A Market in Transition

08/21/2017 2:59 am EST


Jim Farrish

Founder and CIO, Jim's Notes

This is a market in transition. The challenge is patience to let it unfold. For now, the short term is driving the direction and the volatility increased this week had only added fuel to the short term views, notes Jim Farrish, editor of Jim's Notes.

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Trading the swings and emotions is perfectly fine as long as you have a defined strategy for doing so. I have outlined some below and we continue to look for the opportunities as they present themselves.

Monday and Tuesday will be key to how this market unfolds short term as we either confirm the downside momentum from last week or the buyers show up and keep the upside dream alive.

The party is far from over when it comes to speculation and news driving direction… take it one day at a time and let the direction unfold.

Five sectors closed Friday on the upside with utilities (XLU) and energy (XLE) leading the day. For the week only three sectors closed in positive territory as the sellers attempt to take control of the overall direction short term. Utilities and basic materials were the leaders for the week while the downside was led by telecom (IYZ) and energy (XLE).

It is important to note as well that healthcare (XLV), industrials (XLI) and consumer staples (XLP) all broke key support levels on the week bring the tally to four sectors in a confirmed downtrend short term and one long term being energy. The shift in momentum over the last two weeks is a challenge for the broad index as the trend is being challenged overall short term.

The S&P 500 index closed down 4.4 points on Friday at 2425 confirming the move below the 50 DMA and breaking key support at the 2435 level triggering a possible short trade. The long-term uptrend for the index remains in place, but the psyche of the investor changed this week as seen in the VIX index climbing to 14.2.

The challenge for investors is the patience to let the short term direction unfold and the wisdom not to fight the trend. The biggest movers in the index Friday were DRE (reverse head and shoulder pattern), ISRG (break from trading range), ULTA (start of a bottom reversal), OKE (start of bottom reversal), and LNT (V bottom in play).

The downside leadership came from FL, DE, NKE, UA, and LB reflecting the weakness in retail for the trading day. Gold (GLD) bounced off test support at the $120.45 level and back to the previous highs. Gave up the break higher on the close Friday, but remains positive.

The dollar (UUP) is consolidating near the current lows. The emerging markets (EEM) stay in the current range. The Volatility Index (VIX) jumped to 15.5 showing the anxiety present on Thursday and closed at 14.2 on Friday. Anxiety is still in play and watching how it unfolds next week.

The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your overall strategy. Keep stops in place and keep looking forward. Manage your risk and stay focused on the horizon, not the rear-view mirror.

Where are the opportunities? Retail (XRT), energy (XLE), industrials (XLI) and consumer staples (XLP) are leading the downside… obvious areas to watch for short trades. My views are to watch for the weaker dollar which in turn helps commodities and emerging markets. Interest rates should remain in the 2.1-2.3% range and not have much impact overall.

Volatility (VIX) will likely be present on a news related basis and should the data fail to improve elevate for extended periods resulting in declining stocks prices. Inflation is not present. Overall more of the same with some rotation based on the developments with the Fed and Washington not willing to do anything to change the current path of the US economy.

Focus on the near term as it impacts the current trends with reversals, bounces off support levels and moving averages… all impacting the technical read for the market near term.

Patience in how you approach this market both short and long term. Let the news settle and the reality develop for the current trends. There are opportunities in all of this activity both long and short various sectors.

The greater challenge for the markets is the fact we completed a double drop without a bounce or buying from investors… this is a change in how the market has been operating in the current trend.

The sell offs have been met with buying or buy-the-dip strategies. This time the buyers didn’t show up on the second dip… yet. If we continue below the previous low the change will be enough technically to allow the sellers to take control near term.

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. There is no clear resolution to that issue and that has now led to money rotating to where is it has better opportunities and clarity.

The break of support at $309 mark offered a short entry. The sector was already under distress from the inability to pass a reform bill… this only gives reason to sell.

Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but the weaker dollar is having some influence near term.

The break of support was reversed on Friday back above the $48 mark. Look for a follow through to the move on Monday. Entry $47.50, stop $44.35.

Taking what the commodity gives and not asking any questions… purely managed as a technical trade. Positive news on the global supply data helping the short term outlook.  

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices.

The move lower and the break of the $63.72 mark was negative for the sector and the short side remains in play with the stop now at the previous support of $63.70. Watching how the bounce in crude oil Friday impacts the stocks.

The rotation is away from risk and embracing safety. The NASDAQ (QQQ) is at a decision point with support at $141 and semiconductors (SOXX) hold the key for the broader index. The triangle or wedge pattern on the chart is trading near support as well ($144.50).

The S&P 500 index (SPY) broke $243.75 support on Friday on increased volume showing a negative setup for the index. It equally broke the uptrend line off the April low. The small-cap index (IWM) has broken support at the $139 level and broke the trendline off the December low.

All of this is negative for the broad market indexes short term. Thus, the short side setup is in play heading into the new week of trading.

The sectors above are all in similar situations with four now in confirmed short term downtrends on the reversals and break of support. The sellers are building momentum and this is a big negative overall.

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