JFarrish UP's & Downs -Feb 22-23

Day #1 (Feb 22)

Charts say it all as the reversal sets up to break higher

By Jim FarrishFebruary 22, 2016Jims Notes

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Crude oil jumps 6% to start the week… market responds by gaining 1.4%… I can see the direct correlation. In fact, below is the chart of USO and SPY and don’t they look similar in the bottoming patterns? Does it make sense? Only if you are looking at charts and trading consolidation pattern setups. How do we manage the process? One day at a time. Let this play out and take what is working now and maintain your stops to deal with the reversal risk. The SPY (S&P 500 index) chart shows the double bottom pattern in place and is in position to break above the 1950 level for the next entry or to add to positions. 

Transports (IYT) cleared $125.50 last week to break the downtrend line off the December high. Today it cleared the $132.65 level of resistance to clear the 50 DMA and it has confirmed the corss of the 10 DMA above the 30 DMA showing positive short term momentum. $137.50 now the target on the move.

Financials (XLF) cleared the $21.25 resistance level and opportunity to add a position in the sector today. It continues to move through the downtrend line off the December highs. Banks (KBE & KRE) are both close to breaking through resistance as well. If this sector joins the movement on the upside the catalyst impact to the broader index would be a positive going forward.

Consumer Discretionary (XLY) cleared the $73.60 level of resistance and is now in position to break the downtrend line off the December highs. Volume a bit on the low side for the move, but we will watch to see how this unfolds going forward. Need the consumer to be a leader if the index is going to keep moving higher. 

Energy (XLE) the bottoming pattern is similar the major index, but is ready to break higher along with oil. Cleared the 50 DMA toady and a target of $65 on the move higher if we follow through.

The charts are lining up to break higher. The volume is not stellar, but you have to watch how it unfolds from here. Oil at $31.43 puts the upside move back on the table. Gold fell $22 today back to $1209. This was our warning last week… if stocks rally gold would fade in response. Watching $114 level for GLD as support. S&P 500 needs to close above 1950 for me to start believing in the bounce and reversal move. NASDAQ 100 index (QQQ) cleared 4200 and now needs to take out the 4285 level to reverse the the trend short term. Small Caps (IWM) cleared $101.15, but look a little weak in the process. Volatility index (VIX) fell below the 20.5 target and a move below the 200 DMA would be a positive for the broader index. Technology (XLK) in same position with double bottom pattern on the reversal setup. The $41.35 level is key short term.

Overall the markets start the week with a determination to move higher. We have to be patient and let this validate the setup currently. I would like to see some volume on the move through this resistance level. The buyers have to come with some conviction or it could retest the recent lows. One day at a time is all we can do for now… willing to trade what we see based on what we believe near term to be true. See the weekend notes for more on that topic.

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Day #2 Feb 23

Oil prices have some heading for the exits

By Jim FarrishFebruary 23, 2016Jims Notes

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The correlation between crude oil and stocks continues. The Saudi Oil Minister stated there would be no cuts in production. His rationale was the supply would be absorbed when the demand side rose going forward. The question begs… at what point can the market absorb 1-2 million barrels per day of excess production? Answer… no one knows… that equals uncertainty and uncertainty creates anxiety leading to higher volatility. VIX climbed 8.1% today to 20.9 showing the reaction… end result… without some clarity looking forward the default position is to sell and push prices lower. This cycle of ups and downs in the energy sector is nothing new with the downtrend still well intact. As seen in the chart below of USO, United States Oil Fund, downside firmly in place and the bottoming process continues to look for an upside catalyst. The Saudi Oil Minister certainly wasn’t what investors were looking for as it relates to the belief that oil prices were going to rise short term on production cut speculation.

The NASDAQ 100 Index moved above the 4200 level on Monday to upside move in place off the recent lows and take another step in the reversal pattern, but forfeited the move today back to the 4162 mark. The test of the move off the February low has my attention as it keeps the reversal move in question and keeps the downtrend in place. Interesting note is only 12 of the 100 stocks closed positive for the day. This has been the weaker of the major indexes over the last six weeks. Watching how the bottom reversal plays out… sellers still look to have the control for now.

The short trade ETFs led the scans tonight which is obvious, but it does setup interesting patterns relative to the downside support and upside resistance. What some concluded on Monday’s move as the momentum shifting to the buyers today disrupted that belief with enough momentum to capture the attention of the buyers. Again there is nothing decided, but it does keep everyone on their respective toes.

I noted in the research notes that the action in the treasury bonds was not supporting what we were experiencing in stocks. The lack of a decline in treasuries when stocks are being favored reflects that money is still be defensive in nature. That was shown today as stocks hit against key resistance levels and worries about lower oil prices returned to push equities lower.

Gold (GLD) responded to the news around crude oil with a rally back above $117. The pennant pattern on the chart still needs a catalyst to keep the upside going… crude oil price may act as that catalyst if the worries continue going forward.

It looks as if the ‘sell the rally’ camp is still alive and well based on the activity today at resistance. The number of worries alive and well in and around the market make a reversal difficult to manage or maintain. Given the fact that on any given day something can happen to rock the confidence that is built on speculation you have to expect this type of volatility. I remain concerned about the economics of the markets going forward… nothing has improved worthy of moving markets higher either domestically or internationally. That lends to the current tug-o-war as markets attempt to establish a bottom and find enough momentum to move higher.

Tomorrow is another day and I am sure oil will be in the forefront of concerns, but data like consumer confidence dropping to seven month low and worries around earnings in the retails sector have more weight from my view than the price of oil at $30 per barrel. Lower gasoline prices at least help some consumers. It doesn’t seem to help with airline tickets however. It was reported today that for the fifth time since January airlines are trying to hike prices again. Bottom line… this is a consumer driven economy and too many factors are hurting the consumer more than helping. Keep your stops in place and manage the risk of the market currently in light of what we see on the horizon.