The market gapped lower at the open and stayed down all day. Just to make sure everyone understood the current sentiment it sold more into the close. The leadership retreated as well with mega caps, software, energy, and semiconductors all selling lower. Interest rates jumped 13 bps and the VIX rose 15.8% on the day showing the anxiety in the markets. Looking at the charts we see the NASDAQ, NASDAQ 100, Dow, and SP500 back to the August lows… with they bounce on Friday? That is what we will be looking at premarket. IWM, SOXX, and IJH all broke below the August lows and bring the May/June lows into play. The question for them is are they oversold and ready to bounce? This all makes Friday an interesting day for trading. From a longer-term view, the move lower brings stops into play as well. Our focus is to find the opportunities in what is happening and there are some interesting scenarios setting up.
The NASDAQ & SP500 indexes both traded lower on the day testing the August lows. Volume accelerated in the selling and was above average on the day. The sell-side bias picked up momentum and followed through on Wednesday’s selling. The S&P 500 index closed down 1.6%. The NASDAQ was down 1.8%. The SOXX was down 1.8%. Small Caps (Russell 2000) were down 1.5%. The ten-year treasury yield closed at 4.48% up 13 bps and that is bad news for banks. Crude (USO) was up 0.3%. (UGA) was up 0.1%. Natural gas (UNG) was down 2.5%. The dollar was up 0.1%. We are focused on managing the risk and seeing how investors respond to the current situation.
ONE Chart to Watch: QQQ – 1) Broke support $366.14. Testing the next level of support at $355. 2) Broke the uptrend from the August low. Reestablished the downtrend from the July highs with a lower high. 3) Added short side trade with SQQQ entry $18.62. Stop $20.07.
Additional Charts to Watch:
SOXX – weakness accelerated again on Thursday breaking support at the $473.23 level. The head and shoulder pattern breaks lower and was confirmed on Thursday. SOXS entry $10.35. Stop $11.89.
Retail Stores – EMTY breaking higher as commercial real estate for retail stores struggles with plenty of distressed sales and bankruptcy issues in play. Short side entry was taken. Entry $15.25. Stop moved to $16.56 and let it unfold near term. Cup and handle pattern on the chart.
Energy – Tested support near $86 and bounced… entry $87.80. Stop $91.02. Hit Stop. Crude tested lower as well. UCO entry $30.72. Stop $35.44. Letting it work. Rolling top. Expect some testing but a return to the upside. Watching opportunities.
Stops Hit: None
Quote of the Day: “Care and diligence bring luck.” – Thomas Fuller.
The S&P 500 index closed down 72 points to 4330 moving the index down 1.64% with above-average volume on the day. The index broke support at 4338 and watching how Friday unfolds. Lower high established and downside risk is elevated. None of the eleven sectors closed higher on the day with healthcare as the leader down 0.8%. The worst performer of the day was REITs down 3.5%. The VIX index closed at 17.5 moving back near the August highs. Break lower has our attention.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials gave up the majority of the bounce and is looking at the 200-day MA as support. The sector was down 0.1% for the week. No Positions. Gapped below the August lows.
XLU – Utilities back to the previous lows and bounced moving above the $64.11 level for entry at $64.15. Stop $64.15. The sector was up 2.8% for the week.
IYZ – Telecom reversed back into the trading range and tested the bottom of the range again. The sector was flat for the week. No Positions. Moved back to the August lows.
XLP – Consumer Staples broke below the June lows. Remains in a downtrend. The sector was down 1.4% for the week. No Positions. Moved below the May lows.
XLI – Industrials established low and bounced… trying to reverse but still not looking healthy. The sector was 0.5% for the week. No Positions. Broke support $102.40, and June lows are now in play.
XLV – Healthcare broke support at $132.64 again after an attempt to move higher. The sector was up 0.1% for the week. No Positions. Downtrend in play.
XLE – Energy moving higher on higher oil prices on the production cuts from Russia and Saudi Arabia… Biden administration has painted themselves in a corner relative to the petroleum sector. The sector was down 0.1% for the week. Entry $81.95. Stop $91 (hit stop). Letting it unfold. Resistance at $92.94 in play. Topping pattern on the chart. Tested below $90 support.
XLK – Technology The sector has turned lower and broke support at the $169.50… negative short-term outlook. The sector was down 2.2% for the week. Moved below the 50-day MA. August lows support.
XLF – Financials Tested the $33.78 level of support and bounced. The sector was up 1.5% for the week. Bank downgrades not helping the sector. BAC testing support and a break lower would be negative for the sector overall. Higher interest rates are bad for banks… watching how this unfolds. 10-year hit 4.48% on Thursday…
XLY – Consumer Discretionary Bounced off support and watching the outcome. The sector was up 1.8% for the week. No Positions. Led downside all week. Retail (XRT) chart moving lower as stocks show weakness.
IYR – REITs Bounced at support… flattened out as the outlook for commercial real estate isn’t great. The sector was up 0.3% for the week. No Positions. Bottom fell out on Thursday… look for a bounce.
Summary: The index closed lower following the FOMC meeting. The negative sentiment from Wednesday remained in the trading on Thursday. Rates were up, energy and tech lower, and semiconductors added to the downside. Retail add to the downside. Philly Fed tanked down to -13.5 versus 12 prior. The index moved to key support and remains in a negative bias. SPY closed below the August lows. Remember two things; first, the trend is your friend, and second, don’t fight the Fed. The Fed proves once again they are in control.
(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)
KEY INDICATORS/SECTORS & LEADERS TO WATCH:
The NASDAQ index closed down 245 points to 13,223 as the index was down 1.82% for the day. Mega-caps led the selling. Support at 13,618 broken… 13,274 support broken… 12,977 now in play. Watching how stocks respond on Friday… some oversold sectors could bounce helping the overall indexes bounce. SOXX was down 1.8% and IGV was down 2.3% for the day. Downside gained some momentum on the day. Watching how Friday unfolds.
NASDAQ 100 (QQQ) was down 1.83% for the day as mega caps traded below support at the $366 level and watching $355 now. The sector had a negative bias for the day with 6 of the 100 stocks closing in positive territory for the day.
Semiconductors (SOXX) The sector moved below the $497 level and accelerated lower on Friday. The sector was down 2.6% for the week. SOXS entered. Broke support and added to the downside. Oversold look on the chart… watch for sympathy bounce.
Software (IGV) The sector broke lower on the week $345 is the support level to hold. The sector was down 1.9% for the week. Exit hit at $360 with solid gain. Joined the downside finally breaking $345 support. $336 next level to hold.
Biotech (IBB) The sector remains in a four-month trading range with a downside bias. The sector was down 0.2% for the week. No Positions. Back below $128.35 support. Broke lower… technically oversold and watching.
Small-Cap Index (IWM) Tested back to the 200-day MA as support. The sector was down 0.2% for the week. No Position. IJH midcaps were equally as bad on the week. Negative day – head and shoulder pattern on the chart breaks support $182.45… added to the downside… now oversold and watching.
Transports (IYT) Broke below the $247.67 support and $238.80 is the next level to hold. The trend has reversed to negative short-term. The sector was up 0.3% for the week. No positions. Airlines warning about higher fuel prices… go figure. Broke lower adding to the downside move.
The Dollar (UUP) The dollar moved back above the June highs and continued higher. The dollar was up 0.3% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions. Solid uptrend remains in play.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.32% up from 4.26% last week. TLT was down 1.5% for the week. Watching how the Fed manages the yield curve. Yields holding at the 4.3% mark for now… Fed wants to keep it there or lower. No Positions. FOMC meeting Wednesday. Yields jumped 13 bps to 4.48% and bonds tank. Banks react as well… don’t be surprised to see the Fed intervene in the process… I know that is crazy but they have to protect the system. TLT fell 2.6% and is oversold short term… watching for the opportunity here.
Tuesday’s 20-year note action showed again a lack of interest from foreign buyers. Rationale… the increase in US debt by more than 1 trillion dollars over the last three months is worrisome. This issue is not going away and the ripple effect will be determined looking forward.
Crude oil (USO) Crude bounced off support and broke higher. USO was up 3.8% for the week. UCO entry $30.72. Stop $35.44. Letting it unfold. Hovering at the $90 level. Got the near-term test, and now we see how this unfolds short term.
Gold (GLD) The commodity remains in a downtrend from the June highs. The metal was up 0.1% for the week. Letting it unfold. Watching the 200-day MA. Bounced… failed and remains in the consolidation pattern.
Our longer-term view remains neutral as the upside trend from the October lows was broken on Thursday… if this confirms on the downside long-term positions will hit their stops near term. Nothing goes straight down or up… there are always positive and negative swings in a longer-term trend. A look at the daily chart from the October lows validates exactly that premise with plenty of volatility along the way. With the trend broken, it puts the broad indexes in an intermediate limbo awaiting confirmation… the last eight weeks’ the micro-trend has tested the longer-term trend and we need to manage stops accordingly on longer-term positions. The topping patterns broke short-term support to create micro-term downtrends that have moved lower this week. The economic data is showing signs of fatigue relative to growth. Seeing some oversold sectors short term and looking how that impacts the longer term view. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.
Friday: Watching the downside pressure as some sectors test the August lows and others break lower. Mr. Powell’s comments relative to inflation, interest rates, and the economy rattled investor psyche. Do we get a relief bounce on Friday? Do we continue to sell lower? The question is will buyers step in to reverse the selling? Letting it play out as we look for opportunities in the current activity. We got a pivotal move on the downside Wednesday… confirmed on Thursday… do the buyers show up on Friday… if they do, for how long? Fed did as expected with no rate hike… surprised with the rosy economic outlook… took rate cuts off the table for 2024… markets reacted on the negative side… Friday will be interesting.
What I am watching:
How does the market respond? We tightened our stops on short side plays. We could see a sympathy bounce. It will all depend on the conviction of the money flow if the buyers do step in. Key area of interest are: QQQ @ $355. SOXX $447 test lower. XLE @$89. USO @ $80.60. TMF back to $5.60. Oversold versus more selling is the question. Makes Friday an interesting day of trading.
Congress is debating the new spending bill/budget for the US government… September 30th ends the fiscal year and a new budget has to be passed or the nonessential government shuts down. I know that is all the government! They are flirting with big ramifications if they fail to come to a budget. Keeping our eyes on this issue as well.
GBTC… upside favored. (Added $18.61.)
BTFP hit another record and the size of the loans/gifts was up to $208 million for the week. More borrowing as banks can’t seem to make enough to pay down the underwater assets on their books. The FDIC was out again about the $550+ billion in unrealized losses in the banking system… If I were a betting man it is probably five times that number.
Inflation warnings are popping up again… on May 4th crude was $67. On August 1st crude was $81.96 which is a 22.1% increase in price… where does it go? Correct, into everything we basically touch. We own USO and UGA in order to keep pace with being able to afford gasoline. But it goes further and we should be looking at where to invest to keep pace with the next wave of inflation.
Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.
“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 develops 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.