Jim’s Notes Tuesday Recap

Moving the Market – February 13th

The markets had the look of a pre-Valentine’s Day massacre as stocks dropped to the 20-day EMA in one day. There was more breadth with all eleven sectors closing in the red. The sellers have been lurking in the background but never could make a complete effort the last few weeks… Tuesday they jumped on the disappointing CPI data and took control from the opening bell. The early attempt to bounce back gave way to more selling in the afternoon session. Small caps gave back their three-day break higher move to test support again at $192. SPY, QQQ, DIA, MDY all tested to the 20-day EMA. MGK was down 1.3% versus RSP was down 1.6% showing the breadth of the downside move. This brings the question… do we hold at this first level of support? I would say there is at least an attempt on Wednesday to hold this level, and we will watch how it unfolds. It will come down to how investors view not only the CPI data but the PPI as well. There are solid patterns on the charts to bounce, but it will need a catalyst to do so… maybe the FOMO trade will come back. There was a move higher in the last 45 minutes of trading on the indexes… do the buyers return? Watching patiently and managing the risk that is.

The indexes moved to key support and we took money off the table as stops were hit on positions protecting our gains. With the Fed storyline being relentless about fighting inflation the CPI data was not what investors were looking for. Remember, don’t fight the Fed. That is why we have been very cautious following the FOMC meeting results. They continue to want clearer data from the economic outlook that prices have stabilized… the CPI didn’t give them that data… we now turn to the PPI numbers on Friday. Watching the volatility factor that spiked on Tuesday. The NASDAQ closed down 1.8%, DIA was down 1.3%, and the SP500 was down 1.3%. The major indexes were lower on the day. The SOXX was down 2%. Small Caps (Russell 2000) were up 4.1%. The ten-year treasury yield was 4.31% up 14 bps for the day. Crude (USO) was up 0.7%. (UGA) was up 0.9%. Natural gas (UNG) was down 4%. The dollar was up 0.8%. We are focused on managing the risk in the current environment and letting it unfold.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “Letting losses run is the most serious mistake made by most investors.” — William O’Neil.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 68 points to 4953 moving the index down 1.37% with above-average volume. The index failed to hold the 5000 level. The index posted a doji candle with a bounce off the intraday lows. Money flow pointing to the index being overbought short term as seen on Tuesday. Eleven of the eleven sectors closed lower on the day with healthcare as the leader down 0.9%. The worst performer of the day was telecom down 2.2%. The VIX index closed at 15.8 bouncing higher on the day. Plenty to ponder between the headlines and the facts. Patience. 4815 level of support to hold. Watching how the Fed factor plays out relative to the inflation data.

Leaders:

XLK – Technology Entry $193. Stop $202. Bounce-off support at $183.50 and renewed the uptrend. Tested and bounced… Letting it play out and managing the risk. The sector was up 2.7% for the week. SOXX, IGV leading. Test to start the week.

XLY – Consumer Discretionary Tested support $171.50. Moved into a downtrend channel on the chart and moved higher during the week. Needs to move above the December high. The sector was up 1.4% for the week. Doji candle on the close Tuesday.

XLF – Financials Entry $33.65. Stop $37.80. Traded slightly higher into a consolidation pattern. The sector was up 0.2% for the week. Holding move above the resistance at $37.95. NYCB regional bank worries is worthy of our attention moving forward. NYCB and KRE bounced nicely on Friday.

XLV – Healthcare remains in an uptrend from the October lows. Solid upside for the week confirming the move above the previous high. Entry $129. Stop $141. The sector was up 1.4% for the week.

XLP – Consumer Staples Uptrend remains in place for the defensive sector with a move towards resistance at $74.72 being tested. No Positions. The sector was down 1.4% for the week. The uptrend remains in play. Tested lower.

XLI – Industrials Topping pattern broke above resistance. Held $110.75 level of support and cleared $114.20 resistance. No Positions. The sector was up 1.1% for the week. The uptrend remains in play.

Laggards:

XLU – Utilities Moved back to the $60.10 support level. In a downtrend from the December highs. Watching how this unfolds. The sector was down 2% for the week. Back below support.

XLE – Energy shows a bottoming pattern and attempted to clear $84.33 resistance but failed on Friday. Some volatility as crude oil looks for direction. Entry ERX $52.15. Stop $54.20 (adjusted). Let it play out. The chart remains in a downtrend from the September highs. Back in the trading range.

IYZ – Telecom Topping pattern continued and broke below support at $22.93 offering a downside opportunity. Small bounce to end the week and watching how this unfolds. The sector was down 3.4% for the week. Solid gain on short trade Wednesday & Thursday adjusted stop. Resumed the downtrend.

XLB – Basic Materials bottom reversal in play with key support at $81. The downtrend in play from the December highs was up 0.06% for the week. Letting the consolidation unfold near term. Activity picking up in the materials CF and EXP. Broke higher from consolidation pattern and tested Tuesday.

Losers:

IYR – REITs Moved to the next level of support at $87. The sector has been drifting lower on higher interest rates of late. The sector was up 0.05% for the week. Watching Interest rates near term. Watching NYCB as they cut their dividend due to commercial loans underwater… Remains in a short-term downtrend from the December highs. Failed break higher back in the downtrend.

Summary:

The index was lower on the day with all eleven sectors selling lower. Money flow remains in overbought territory. The market has shown signs of fatigue and the CPI data in light of the FOMC notes and Fed talk was bad news. Gapped lower, sold lower, and bounced last hour of trading. Small caps with latest gains showed the worst losses on the day. Watching how the leaders respond on Wednesday. Remember two things; first, the trend is your friend, and second, don’t fight the Fed…

(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 Indexes & Sectors To Watch

The NASDAQ index closed down 286 points to 15,655 as the index was down 1.8% for the day. Downside in both semiconductors and software to lead the downside move. Small caps and energy helped on the downside as well. Uptrend remains in play and watching how Wednesday unfolds. Managing the risk that is and watching leadership.

NASDAQ 100 (QQQ) was down 1.56% for the day as the mega-caps tested support. The uptrend remains in play. Manage stops and let it play out. Entry $354.20. Stop $425. Patience.

Semiconductors (SOXX) Added position at $601. Stop $625. Tested lower… bounced at support at $583.41. Took the opportunity presented. The sector was up 5.5% for the week. The uptrend from the November lows remains in play. Back to the upside leadership… Hit stop as it was tight. Watching how it responds… tested support.

Software (IGV) continued the uptrend from the January test. Broke higher from the topping on the chart. The sector was up 2.9% for the week. Adjusted stop on the move higher. Tested support and watching.

Biotech (IBB) Topping pattern on the chart and a modest downtrend from the January highs. Entry $121.30. Stop $133. The sector was down 0.01% for the week. $136.50 level to clear on the upside. Closed below support hitting stop…

Small-Cap Index (IWM) down trending move breaks higher and looking for confirmation of the move. Added at $192.13 upside move. Cleared $198.64 bar. The flag pattern on the chart breaks to the upside. Letting it unfold with a breakeven stop. Three solid upside days were erased in one day. Led the downside.

Transports (IYT) Broke higher from the sideways trading range and confirmed the move higher. Despite the Red Sea issues continuing to escalate the sector is moving higher. BDRY has done well in response, bouncing back from the test at $8.95. The sector was up 3.1% for the week. Entry $266. Stop $263. Tested support.

Red Sea issues are continuing to be bad. There are been ships on fire, protection vehicles turned back, and just an overall mess. The cost in some cases is over $100k per day. The true impact of this on prices has yet to be passed through to consumers… this is a growing issue so look for disruption to the supply chains. BDRY entry $9.70. Stop $11.40

The Dollar (UUP) The dollar bounced off the December lows and has not looked back. Stronger dollar in January. Fed talks on higher interest rates is keeping the dollar higher. The buck was up 0.2% for the week. Big bounce as interest rates jumped.

Treasury Yield 10-Year Bond (TNX) The yield on the 10-year bond jumped following the FOMC meeting. The yield moved from 4.03% to 4.19% this week up 16 bps. Higher rates are not good for bond prices or banks at this juncture. TLT was down 2.3% for the week. TMV has been the trade of late. Gapped higher closing at 4.31% up 14 bps. TLT fell 1.7%.

Crude oil (USO) Remains a challenge relative to clarity. Production has been higher than expected as OPEC juggles its production outlook. Of interest to this conversation is the increased production in the US. OPEC has set a meeting for March to discuss extending their production cuts. As seen on the chart it is attempting to renew an uptrend from the December lows… plenty of volatility to go with it. The commodity was 6.1% for the week after being down 7.3% last week. Entry UCO $26.70. Stop $28. Higher to start the week Resistance at $73.26.

Natural Gas (UNG) The move higher from the December lows came to an abrupt end with natural gas falling on projected supply rising the first half of the year. We traded the upside move and the downside move. Pressure is on the downside based on the White House taking away permits for new LNG facilities for transport globally. Not seeing any reversal to the downtrend currently. Managing our stops on KOLD. The commodity was down 11.4% for the week. Accelerated lower again.

Gold (GLD) The commodity continues to trade sideways with some volatility sparked by a stronger dollar the last month. The dollar gained some near-term strength adding downside pressure on the metal. The metal was down 0.5% for the week. Broke support on rising dollar… GLL in play.

FINAL NOTES

Tuesday: The broad index held the longer-term uptrend but the selling was broad-based on Tuesday. The key is to watch how it unfolds the balance of the week relative to buyers. Eleven of the eleven sectors closed showing some profit-taking, fear, and anxiety with VIX hitting 18 intraday. Plenty of distractions in the activity, but we remained focused on what was moving and if the bias remained on the sell side.

Longer-Term View: The uptrend from the October lows continues. They moved above the July and August highs and broke above the 2021 highs to a new high. This resumes the long-term uptrend from the lows of October 2022. Currently, we are allowing the short-term to unfold in light of the longer-term perspective… don’t combine the two as the weekly charts look very different than the daily. A look at the weekly chart below shows the uptrend from the October 2020 lows is still in play at a slower degree of assent. There are always positive and negative swings in a longer-term trend. A look at the daily chart from the October 2022 lows validates that premise with plenty of volatility along the way. Short term the market has resumed the uptrend from the October 2023 lows. The current bounce remains in play despite any issues on the horizon. Current activity shows optimism from the buy side and we will take what the market gives. We look to charts and fundamentals for answers. 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.

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.

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