MARKET OUTLOOK: Week of October 17th
Investors show signs of worry as the VIX index rises. Europe, the Fed, earnings, economies, speculation, energy, and more are all in the headlines like a revolving door. The more uncertainty created by the worries the higher the volatility. Without clarity, investors will head to the sidelines and take a risk-off view of stocks. The attempted reversal on Friday failed to hold any conviction and thus the markets closed flat. We will head into the week with a cautious tone… tighter stops on trading and short-term positions, and the longer term view will be analyzed as it relates to those positions. The trend is your friend and the trend is being challenged by the uncertainty again.
Only two of the ten sectors closed in positive territory with utilities (XLU) leading the upside despite the worries about a hike in rates on the horizon. Consumer staples (XLP) was the other and it was barely in the green. Healthcare continues to be the weak link leading the downside as biotech (IBB) breaks lower and flirts with the next key support level. Financials (XLF) attempted to bounce on the earnings data Friday from banks but failed to hold the move with any worth. Energy (XLE) struggled on the crude oil hitting resistance. The S&P 500 index flirting with the 2120 level of support didn’t help the technical view of the broader markets and NASDAQ hit the 5175 level of support with technology and semiconductors struggling to hold their respective trends.
Overall the scans show exactly what we are seeing over the last two weeks… uncertainty. The key is to remain patient, let the rumors validate and don’t speculation or gamble on the outcome of rumors. This is a market for a defined strategy and define risk parameters for any and all trades. Be patient and let the clarity be gained either short-term or long.
Biotech (IBB) continues to show weakness with the downside move still firmly in place. The challenges come from the earnings outlook for the sector. REITs (IYR) bounced off the recent lows to show some positive signs near term. The bottom line was the oversold sector found support and held. The worry sectors found sellers and the speculation sectors, commodities, were up and down. We continue to take this one step at a time and look for definitive direction.
Crude oil dropped to $49.93 and back below the $50 mark barely. The upside bias in the commodity remains, but the selling the last two days has been enough to catch the attention of investors. Whether they see this a buying opportunity or the first step to more downside is yet unknown and something to watch the balance of the week starting with tomorrow’s response to the OPEC meeting.
Biotech (IBB) moved lower on worries about the election, attempted to bounce back to the August highs and failed again breaking key support at the $278 level. The sector is now sitting on support at the $264.60 mark. We started the week look at the short side trade as a possibility and hit the entry on BIS, the leverage short trade ETF. A follow through lower will bring our stop to breakeven on the entry and let it play out from there. BIS $34 entry hit and stop at $32.60. 
REITs (IYR) have been lagging in response to interest rate worries from the Fed. The analyst downgrading the sector on valuations has not helped. The move lower has been just over 10% off the high in August. Looking at how the $75.75 support plays out currently with the potential bounce to end the week? The big question is the catalyst for the upside bounce? If rates are going to remain low rally could be sustainable… if rates move higher, the bounce will be superficial. Two points of interest, watching $75.75 level for short side trade in SRS. $38.25 entry. If the bounce can follow through it could offer a possible reversal trade at $78.20 level if the move continues. News will be the deciding factor… let it play out and trade accordingly.
Treasury yields moved higher and through resistance (1.73%) on worries about the Fed hiking rates again. The move higher pushed the yield to 1.79% this week… Investors believe the Fed will take action prior to the year-end and are acting in advance of the next meeting. The thirty-year bond moved to 2.53% as the belief factor impacts the yields and bond prices. TMV (3x leverage) or TBT (2x leverage) are trades for the activity. Entry hit at $18.35 with stop at $17.50. 
Gold (GLD) made a gap lower through the support at $125.25 level. Why the move? Interest rates and the belief growing the Fed will finally act. Remember it is speculation until it happens. The move to the 200 DMA is key for now and watching how the consolidation at support plays out. Missed the short side trade on the gap lower, but $119.05 would be the next entry for a short trade on the metal. Short gold miners is equally attractive with the move lower in gold. GDX support is $22.35 and DUST is the leveraged short ETF.
Crude Oil made a solid move higher on supply data and positive outcome at the OPEC meeting. For now, the upside is in play and $50.10 is acting as the resistance level to watch. Hope is driving the near-term direction for the commodity. Energy stocks have stalled along with the price of crude and watching how this unfolds on the week. USO @ $10.75 entry. Stop @ $11.18. XLE @ $69.75 entry. Stop @ $67. 
Volatility index spiked higher on worries or anxiety rising around Europe, Fed and life. Uncertainty creates this type of action. Eclipsed 16.2 on the week and closed at 16.1 as investors worry about the future. Confirm of the move opens the door to the UVXY trade at $18.50 follow through. 
I am sticking with my comment there is plenty to watch relative to anxiety, speculation, and reality as each offers day-to-day anxiety for the markets. Hope provides some relief, but in the end, investors look and act worries about the outlook. Bank earnings on Friday offered some relief, but the European worries about Brexit are back on the table. This remains a news driven market and trading is the mode of choice. Patience is the key with a defined exit and entry strategy for any positions.
Daily Scan Results:
FRIDAY’s Scans (10/14): Attempt to bounce higher on the day ended with a flat day overall. Leadership is lacking and investors seem to be willing to wait this one out. Patience and discipline are key short-term.
  • Friday 10/14
  • Biotech short (IBB/LABD) the bottom pivot and reversal two weeks ago remains in place with a strong follow through on Friday… decision point for the next leg for investors.
  • Gold Miners short (GDX/DUST) sold lower on the price of gold dropping… decision point for the sellers. Move above the $50 level is of interest for a trade.
  • Latin America (LBJ) reversed from the selling Thursday and upside opportunity remains for the sector.
  • Treasury Bonds short (TLT/TMV) hit the entry point at $18.50 level and watching for follow through on Monday.
  • Semiconductors (SOXX/SOXL) selling reversal follow through to the doji left on the chart Thursday… follow through on Monday above $44.65 could offer upside trade?
Other moves of interest on Friday… YINN, DGAZ, BRZU, ERY, RUSS, GLL, CORN and UGA.
  • Weekly Scan…
  • Biotech short (IBB/LABD) clearly the downside leadership over the last week has offered a trade that has worked well… stops are must now.
  • Natural Gas (UNG/UGAZ) upside move the last two week has been picturesque. The stall at the current level has my attention… stops are tighter… watching for a near-term test of the move.
  • VIX index (VXX/UVXY) some worry in the markets near term as investors see bigger question marks about Europe and the US Fed. Watching for follow through trade opportunity on a spike in anxiety.
  • Semiconductors short (SOXX/SOXS) downside reversed on Friday… watching how it unfolds and any trades need tighter stops in response to the move on Friday.
  • Emerging Markets short (EEM/EDZ) selling in response to the global worries. Stronger dollar. Lower metals prices. Watching the opportunity if it unfolds.
Other moves on the weekly scan of interest… RXD, TMV, WEAT, CORN, EFU, URE and UUP.
THURSDAY’s Scans (10/13): Mixed views of the market with investors selling early and then attempted to work back towards positive. The scans show the uncertainty in sectors and confidence placed in other. Still patient as we work through the issues.
  • Natural Gas (UNG/UGAZ) nice follow through on the entry hit Monday in the commodity. Entry $46 and stop now $47 on the move. Positive spin on the inventory data Thursday.
  • Volatility Index (VXX/UVXY) nice move higher on the uncertainty and the VIX clearing 16.2 resistance… follow through offers upside trade for the index.
  • Gold Miners (GDX/NUGT) held the $11.75 support and attempting to find some upside momentum. Gold made modest move on the stronger dollar helping the cause… watching how this unfolds today.
  • China short (FXI/YANG) the decline in exports hurt the country outlook on Thursday and closed above the $15 resistance opening the short side trade. Watching how it unfolds today and looking for the potential entry point. $15.55 looks interesting.
  • Wheat (WEAT) cleared $7.30 resistance of the bottoming trading range and with follow through could offer a upside trade. Watching today.
  • Semiconductors short (SOXX/SOXS) stated yesterday a move above the $16.50 level was of entry and it did hit the entry point Thursday. Watching with stop at the $16 mark currently.
Other moves of interest from the scans… UPW, JJG, BRZU, CORN, EDZ, TZA and EFU.
WEDNESDAY’s Scans (10/12): Mixed day of trading, but the scans look similar in nature showing no true signs of leadership as specific news drives the upside and the downside. The key is to be patient as this all unfolds.
  • Biotech short (IBB/LABD) hit the $19.50 entry level for the sector as the downside unfolds. Putting the stop at the 19 level for now. IBB broke the support at $277.80 level and never looked back.
  • Gold Miners (GDX/NUGT) holding support near the $11.70 mark, but the downside momentum still has the advantage. The upside would need to validate the move higher on the day.
  • Russia short (RSX/RUSS) the downside is attempting to find momentum again. Worth watching.
  • REITs (IYR/URE) upside bump off support and showing some positive signs of potential reversal. Move above the $114.60 level is of interest near term.
  • Semiconductors short (SOXX/SOXS) The selling we discussed yesterday remains a possibility to follow through based on the charts again today. $16.50 level is of interest for trade if the sellers continue to push the sector lower.
Other moves of interest on Wednesday… XLU, KIE, XRT, EWH, UUP and GREK.
TUESDAY’s Scans (10/11): Selling flips the charts to the negative side on the day and now we have to watch how it unfolds going forward. Biotech and technology were downside leaders on the radar now to watch how they will impact the longer term view. Watching how we open today in light of the list below and any follow-up.
  • Volatility Index (UVXY) with anxiety and uncertainty comes a rise in volatility. The downside move was attention getting as the index spiked to 16 and closed at the 15.7 mark. The move above 13.7 was a buy signal for the index. Watching to clear the 16.2 mark today on the close if this going to be tradeable on this move. Patience is the key.
  • Biotech (IBB/LABD) the move above the $19 mark is a positive for the short side trade. The guidance is the issue from my view, it is not a short-term news event… it is something worth our attention on the side trade. $19.50 entry opportunity on follow through.
  • China (FXI/YANG) so much for the upside move on Monday as the sellers returned to impact the sector. The ripple effect to the emerging markets (EEM/EDZ) was evident as well. The key is for this confirm on the charts today.
  • Semiconductors (SOXX/SOXS) downside move shows some weakness in the sector and on my watching list for the downside trade should this continue to unfold. Entry $16.35.
  • Gold Miners short (GDX/DUST) cleared and tested the entry at $43.70. $50.50 is the next level to clear and enter the positions to trade downside move in the sector.
  • Small Caps short (IWM/TZA) the sellers are challenging the uptrend and entry is $28.50 if we follow through on the selling.
Other moves of interest on the day… VXX, TECS, FAZ, RUSS, EUM, and MYY. Patience as the direction unfolds.
MONDAY’s Scans (10/10): Market makes a modest move on the upside with commodities and emerging markets leading the move. The S&P 500 index is in position to make a break upside which would help the overall outlook for stocks near term… patience is key in the process.
  • Natural Gas (UNG/UGAZ) Continued the breakout move started on Friday… entry at $46 for the brave hearted in this commodity. The consolidation pattern started in June has been a rollercoaster ride, but the upside break is worthy of attention currently.
  • Latin America (ILF/LBJ) gap higher move for the sector breaks the downtrend line off the August high and resumes the previous uptrend. $101.70 entry of interest on the move.
  • Crude Oil (USO/UCO) clears resistance at $11.50 and in position to run higher. Target $13.15 on the move. Crude closed above $50 for the first time since June. Speculation remains on the upside move for the commodity.
  • Energy (XLE/ERX) following the price of crude higher was stocks in the sector. Cleared resistance at $33.60 and in position to climb higher in relationship to the commodity.
  •  China (FXI/YINN) Tested support at $19.30 on Friday and followed through with upside move Monday. Consolidation triangle is in place and break on upside offers another entry point for a trade.
Other moves of interest from Monday… EWW (break of downtrend), EDC, BRZU, KWEB, IEZ, XBI and SVXY.
Sector Rotation:
  • XLB – Materials moved lower breaking $46.50 support. The pivot reversal on Thursday is of interest with the follow through on Friday. Patience as oil will influence the outcome short term. Sellers testing the downside support with buyers pivot on Thursday. Watching how it unfolds on the week. 
  • XLU – Utilities moved lower on interest rate worries. Valuation is a concern with the hint of higher interest rates lingering in the back of investors minds. Short side trade reversed hit stops and now looking at the bottom reversal as a potential trade. Entry $48.50. if continues upside trek.
  • IYZ – Telecom found support at the $31.50 mark. The test of the bottom side of the range is of interest if it breaks lower. Watch how the week unfolds. Testing the $31.60 support? 
  • XLP – consumer staples tested the support of $51.86 and holding for now. Short side is still in place off the July highs.
  • XLI – Industrials pivot off support at the $56.75 mark again. Break lower could offer a short side trade and watching how it unfolds to start the week.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. All the news is positive and moving higher currently along with the price of crude. $68.75 entry. Stop $67.70. Modest selling… watching. $69.75 support is level to watch for downside reversal. 
  • XLV – Healthcare broke the downtrend line off the July highs, but has returned to the downtrend after attempting to hold support. Weakness in Biotech is weighing on the sector short term. Watching how the week unfolds. Short trade entry $71. Stop $71.50. 
  • XLK – Technology sideways trend attempted to break the $47.70 level of resistance. Weakness in Semi’s and questioning investors stall the sector. Keep stops in place and watch how it unfolds near term.
  • XLF – Financials reacted to the Fed indecision and now need to move back above $19.70 for any interest in trading the sector. Earnings Friday gave a small boost to the sector, but they need more positive earnings this week. KBE of interest at $33.90 entry. 
  • XLY – Discretionary Consumer pivots off the $78 level of support and $80 is the next move to make. Patience as this unfolds. Watching $80 as an entry if the upside follows through. 
Overall markets remain is a watch and see mode. Worries remain around banks, the Fed, election, Brexit and just about anything else you can think of.  Investors nor Wall Street have offered any clarity on interest rates, earnings, quarter and monthly economic data, Europe and commodities. Plenty to ponder and decide before we get the clarity needed. The cycle remains the same of uncertainty and lack of conviction from traders and investors. Patience and risk management are a must going forward.
WEEKLY RESEARCH NOTES:
The story lines behind the moves are always of interest to me. They validate if the move is just news or a sustainable event. I am always looking for sustainable events and news that are trade worthy. The following stories have my attention now and looking forward. These story lines are what impact the longer term view of the markets. With more individuals focused on the short term activity, we often lose sight of what is transpiring longer term and more importantly what is driving the trend.
  1. Banks bounce back as worries subside with earnings from JPM. This puts the longer term view of the sector back on the radar for adding positions. Watching how the earnings flow unfolds this week.
  2. OPEC agreement gave energy upside lift, but still stalling at resistance. Still looking for the follow through on the promise to cut production, if they don’t materialize this will get interesting going forward. Trade the short term and let the long-term opportunity unfold.
  3. Brexit is still in the news and I stated it isn’t dead as a concern… just dormant. It has resurrected itself in the last few days and remains a challenge as it relates to Europe. Watching how investors react this week and how the reality of it all unfolds longer term.
  4. NASDAQ 100 Index. – This has been an index of interest as the earnings, revenue, and outlook to start the year were weaker. The downside did accelerate to test the lows from August of 2015. Since the lows in February, the upside move has been in control with two tests of support. The move back below the $118 level is of interest showing the lack of conviction we discussed to be key. Watching to see how this week unfolds and if there is follow through to the modest bounce to end the week. Tight trading range the last two-plus months. The stop @ $113.50 (longer term exit would be the $108.50 level.) Looking for a follow through on the upside if this trend is to lead.
  5. The S&P 500 index moved below support at the 2145 level testing the upside trend in place from the longer term perspective. 2185 resistance on the upside. Tested 2120 support this week again and watching how this unfolds. Long-term views are on the upside, but the moves of late have put a dent in the belief. The short term selling is of interest both short and longer term. We have to be patient as this all unfolds. Move below the $212.50 level is of interest short term to hedge positions or take a short interest in the index. SPY $210.80 entry. Stop @ $212 (short-term positions hit). (longer term exit is $203.50 to allow for volatility should it return.) Patience as this continues to unfold moving forward. 
  6. The Russell 2000 Small-Cap index has moved lower and tested the $119.50 mark again short term. A move below this level is a negative for the sector overall and a clear exit point for short-term positions. The longer term view remains in an uptrend with concerns. Thus, we have to approach the sector based on our time horizon. For our purpose here, it is longer term and we would want that trendline to break in order to exit positions. The reversal or pivot off the test lower in June hit entry for IWM at $114.50. Stop @ $117 (consolidation range low). Cleared resistance at the $123.75 mark. Patience short term as it unfolds. (longer term exit would be in the $108 area of support.) Watching with patience.
As stated. patience coupled with sound risk management is vital to protecting your money. 
“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.