Test of the Bernanke Speech Closes Flat

Tuesday, November 20th

Market started the day on a slightly negative note and never really found much in the way of upside after Bernanke’s speech sent the indexes lower. They did manage to rally back into the green before the close, but showed the tenuous sentiment from investors. The big debate rages on as to what will happen with the fiscal budget and taxes. Only time will tell and investors will continue ride the wave.

Banks were up more than 1% at one point for the day, and closed up 0.8% after the Bernanke spook. This is one of the sectors we want see gain upside momentum if the bounce is to amount to any more than a bounce. KBE closed at resistance of $23.10 on low volume, but is attempting to make a follow through move off the low. Bank of America, Wells Fargo and Suntrust were amoung the leaders gaining more than 1.5% on the day.

Healthcare followed through on the day as well with XLV closing at the next resistance point of $39.56. Looking for a follow through in the secto as well. Biotech was the leader on the day with IBB gaining 2%. Another sector we need leadership from if the bounce is going to follow through.

Consumer Services followed up the move from Monday to the downtrend line and the 50 day moving average. Retail bounced, but remains in the downtrend. The sector is key to the move higher if it goes for more than a bounce.

Plenty of speculation and discussion about the direction of the markets going forward, but the reality is too much to worry about to mount a serious run higher from my perspective currently. Take what the market gives one day at a time and don’t make any assumptions. Disciplined trades with stops to keep your assets safe.

What am I watching?

Follow through? Didn’t get much today, but it did hold the gain from Monday. Plenty of issues on the table other than just the fiscal budget issues. Watching for signs of health, otherwise still willing go be short the market on this bounce short term.

What about the estate tax issues with the Bush tax cuts expiring? The tax resets to 55% of any amount over $1 million. That is a substantial increase and will have an impact going forward if nothing is done. One more log for the worry fire.

Oil jumped higher on Monday and gave it back on Tuesday. Volatility remains in the sector and not worth the risk at this point to attempt to manage the directional changes.

Treasury bonds reversal on a market rally. TBT is the trade on the upside. Got the move today. Watch and protect the position as the bonds have been equally volatile on price.

Looking for a short set up on the bounce. The gap higher on Monday took the bounce trade away and we will see how this sets up going forward.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index rallied on the hope of resolution to the fiscal cliff on Monday. Tuesday dealt with the Bernanke speech stating the Fed needs the Congress to come to a useful resolution to the budget and taxes. Sold lower on the speech then bounced back to close even on the day.

The Scatter Graph below has a starting point of 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and then renewed the trek lower and on the 15th bounced off the recent lows. The bounce is in play now and we will shift the pivot point forward to the 15th if this move holds.

The leadership for the move has come from Consumer Services, Financials, Healthcare and Basic Materials. We would like to see Energy and Telecom join the move to the upside as well. Watch, be patient and protect against the continuation of the move lower.

Breaking the Sectors Down:

Financials – Bounce in play. cleared $15.45 resistance on the move today. Watch for confirmation and follow through on the bounce. Got some movement today as we watch for the follow through upside on the bounce move.

XLF – $15.70 potential entry on the move back towads the top end of the trading range.

XLU – Watch the bounce at $34 for a follow through on the upside. Holding above the $34 support without much upside taking place short term.

XLK – Watching the $27.20 level to hold from Friday bounce. Networking and Semiconductors are the key short term to this turning around. Watch as it held and had an inside trading day.

XLV – 38.75 support level to watch. Took entry on the S&P Model. Manage the risk of the move.

XLB – 34.77 support level to watch. Global picture is adding to the impact on the sector. Moved back towards the 200 day moving average. Looking for move higher.

IYZ – 200 day moving average support level to watch. Back above the 200 day and holding.

XLE – 68.24 support level to watch. Watch oil prices to provide a bounce if they rise. Moved back to the 200 day.

XLI – Watch and let this play out short term. Bounced? 200 day moving average in play.

XLP – 34.10 bounce in play. Above the 200 day again. Watch $35.25 for breakout.

XLY – 200 day moving average support level to watch. held and bounced. Testing the downtrend line.

On my Watch List looking forward:

The housing sector has turned the corner just in time to see a train coming head on. The sales have improved and inventories drawn down, not to mention the homebuilders stocks have have climbed better than 45% during the year. Why the train comment? The budget issues facing the country need income to feed the deficit. Thus, what better place to go than the interest deduction for interest on a home loans. If the rumors are true, that change could derail any continued recovery in the housing market short term.  XHB is testing support near the $24.35 level. The economic data relative to housing continues to improve this week. Existing home sales were better than expected, builders index was up over October and housing starts were better than expected. Impact on XHB… not much. The upside continues to struggle with the overhang of the current fiscal cliff issues and taxes. Watch for downside risk to risk on a pullback in the broad markets.

Short opportunities are not over… we did get the bounce we were looking for and now it is matter of sustainability? I am not inclined at this time to believe that exists. The oversold snap back was just that for now. This could and should based on what we know, produce a short opportunity on the rally and an opportunity to take money out of positions that have been lagging overall.

The VIX index (S&P 500 Volatility Index) remains low and not showing any elevated fear from investors.  This remains interesting to me short term and we will continue to watch how this plays out. Moved even lower Monday on the rally with the index moving back towards the 14 level.

NASDAQ Index – Have we found support? Intraday reversal on Friday gave some hope, Monday provided a opportunity on the upside, but there is still plenty of work to do moving forward. Due to the move on Monday we are still looking for the downside opportunity on the bounce. We will watch and be patient to see how it plays short term.

The bounce on Monday puts the index above the 10 day moving average, but still a long way from shifting the current trend. 200 day moving average is the short term target on the bounce currently.

WATCH: – QID – Entry $32.30 – Watch and let this develop short term.

2) Currency:

Dollar – The dollar bounce still in play, but volatility is rising short term. We will take the trend as the key and hold with our stop in place.

WATCH: UUP – Entry – $22.05 – Stop $22.05

Euro – Watch for a play to develop in the euro near term as support tested and the oversold conditions bring buyers in. Big bounce on Monday. $127.30 is the entry target for now.

WATCH: FXE – Entry – $127.50

3) Fixed Income: Yields bounced again on Tuesday putting downside pressure on Treasury bonds. The shift is welcomed for equity holders.Tested the lows and looking for some definitve direction short term.

Treasury Bonds – Reversal short term as yields climb on the 10 year to 1.65% and the 30 year to 2.8%. Watch the downside to play out short term with TBT is the yields continue to rise.

WATCH: TBT – Entry $60.25 / Stop – $60

High Yield Bonds – Big bounce on Monday with stocks moving higher. Watch the downside to return as the bonds tend to trade more in tandum with stocks.

WATCH: HYG – $91.70 short play <OR> SJB – Entry $33.25 (ProShares short high yield ETF)

4) Commodities: The commodity sector continues to be a challenge without clear leadership. The attempt to bounce off support didn’t last and the only real opportunities are generated by trading. Still not interested in holding the sector. Moved higher on Monday with the broad markets, but oil moved lower as the peace talks in Isreal settled the speculation. Too volatile to play in the sector for now.

WATCH: SLV – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance. Hasn’t materialized and looking to exit if we don’t move higher on Monday. Got themove higher and we watch to see how it progresses.

WATCH: OIL – $21 Entry – Gapped higher on Monday, tested the move on Tuesday. Middle East issues playing havoc with the futures market.

WATCH: UGA – Entry $56.25 / Stop $56.25- Watch and manage the volatility. Move above $57 positive. Made that move on Monday, but failed to hold the move.

5) Global Markets: The NASDAQ Global Market Index (NQGM) broke below the 200 day moving average and the downside has accelerated similar to the US markets overall. Likewise it rallied or bounced off the lows. The EAFE index broke support last week, but managed to bounce back on Monday with a 2% gain. Solid bounce back in China (FXI) after testing support. Still no clear direction in the global markets as the risk remains high in the asset class. one day doesn’t make the trend change. Watching for follow through.

WATCH: EFA – Bounced, but still looking for some clarity.

WATCH: EEM – Bounced, but still looking for some clarity.

6) Real Estate (REITS) – The sector broke support at $64 (IYR), and tested the $61 support for the recent bounce. Should see some stability, but limited upside for the near term.

WATCH: IYR at the 200 day moving average.

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. Greece back on the table along with Europe. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and attempting to hold support at $121.. Broke on Friday… watch to see how it plays this week.

WATCH: International Corporate Bonds (PICB) – broke below support on Thursday and confirmed Friday. Clear exit for any positions. .

Watch: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit 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 risk will limit the downside of your portfolio.