Prepared by Geoff Bysshe, President of MarketGauge, filling in for Mish for until September 2nd.
Running On Fumes
All The FOMC minutes drove the markets from their highs for the day to their lows of the day, but that was just another opportunity for the bulls to buy the lows and sell the highs near the close. Despite this intraday recovery and the SPY’s closing at new 2104 highs I think its time to plan on the markets moving sideways or down.
While I’m really reading into the minutia of the numbers, there are two patterns that suggest to me that the upside momentum for the next several days will be very limited. The only hesitation I have in saying this is that it’s August, and as I’ve said before, this is a month that often defies gravity.
This is not a call of top because we don’t have topping price action yet, but the market is running on fumes. The first pattern is in the new high data. Both NYSE and NASDAQ new highs have been climbing, albeit at weak absolute numbers. However, despite the SPY and QQQ making new highs in price the number of new highs dropped. Most notable, NYSE had fewer new highs today than yesterday or Tuesday.
The new highs pattern would not have made it to this commentary were it not for the fact that the McClellan Oscillator, another measure of market breadth, also turned down today. Turning down over one day is not a big deal, but it’s doing it from the highest level its reached since February. When the McClellan gets over 150 and turns down the odds favor a sideways to down market for at least several days.
I’ll always wait for negative price action before I become negative on the market, but the RSI numbers have been over bought for days, and the SPY closed at a new closing high and broke its intra-day high, while IWM closed below the prior day low and back under its 50 DMA. The divergence is an old story and a terrible market timing pattern, but today’s relative performance is glaring. If the IWM comes roaring back tomorrow then I’m wrong. If not, keep your stops tight.
If you watch the VIX as a fear gauge you may be tempted to argue that it still has a ways to fall before it would reach the lows and indicate that all the bulls are too confident. But take note that the VIX currently sits at the level from which the market peaked in July.
That said, right now there is a better place to look for an indication of fear that any decline will continue – the TLT. If I see the TLT rallies as the stocks sell off, I’ll be even more concerned that the market is not just running on fumes, but rather it’s completely out of gas.
Subscribers: Positive pivots in all but IWM. Today's lows are important levels to hold on a closing basis.
S&P 500 (SPY) - New highs on a closing and intra-day basis. Given what I said above I'd be cautious below the FTP.
Russell 2000 (IWM) - Back to a warning phase. It should have decent support lower - 113.50 area. S1, 115.30 area, is likely to be significant resistance.
Dow (DIA) - Confirmed bull phase and into the 170 level which I think will be significant resistance.
Nasdaq (QQQ) - Has not broken its prior day low in 6 sessions. That's the only level I care about tomorrow.
XLF (Financials) -The key zone of resistance 22.93-23.07.
KRE (Regional Banks) Could not get solidly over 38.50. Looks like a bearish consolidation. A move lower could turn into a significant drop quickly.
SMH (Semiconductors) - One of the best groups today and into the resistance zone of 51.90-52.15.
IYT (Transportation) - Strong day but still under the highs at 152.40.
IBB (Biotechnology) - Volatile intra-day action near HOD and LOD and closing with a doji for the second day.
XRT (Retail) - Very strong day following its gap higher yesterday.
IYR (Real Estate) - Strong day that continues its march to the 2013 highs of 76.
ITB (US Home Construction) -Took a well deserved break - inside day sitting on the 200 DMA.
GLD (Gold) - Stuck in a range between 128 and 122.
XME (Metals and Mining) - Consolidation day that held key support at the 43.50 area but also stayed below the breakout level around 43.70. One to watch if it moves higher.
USO (US Oil Fund) - Inside day. It would be interesting if it popped back over 35 tomorrow.
XOP (Oil and Gas Exploration) - Basically an inside day. Did not budge at the FOMC comments and closed well. 76.60 is key level to break to move higher.
FCG (First Trust ISE Reserve NatGas) - Finally! Closed over the 10 DMA 2x in a row for the first time since its highs in June. Plus, as I've been saying... 20 is a massive support area but need more confirmation to consider any trade.And it's got an inside day. Subscribers - we'll be watching this one closely tomorrow.
TAN (Guggenheim Solar Energy) - Came right down to the 43 level and bounced as anticipated. A little more consolidation will set up a good trade against that level.
TBT (Ultrashort Lehman 20+ Year Treasuries) - TLT - very calm reaction to FOMC comments. Sitting on the 10 DMA and lots of support around 116. See if the Jobless Claims data moves it.
UUP (Dollar Bull) - Big up day and not surprising given the pattern.
EEM (Emerging Markets) - Recovered from a negative reaction to the FOMC comments. The big picture here is the 45 level which is the top of a multi-year base.
IFN (India Fund Inc.) - More consolidation. Over 26 this has a nice trade with stop under 25.80. Keep an eye on it.
EWW (Mexico) - Healthy consolidation
FXI (China Large Cap Fund) - Bullish consolidation, but now 5 days since making its new high, bulls need to push it higher or it could get heavy.
CORN (Corn) Subscribers: -Moved lower in the morning then big volume brought it back up. Looks like a solid base.
JO (Coffee) Subscribers: - In typical JO fashion, it flushed the support levels and then moved up sharply but on light volume. Key range is 34.46 to 36.80.
* * * * * Picks * * * * *
Longs:
On categories: Gap higher days we go to all categories and choose ones with lowest risk that break the opening range. On weaker days, we look at Category 3, especially if the picks hold S1, previous day lows or a major moving average and have a good risk on the reversal. The difference between Category 1 and 2 is the stock condition-a Condition 1 is strongest stock and more likely to make a parabolic move.
Note: Anything that is on this list is a candidate for a swing trade - (of course market condition is a factor) -use the max risk mentioned along with an opening range stop using fudge factor and time confirms. I suggest you decide on 1 or 2 that have a risk you like and then position size accordingly.
Category 1: (Aloha) Positive Phase, Condition 1, 2 days under the FTPs, Risk to Previous Day low, Can buy ½ over FTP and ½ over R1, Target- Day to at least 3 ATRs from entry:
KMX – Watchign for a breakout or an ORR over the FTP at 51.05. Max risk 50.50.
IFN - Three days of consolidation at a key level of 26. Looking for a break of 26 and a stop under 25.80 or 25.65 for a swing trade.
CAM - Big volume today with strong price action. Looking for ORR with max risk of 72.
CF - Must be over 257, Max risk under 254.30
Category 2: (Pipeline) N/A
Category 3: (Double Up) Positive Phase, Condition 1 through 4, Positive Pivots which means can either buy a opening range breakout or candidate for Opening Range Reversal, with Risk below S1 or previous day low, whichever is lower unless noted differently. Target - Day to at least 3 ATRs from entry: (Opening range reversals are good on anything above S1)
OIH- Looking for a breakout of daily consolidation. Prefer breakout over 54.50 with risk under 54.25. But ORR with risk under 53.90, may be worth a shot.
Category 4: (Rip Tide)
FCG - If inside day breaks up, then I'm anticipating low of the move is now 19.77. My risk level is under 20.
AXP - Good risk point at 88.30. Max risk 87.90
Phase Change:
FTI- Unconfirmed bull phase. Max risk under 60.25.
APA - Unconfirmed bull phase. Max risk under 98.30.
Shorts:
Category 5: (Titanic) Bear Phase, Negative pivots, not oversold, Risk R1 or previous day high. Target: Day to swing
KMB – Must be below 108.35, max risk 109.
LVS - Must be below 69.00. Max risk 69.70
GES - Inside day, must break 25.60, max risk 26.10
AMAT - Max risk 22.15
Category 6: (White Cap)
N/A
Best Best wishes for your trading,
Geoff Bysshe
President
MarketGauge
Filling in for...
Michele Schneider
