Upside follow through and more consolidation

OUTLOOK: March 6th

The ups and downs continue with the market subject to the news and belief of the day currently. Congress decided to chime in on the tariff issues and stated they were worried about such actions… thus, a bounce in stocks ensued.  A positive day for stocks and hope for the upside returned. The bias is still to the downside as an ABCD pattern emerges clearer on the charts. The bounce off the next level of support (2663) on Friday followed through on Monday and sets up the next leg of the pattern. 2700 or 2750 would be the bounce and then the downside would continue based on the way the pattern unfolds. This is all statistical and technical data… if it unfolds the downside plays will continue the test of the February 9th lows. From the longer term chart, you see more of a topping pattern for the uptrend. Look at the market and your positions from the proper perspective and don’t let the short-term volatility impact your views longer term.

The S&P 500 index closed up 29.6 points at 2720 and bounced intraday off the next level of support. 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 ABCD pattern in play. Need to clear 2779 upside to break the pattern or 2660 downside. Letting this unfold as we continue with a negative bias. We added SPXS at $26.90. Stop $27 (adjusted). Target $32.

The NASDAQ index rallied as well off the test of 7103 level of support and followed through on Monday. The chart has the same setup but has more leadership with technology holding up well in the current selling. 7422 is the level on the upside we have to clear or 7116 on the downside. The move below support 7206 put the short side trade in motion for me with SQQQ at $16.70 entry, $20 target, stop $16.25.

Small Cap index has been weaker on the bounce off Feb 9 low. The bounce off the intraday low on Friday $148.40 followed through on Monday to clear $152.53 level again showing some positive traits finally. The chart needs to clear $154.90 upside or $148.38 downside to alter the current pattern. We added a short side trade in TZA on downside move with entry at $11.90, stop $11.35, and target $13.50. Watch and see how this unfolds.

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 but have failed to follow through yet on the upside. The bias remains lower. Base metals (DBB) are showing some topping on the charts closing below $19.35 and attempting to hold the next level of support at $18.68.

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 and then the tariff talks started pushing the buck lower to end the week on a negative note. The positive notes from Congress on Monday failed to help. Watching for the reaction moving forward.

Treasury Bond yields moved to 2.88% as they continue to deal with a rolling top. 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 the ‘fear’ of stocks could create a rally in bonds. The VIX is showing some settling in anxiety levels and could allow bonds to resume the downside move as yields rise.

Crude oil (USO) moved back above the $61.60 mark showing the same ABCD pattern as stocks. The weaker dollar added the bounce Friday… followed through on Monday and 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) again on a stronger dollar. Last week we retest of the $47.90 mark that held on Friday. Short side entry offered with the move below $48.60. Bounce in play for now.

The Volatility Index (VIX) closed at 18.7 Monday… chart shows the uncertainty from investors currently in the market outlook. Watching how the week unfolds with all the talk of tariffs and trade wars or not.

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 gained momentum last week with threats of tariffs and trade wars globally. The selling volume for the week rose as the indexes setup a downside pattern. The economic data continues to garner attention as the Fed confirms growth and interest rate hikes. The Fed Chair comments to Congress reinforced this outlook and the impact on interest rates. 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 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 holding in a trading range of $107-112. Positive follow through on Monday. 

Semiconductors (SOXX) bounced off the low at the $166 level and established a new high… then tested lower, but the sector is holding okay. Watching the $181.60 level of support and the 10 DMA. Moved back to the previous highs and remains a leader. 

Software (IGV) hit new highs last week and despite the retreat midweek it is holding above the $171.11 breakout high. Watching how this sector holds up near term. Moved to a new high again showing positive leadership. 

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. Gave up gains… watching downside. Bottoming pattern remains in play. 

Treasury Yield 10 Year Bond (TNX) moved to 2.83% showing some rolling top activity of late. The recent bantering and talk from the Fed and Washington aren’t helping the cause. 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).

Energy stocks (XLE) The sector tested the $67 level of support again with a break and bounce to end the week as crude leads the activity. Entry at $68.85 is of interest if the upside validates the move. Short set up with ERY entry at $11 if downside follows through. Bounced off the low. 

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. $22.69 upside is level to clear. Patience as this unfolds. 

The S&P 500 index closed the week down 2% for the week. The middle of the week was negative testing the upside bounce off the 2/9 low. Monday and Friday were positive, but not enough to overcome the selling. Watching the ABCD pattern unfolds. We continue to look for leadership. Semiconductors and software are positive, but they are outweighed by the downside of materials and industrials. Patience is the key for now with risk management at the forefront. Positive day to start the week as the pattern unfolds. Leadership from technology is positive on the day. 

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

Daily Scan Results:

MONDAY’s Scans 3/5: A positive follow through to the bounce on Friday. Looking for the follow through if the near term activity is to resume the uptrend. Average volume on the bounce and technology leads the upside move. We will deal with any short trades if the upside continues, but my bias in the pattern remains on the downside. I know it sounds stupid… but you have to trade what you believe and not your emotions.

  • Biotech (IBB/LABU) bounce follows through and back to resistance. $98.60 is the level to clear for the upside trade in LABU. Watching volume and bias as this unfolds.
  • Financials (XLF/FAS) nice follow through to the bounce on Friday. There is still work to be done to resume the uptrend.
  • Crude Oil (USO/UCO) followed through on the bounce Friday. Watching as the dollar struggle resumes. Needs to clear the $26.71 level upside. Still in the pattern consolidating.
  • NASDAQ 100 (QQQ/TQQQ) upside bounce followed through and watching how it unfolds. Technology leading the sector currently.
  • Semiconductors (SOXX/SOXL) upside follows through as the sector heads back towards the previous highs. Watching the volume on the moves upside.

Leadership reamains in technology (XLK), semiconductors (SOXX), and software (IGV). Some solid upside moves in biotech (IBB) and financials (XLF) on the day.

Patterns remain in the ABCD move as a majority. The consolidation is building across the board and watching for the next catalyst… up or down.

Other Charts of interest… CURE, FDN, FCG, SKYY, WEAT, XBI, IGN, DBA

Plenty to ponder on the move Monday… volume, news driven, emotions still in play (VIX)… hope of the upside return is the driver. For me, the technical data still points to a retest of the Feb 9 low. Letting this unfold and taking it one day at a time. Short side trades set up slowly as bull markets die a slow death.

FRIDAY’s Scans 3/2: Positive day with a relief bounce in the broad indexes. Tested lower to start the day and then the buyers stepped in and the index closed near the highs of the day. Prototypical day to continue the ABCD pattern setup lower. Hit some stops on short side trades, but we will look how they unfold and add them back if they warrant the trade. The long-term outlook remains a testing of the uptrend.

  • Semiconductors (SOXX/SOXL) trading range… $181.60 twice attempted to break higher… both failed. Still leading… still questionable letting it unfold as one of the last leaders to hold support and hold for the broader index.
  • Software (IGV) uptrend remains in play and the new high on Monday last week was tested… reestablished upside interest on Friday and watching how it unfolds this week… another leader holding on during negative times.
  • Biotech (IBB), semiconductors (SOXX), small caps (IWM), technology (XLK), Cybersecurity (HACK), and pharma (XPH) showed some leadership with a solid bounce on Friday off support. All worth watching as we start the new week of trading.
  • Energy (XLE/ERY) testing the $67 level of support as the sector remains under pressure from sellers. The bounce in oil helped the cause on Friday, but the weakness in the stocks remains… short side set up in place with a break below support.
  • EAFE index (EFA) not a pretty chart, but it is a classic downside move with a failed bounce and retest of the lows. Break of the 200 DMA and we will see more downside in the index. EFZ is the short side ETF to trade.

Watching for Leadership: SOXX, XLK, HACK, QQQ, TMV, KWEB, SOCL, FDN, and KRE

Pattern Setups: ERY, NAIL, UGL, IEO, DUST, UNG, GLD, XME, and EFA

Charts of Interest: LABU, SOXL, TNA, TMV, ERY, SCO, EWO, and IYR

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.

 

(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… Failed to hold the move above $60.96 and moved below $60 on Wednesday… tested support at $58.44 to end the week. 
  • 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… 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.
  • 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. Break of support at $75.72 on Thursday. The reversal is in play. 
  • XLE – Energy sold below $67 and it responded positively with the upside in crude returning. $68.82 level of resistance to clear. Failed to hold the move above $68.82 and broke $67 support on the low again. 
  • XLV – Healthcare tested the 200 DMA and held… its all been up and down since. Managed to move back above the $83.24 level on Friday… watching patiently for this to unfold.
  • XLK – Technology tested $62 support, bounced, and watching made positive progress with a ‘V’ bottom back to previous highs and testing again. $64.80 entry. Sold at $67.50 Friday. Bounce off the test and locked in gains.
  • 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 $28 (adjusted). Tested again on Friday and watching how this unfolds near term.
  • 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 $104 (adjusted). Hit Stop Friday… watching how the saga unfolds with downside bias in place.  
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. Bounced off the $82 support and watching. Tested lower again with a bottom pattern in play.

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:

Bounce on Friday sets up the ABCD pattern. The high volume selling mid-week offers short side positives and the reaction to the bounce to start the week will be of importance. 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… I am looking for a retest of 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.