Chinese markets finished down a whopping 5.3% overnight as
interbank lending continues to dry up amid rapidly rising rates,
and the People's Bank of China is choosing not to intervene to
inject liquidity. If nothing else, the credit squeeze will provide
a telling stress test for the nation's banking system.
European markets are down 1.5-2.0%, US stock futures are also
(INDEXSP:.INX) futures are currently down 17-18 handles as we look
set to break last week's. A dovish article from
Wall Street Journal
Fed commentator on Friday helped trigger an afternoon bounce, but
that rally is proving to be quite frivolous.
Based on the recent technical action, today's downside
follow-through is not altogether surprising. The first major sell
signal came back on May 22 when we saw the major outside reversal
after putting in an intraday high at 1687. After that, the market
was able to hold the 50-day moving average twice, but after talk of
QE tapering grew louder, the key was always going to be the Fed
rate decision last Wednesday. Following that announcement, we got a
1-2 punch from the rejuvenated bars. We failed intraday around
1640ish as Chairman Ben Bernanke stated the pace of purchase of QE
could be reduced later this year. Then Thursday morning the market
opened below the 50-day moving average, hovered below it for 75
minutes (showing the bears in control), and then continued lower,
breaking the bigger trend line that's been intact since the
November 16, 2012 reversal.
Friday we held the 100-day moving average around 1577, but the
bounce was somewhat feeble. Today we were set to open right around
that spot. For today, watch Friday's low in all sectors/stocks and
see if we hold it or break it. If we don't hold S&P 1577ish and
close below it, the the next micro point is 1562 then 1548. The
major level is 1530-1540, and the 200-day is now at 1506.
During corrective phases, you want to simplify your process. Focus
only on a few key sectors and some leaders in those key sectors. On
a day like today, you want to see if anything can go green and show
relative strength to help lead us off the lows.
Here, I will go over some key levels in some sectors as well as
high beta names.
The banks (NYSEARCA:XLF) broke down out of an upper level wedge
after the Fed announcement. On Friday, the XLF broke and closed
below its 50-day for the first time this year. Next support is
coming in at around $18.60 where the 100-day moving average lines
up with April's pivot highs.
The consumer staples (NYSERACA:XLP) led the market down on
Wednesday and Thursday but were able to see a small bounce on
Friday as they finished the day up 0.66% and closed right below the
100-day moving average. With today's gap down, use Friday's low as
the new point of reference for this sector.
iShares Dow Jones Transportation Average ETF
(NYSEARCA:IYT) also dipped below its 100-day moving average for the
first time this year after three-day sell-off. The IYT did try to
bounce on Friday but the sellers stepped in again during the last
30 minutes to bring it well off of highs and close right around its
100-day. Use Friday's low as pivot, under that level the next big
support area is $104.40-105.
The homebuilders (NYSEARCA:XHB) rallied on Monday and Tuesday due
to better-than-expected June housing numbers, but the bounce was
short-lived as the ETF got hit pretty hard amid the recent selling
pressure in the market. The sector ETF is already almost at its
200-day moving average after giving up its 100-day moving average
on Thursday. The 200-day moving average currently stands at $27.95.
The utilities (NYSERACA:XLU) led the market up during the first
four months until it topped out at $41.44 at end of April. Since
then XLU has continued to make lower lows as investors pile out of
the dividend-oriented defensive sectors. XLU is now below the
200-day moving average, and the next major support comes in at
The mixed action continues in high beta tech as some of the
stronger names succumbed to market weakness late last week.
) re-tested its accelerated uptrend that has been in place since
April 18 lows and is holding this trend line so far. The market
leader briefly breached below its 21-day moving average on Friday.
Use Friday's low of $873 as the new point of reference to trade
against. The 50-day moving average below that is $857.
) also saw a two-day pull-back last week, but the damage was
contained at the 100-day moving average on Friday. The stock is
trying to hold its short-term uptrend that has been in place since
June 5's pivot low.
) retraced around 3% during each the last two sessions and closed
right around its 50-day moving average on Friday. The recent pivot
low is $214.86 then $205. The real important support spot is
) re-tested and held the downward trend line that it broke above
with a powerful move on June 7. It bounced off this trend line on
Friday and closed back above its 21-day moving average. AMZN is
still one of the best looking charts out there. If it doesn't hold
$269ish, the next key spot is $265ish.
) continued to bleed lower after breaking its ascending channel
around $444isn and then its major support of $419 on Thursday to
put in a new low of $408 on Friday. Use this low as the new point
of reference to trade around, then bigger support is at $385.
(TSLA) held up well during this market sell-off as its still
holding above its 21-day moving average after seeing small losses
in the last two sessions. The $96.50 support level could be key,
and if we close below it we could see the $90 area.
iShares Barclays 20+ Year Treasury Bond
(NYSEARCA:TLT) shed another 1.7% on Friday after breaking another
support area of $112 on Wednesday as the head and shoulders pattern
looks more valid by the day. Could we be seeing the beginning of
the end for the historic 30-year bull market in bonds? The media
ran with that narrative this week, but I would caution chasing a
trade when herd consensus gets so skewed in one direction.
Especially if the economic recovery falters and the Fed sticks
around a little longer, we could get a swift snapback in bonds. If
you've been short this ETF you could cover some and stay with some.
Gold (NYSEARCA:GLD) saw a big gap down on Thursday to break below
its key support of $130.50, but the metal was able to find its
footing on Friday. I remain bearish on the commodity ETF. If the
Fed does indeed move forward with QE tapering later this year, Gold
will be robbed of its greatest single price driver. The only way I
see GLD bouncing from here is if we get a scenario like I mentioned
before with bonds: the recovery falters and the Fed backtracks.
Reactionary low was $123.33 to trade against. Below that is $122.
At this point, it's best to measure your risk and timeframe as
these markets move fast. Having a plan with levels and action areas
could help you. Let the market confirm what it's going to do. It
gave clues that we needed to take risk off in the past month, and
it will also give us clues on where to put some risk back on based
on the action and composure. I remain tactical and will need to see
something very compelling to even hold things overnight.
As a side note, what baffles me sometimes is that everyone been
saying that rates can't stay low forever for the past few years.
Now that they are starting to go up, everyone starts asking, "How
did this happen?" Bulls and bears have been saying that the market
need to correct. Now that we are correcting they are saying, "How
did this happen?"