Volatility and potential reversal in play

Thursday – Notes & Research

Day 4 It’s back! Cyprus keeps banks closed until next Tuesday and that prompts a concern of a run on the banks in other European countries with similar problems. The US markets react to the European reaction and we sell off more than 1% intraday. Wow! I love it when fear morphs into speculation and reaction by investors. There is plenty to discuss today as the sector impact is now getting to a level where we have to fish or cut bait. Scanning the sectors for rotation we continue to see developments that are warnings in the making.

  1. Oil drops more than 1% in response to the issues above. OIL remains at support and we watch to see how this story unfolds looking forward. We will have to see if this develops into a downside opportunity.
  2. Volatility index jumps back above 13 on the worries today. VXX is setting up for a trade above $21.10 again. Watch the futures in the morning for possible move on volatility.
  3. Speaking of volatility… Technology (XLK) is moving up and down 1% a day the last week. Still in the consolidation range for now, but setting up for a trade whichever direction momentum decides to go. SOXX fell back to the bottom side of the uptrend channel again to test the uptrend. Watch how this unfolds short term.
  4. Gold started the trek higher again as the Cyprus catalyst returns? I know, yesterday it was gone… today it is back. Watch for the upside to break through $156.40 for possible upside trade. ¬†We will add this to the ONLY ETF Watch List for tracking… up or down. Silver (SLV) bounced back to the topside of the current range. Worth attention as well short term.
  5. Interest rates rose on the 30 year bond to 3.15%. Volatility picking up again in the bonds as fear rises. Watching TLT and TBT to define the trade that unfolds from the current up and down action.
  6. China bounced 2.5% on Wednesday and fell 1.1% today. The downtrend remains in play, but watching to see if support holds near the current lows.

Wednesday the big question mark on the day… Will this move higher hold? Answer… not today! What went up just went down. We must give room for this to play out as the issues are purely speculative in nature due to the uncertainty in Europe. We stated that we were back to the four options on the¬†S&P 500 index high of 1565 we posed earlier in the week.¬†¬†The one playing out since the post is never, or at least delayed. Still looking for the answers on market direction relative to the issues overseas.

Economic Data:

Jobless claims better than expected. PMI better than expected. Home prices up year-over-year. Leading Economic Indicators better than expected. Philly Fed better than expected. All positive, however the trump card on the day was held by Europe and Cyprus worries.

Economic Events & Calendar 

1) US Equities:

Back to the downside as the worries globally return. Wasn’t as bad as it could have been, but then the upside hasn’t been stellar either. This is going to have to work itself out short term before any good comes of the current activity.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside (added chart as well to see the downside leadership), and yesterday’s line was moved to today as when move lower than Tuesday’s close. I know it looks confusing, but it keeps the trend in perspective and allows you to focus on what matters, the trend. The shift in the chart today has some impact. XLB led the downside losing 1.7% and sitting on support at the $39 level. XLK, XLI and XLF all fell more than 1% on the day as well. XLE and XLB are leading the downside over the last five trading days. Six sectors below the index and four above. The pressure on the downside is in play and we have to be cautious of how this unfolds.

Scatter 314

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The trend has continued to push higher after the February 25th test. See above.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. 

SP500Scatter

Sector Rotation of Interest:

Technology РBecoming volatile short term and the downside pressure is building. Watch support at $30 on XLK. Closed at $29.97 and the 30 DMA.

  • Semiconductors (SOXX) Tested the bottom end of the up trending channel. Watch $58.80 as trade on upside and $57.50-57.25 on the downside.

Financials РThe Cyprus initiative is pushing the sector back towards support at $17.90. Watch the outcome short term and manage your stops accordingly.

Energy РThe sector hit resistance at the $80 level and tested lower. Watch for support to hold at 50 DMA. Volatility in play, but the uptrend is holding for now.

Consumer Discretionary РBroke above the $51 resistance on XLY. Made a nice move on the upside and has stalled off the $53 high. The stall is in concert with the broad markets, patience short term.

2) Currency:

Sector Watch:

  • Dollar back near the high on euro news. The move higher keeps the upside trend in play. UUP closed at $22.56. Still watching support at the $22.35 mark on the downside. Manage your stops.
  • FXB¬†– the British Pound jumped big last week and held¬†the¬†move. Watch for move above¬†the¬†$150 level. Tested the move today, but closed lower.
  • FXC¬†– the Canadian Dollar is attempting to hold support at $95.35. Bounced nicely to breakout, but has retraced to the consolidation zone.
  • FXY¬†– yen is still in bottoming mode. ¬†Watch for a base to build short term if the direction is to switch.
  • FXA¬†– Australian dollar bouncing as stocks continue higher leading the way. ¬†ONLY ETF MODEL.
  • FXE¬†– ¬†The euro is testing support on the downside again? Broke support at the $128.15 level for now? Watch.

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly higher as stocks hold gains. ¬†The question is if the market corrects how much will it impact? Patience as the downside in bonds continues.
  • 30 Year Yield = 3.15% – down 2 basis points — ¬†TLT = $117.24 up $1.11
  • 10 Year Yield =1.93% – down 1 basis points — IEF = $106.85 up 28 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe volatility in the bond sector has risen short term and it is causing grief for investors. Watch and protect on the downside. Estimates are for 2.75% on the 10 year bond by year end? Bounce in motion for the bond off the lows for now. Volatility is back.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95 Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. Downtrend line remains in play. Patience as this plays out.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The downside risk remains and this is a sector of the bond market to avoid for now.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Starting to see some selling off the highs. Watch stops and protect your gains.

4) Commodities:

Sector Summary:

  • The commodity sub-sectors are finding some signs of life along with volatility in the sectors. Watch and play the leadership. GSG attempting to build a base on the parts moving. Hitting the 200 day moving average as short term resistance? Not for the faint of heart.
  • UNG (natural gas) made the big move higher breaking out and following through on the upside. Testing the high as well as the $22.45 resistance. SEE¬†ONLYETF Model Portfolio
  • Crude tested support at $89.30 last week and closed at $92.38 for the day.¬†ONLYETF Model Portfolio¬†The upside is still in play. Tested the $22 resistance on OIL.
  • GLD – Gold gained on the alternative asset choice relative to Cyprus, Europe, China or any other worry produced this week. The gain put the metal back near the $156.25 level. Downside is still the outlook, but we have to be patient.
  • DBA and DBB ¬†both trading near their respective lows – watch the downside¬†acceleration.

Commodities Rotation Chart:

 

5) Global Markets: 

 

Country Watch:

  • Global markets tested lower on the Cyprus news to start the week and volatility has kicked in since. More downside pressure added today as the Europe issue is back on the table. ¬†The other shoe syndrome is still alive globally.
  • FXI¬†– China continues to lead the downside relative to the global markets. FXI bounced 2.5% on Wednesday and dropped 1.1% today. Downtrend in play… news not enough to change direction short term.
  • Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.60 and still moving to the¬†upside. Getting extended, protect your gains.
  • EFA¬†– The long term uptrend remains in play and support has held, but the sideways motion and the 30 DMA have my support. Watch the ripple effect of Europe short term as this plays out.
  • EEM¬†– emerging markets continue to struggle. Short is the call on the sector. (EEV breakout $22.75)

6) Real Estate (REITS):

Real Estate Index (REITS) РSettling into a trading range near the high of $68.50-69.25. Sector Rotation Model

Sector Summary:

  • XHB – Homebuilders moved to new high on the housing starts Wednesday, retraced some today, but still remains a positive sector. Be patient and manage your stops if the downside resumes.
  • REM – Mortgage REIT continues to push higher in the trend – let it run is the only thing to do with trailing stop.
  • NLY- Annaly Capital Management – continues the upside trek with some daily volatility. Hold and let it run.

7) Global Fixed Income:

Sector Summary:

  • The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.
  • Some basing is starting to take place and we continue to scan and look for opportunities in the sector.

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 losses.