positions. Money management is the key now market management or speculation. 

(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. Thus making it more of a trading sector than investing. The current move lower tested the $101 support, bounced and cleared $107 and held in last weeks trading. We added a trade in LABU at $85.20 with a stop at $91 (adjusted). Tested Tuesday. Wednesday follow through and watching the $107 level of support on Thursday which held. Took the exit on long positions at our stop. LABD offered entry at $3.45, stop $3.14. 

Semiconductors (SOXX) bounced off the low at the $166 level and established a new high on Monday… the last two days have tested lower, but the sector is holding okay. Watching the $181.60 level of support and the 10 DMA. Held $181.60 at the close…

Software (IGV) hit new highs last week and despite the retreat the last two days is holding above the $171.11 breakout high. Watching how this sector holds up near term. Closed below the $171.11 level and watching the support at $168.20… exit point for (short-term) long positions if we break that level. 

REITs (IYR) The sector broke support and is building a bottom reversal pattern now with a double bottom setup. We added a position on the initial move… Entry $75.15, Stop $71.50. We would look to add to the position on follow through above the $75.30 mark. Patience is key. Gave up gains… watching downside. 

Treasury Yield 10 Year Bond (TNX) moved to 2.87% holding near the highs of late. That is enough to solidify the move higher in yields and the short side trades in the bond. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping, and neither is the comments from the new Fed Chair. Add some inflation (CPI) and it makes for interest times. Watching how this unfolds, but for now, rates have moved higher and the short side of the bond remains the trade with worries of yields rising further. TMV holding entry $18.50, stop $20.75 (adjusted). Rates moved higher Tuesday and lower Wednesday and Thursday as we look for direction on the upside trend… content to move sideways for now. 

Energy stocks (XLE) The sector tested the $67 level of support again with most break and bounce to end the week as crude leads the upside response. Entry at $68.85 is of interest if the upside validates the move. Oil services (IEZ) cleared $33.50 resistance offering upside trade as well. Gasoline (UGA) cleared $31.15 upside entry also last week. All worth trading the upside move. Stops are a must on these trades. Trading with stocks on the downside to retest lows and support at $64.74. UGA broke $31.14 a negative as well. IEZ retested the previous low/support. Stops hit and watching how this unfolds. Short set up with ERY entry at $11 if downside follows through. 

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. $22.50 upside is level to clear. Attempted to do so on Thursday and failed at the close.

The S&P 500 index closed the week up 0.59% for the week. The first three days of the week were slightly negative testing the upside bounce off the 2/9 low. We continue to look for leadership. Oil made a positive move higher. The dollar bounced. We held the test of the move off the lows with a positive close on Friday. We now look to next week and any opportunities that present themselves. Started the week with the continuation of the upside move. The second leg off the bounce in play… volume low… proceed with caution and using the move to take some more money off the table. 

Tuesday erased the move from Monday and the worries are back… watching how today unfolds… stops are in place and looking at what to trade on a follow through downside. Hit stops on Wednesday… follow through lower on Thursday and the short side is in play near term… the longer term uptrends remain and we have to watch how the buyers respond to all the noise. 

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

Daily Scan Results:

THURSDAY’s Scans 3/1: a new month is lost in the worries created from Washington Fed, White House, and Russia. Taking it for what it is… and emotional reaction to the news and a follow through to the downside move. Regardless of the reason the technical setup for the downside followed through as the seller exert efforts to push the indexes lower. If the masses buy into the drop it will get ugly quickly at the continued overbought levels.

  • VIX Index (VXX/UVXY) hits the entry point and continues to be elevated. This is a very short-term trading opportunity as the volatility jumps back above the 20.5 level.
  • Semiconductors (SOXX/SOXS) short side shows some interest on the follow through to a bottom reversal in the chart of SOXS. $12.13 entry with a stop at $11.15… low-risk trade if the downside continues.
  • Short NASDAQ (SQQQ) followed through on selling an entry at $16.65 hit. stop $15.80. We will manage the short side trade accordingly.
  • Short Biotech (LADB) cleared resistance as selling followed through in the sector. Entry $3.45, stop $3.16. Watching how it unfolds today.
  • Financials (FAZ) the downside continued with $10.90 entry and stop at $10.35. This is a hedge against our long-term positions to protect the gains.

There are plenty of setups for short side trades over the last four day and more. The key is to not get caught up in the emotions but to trade what the market gives… nothing more.

Other moves of interest on the day… WEAT, TECS, EFU, TMF, RXD, SRS, and UDN.

WEDNESDAY’s Scans 2/28: end of the month selling? Reversal and retest of the Feb 9th low? Today will hold some answers as the initial bounce held until the last 90 minutes of trading when high volume selling upset the move to lead the broad market lower. Downside back in play? That is what we are watching and trading now as defined above in the sector break down. Some other key move on Tuesday showed up in the scans as well.

  • Oil & Gas Short (DRIP) cup and handle pattern in play. The $15.69 level will resume the downside for the sector and the upside for this trade opportunity. Oil is reacting to the dollar and thus the downside for the stocks.
  • Natural Gas (UNG/GASX) cup and handle pattern in play. Watching the 200 DMA overhead. Energy sector and commodities are moving lower in reaction to the dollar.
  • Russia Short (RUSS) bottom reversal as the downside in oil is impacting the country ETF… watching for a confirmation at the $16.70 level.
  • China Short (YANG) double bottom pattern in play and cleared the $4.83 level of entry. Crude, inflation, US politics, and just about everything else is impacting the country ETF… watch how today unfolds for confirmation.
  • Small Caps Short (TZA) bounced off the $11.42 support and move through the $12.13 resistance. short side trade is back and looking for the follow through today.

More sectors to watch from the scans… LABD, SCO, EDZ, ERY, FAZ, WEAT, JJG, DUST, and EFZ.

TUESDAY’s Scans 2/27: Reaction day of trading as short side exerts some muscle. Our first test of the second leg of the bounce off the Feb 9 low. I still have the belief we test the low and the upside is only a bounce reaction to selling. Taking money out of the upside trades with stops on the balance. Below are some moves of interest from Tuesday’s action.

  • Volatility Index (UVXY/VXX) bounced as anxiety returned on the Fed Chair comments to Congress. Upside trade is of interest at $16.70 entry. More comments from the Fed Chair today…
  • China (FXI/YANG) short side still of interest based on the current environment and the data. $4.85 level is of interest for a trading opportunity.
  • Gold (GLD/GLL) double bottom on the short ETF clears $66.50 entry on the move higher. Gold prices are reacting to the dollar strength. $68.24 is next level to clear and $66 stops on Tuesday’s activity. Gold miners (GDX/DUST) same issue with the downside reaction. $27.26 entry with a stop at $25.50.
  • Emerging Markets (EEM/EDZ) downside is back on the dollar and talks about the stronger outlook for US economy. Bottoming in EDZ and entry of interest if we move above $7.86.
  • REITs (IYR/SRS) downside resumed with the move in interest rates. Flag pattern in place and if the upside is to resume looking for entry at $35.36. Stop $33.25.

There are plenty of things to look at on the downside should this unfold. The first opportunities come in the root cause of the negative move… the dollar and higher interest rates… what do they impact… that is where the first shots are fired… the ripple effect is the second trading opportunity… I am looking at the first and building a list for the second should this all unfold.

Other moves to watch from Tuesday… TZA, SQQQ, SCO, FAZ, ERY, EFU, and UUP.

MONDAY’s Scans 2/26: Second day for upside in the second leg of the bounce off the low. Low volume again but it was higher than Friday. Technology did produce some leadership for the day. Taking what is offered by the markets and managing the risk… plain and simple.

  • Semiconductors (SOXX/SOXL) cleared resistance at $164.72 for entry opportunity to add to positions or add a new position. Nice upside follow through and we raised the stop to $158 ($150 entry).
  • NASDAQ 100 (QQQ/TQQQ) nice upside follow through… raise stops $145 entry trade to $159. Banked some gains on the $145 trade at $175 on the day (sold 1/4 of position).
  • Healthcare (XLV/CURE) added at $49 last week… finally some upside follow through and raised stop to break even.
  • China (FXI/YINN) upside follow through and watching how the country unfolds near term.
  • Financials (XLF/FAS) upside follow through as some leadership returns to the sector.

Leadership remains with technology (XLK) as big tech (QQQ, MSFT, INTC, CSCO, MU) steps up on Monday. Metals (DBB), Drugs (XPH), biotech (IBB), financials (XLF), semiconductors (SOXX), and retail (XRT) all continue to lead the upside.

Pattern and technical setups followed through on Monday confirming the second leg of the bounce off the Feb 9th low. Plenty of trade opportunities presented with volume as the only question mark on the move. Manage your stops on both new and older trades.

FRIDAY’s Scans 2/23: Positive day for the broad index… but, the volume was weak. We take what it gives, but look at how it can unfold to adjust and manage our risk accordingly. The scans were all on the positive side with some positive upside breaks through resistance. Stay focused on the horizon and manage your risk accordingly… still looking to take some money off the table near term.

  • Volatility Index (VXX/SVXY) the move higher in prices is pushing the volatility lower… the bigger question is will it return? If the S&P 500 index fails to move above the 2747 resistance it may very well do so. $13.30 level to watch for a short trade.
  • Energy (XLE/ERX) positive move in the index and back to the top of the bottoming range. $29.25 level of interest for a trade. I like the trade with the price of crude resuming the upside move.
  • Semiconductors (SOXX/SOXL) upside needs to clear $164.72 for entry. The leadership in tech returned on Friday and looking for the follow through.
  • NASDAQ 100 (QQQ/TQQQ) cleared $159.10 entry and followed through to end the week. The stop is break even on the trade… looking to take some off at the $170 mark and let the rest ride short term.
  • China (FXI/YINN) upside attempting to follow through at the $39.55 mark. Entry taken and stop at $37. Patience here for now as the emerging markets remain volatile relative to the dollar bounce.

Watching the leadership off the 2/9 bounce… BRZU, TQQQ, YINN, SOXL, TECL, EDC, SVXY, LABU, TNA, FAS.

Pattern Setups off the 2/9 bounce… EDC, LABU, TNA, FAS, CURE, EURL, MVV, ERX, XME, SOCL.

Stock patterns of interest… AMZN, NFLX, MOS, CF, AMAT, JWN, FSIV.

 

(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:

  • XLB – Materials bottomed and bounced off the 2.9 low… Cleared $60 level of entry and stalled at the $61 resistance. Followed through on Friday and watching how this unfolds in the coming week. Failed to hold the move above $60.96 and moved below $60 on Wednesday… tested support at $58.44 on Thursday. 
  • 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. Added to the position with a move above the $49.50 mark… Letting this play out as the trade unfolds. Failed to hold the move above the $49.50 level. 
  • 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? Some consolidation and drop to November lows. Watch for the opportunity. Bounced off the lows. $27.75 upside trade entry. Nice follow through with a stop at $27. Letting this unfold in the volatility of bottoming. Tested the bounce of the lows. 
  • XLP – Consumer Staples moved to the November low and held taking upside trade on the bounce again if we can clear the $54.92 mark. Testing the lows again. 
  • XLI – Industrials moved to support at $71.43 and bounced… Bottom reversal and followed through upside with entry $$75.72 and stop at $75. Letting it play out for now. upside break from consolidation and break of $75.72 on Thursday. Reversal in play. 
  • XLE – Energy sold below $67 and it responded positively with the upside in crude returning. $68.82 level of resistance to clear for any upside trades this week. Failed to hold the move above $68.82 and broke $67 support on the low again. 
  • XLV – Healthcare tested the 200 DMA and held… responds well at the $82 resistance on the bounce. Cleared $83.24 opportunity upside trade. Stop $83 and letting it unfold. Need to clear the 50 DMA as resistance. upside follow-through above the 50 DMA failed and testing teh $83.24 support.
  • XLK – Technology tested $62 support, bounced, and watching made positive progress with a ‘V’ bottom. $64.80 entry. Stop $65.50 (adjusted). Nice follow through on the upside. Moved to a new high and tested on Wednesday. 
  • XLF – Financials remain in a long-term tested $27 support, bounced, and watching how it unfolds this week. Cleared resistance and offered trade upside $28.25. Stop $27.25. Moved below the $83.24 support and retesting the previous lows. 
  • XLY – Consumer Discretionary sold with the rest of the market… found support at $99.42. Positive bounce and follow-through with entry at $102.50. Stop $102 (adjusted). Moved to support at $102.51. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. Bounced off the $82 support and watching. Tested lower again and bounced. A bottom pattern in play. Entry $84.80. Stop 83. Bounce retesting the lows.

Overall the sectors are positive, but they still have plenty of work to do. Looking for leadership near term. Technology, utilities, and basic materials led the week. Since the bottom reversal on 2/9 technology, industrials, and financials have led the upside move. In fact, they are the only three sectors to outperform the index overall for the period. That is narrow leadership and one reason I still think the downside isn’t done. Watching how this unfolds moving forward.

Fed Chair stated the facts as we know them and the reaction from traders was negative… it was a justification to sell the bounce off the February 9th low. The bigger question is answered, a retest of the lows and maybe more in motion. We hit stops locking in some gains and trading the downside opportunity as it unfolds. Emotions are in full swing as the ABCD pattern plays out. 

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

FINAL NOTES:

Upside move on Friday saves the week. The low volume on the move is a concern and one thing to watch in Monday’s trading. There are still plenty of questions on the horizon about too many things to outline. 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 correction bounce that has stalled and is looking for a rationale to move higher. The retracement is at a key level… it either breaks higher or we retest the lows. Our long positions we will look to take profit… if the test lower shows volume and conviction we establish our short side trades with a near-term horizon (0-90 days). Long-term views remain in an uptrend and our stops have been given more room with the recent move off the 2/9 lows. I can only focus on what is happening, how it impacts my beliefs and current positions, nothing more. The key is to filter out the noise and focus on the strategy being deployed with my money.

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.