Focus Shifts From Earnings to Economic Data

World markets are painting a very mixed picture this morning. Europe is up a bit but Asia is pretty ugly.Japan is now down almost 6% in two sessions as Abe is seriously considering delaying and or watering down a planned sales tax increase. This move seems to be unnerving the “Abenomics” enthusiasts. The Chinese index is down 1.7% as the government has ordered a nationwide audit of all debt levels. There still is a lot of concern over how to cool down overheating credit markets in a way that won’t shock the markets.

S&P futures are down 4-5 handles as we try and figure out how much time is needed before a potential move over S&P 1700. Last week it seemed like there was some small technical sell signals, but overall we held the July 11th gap support around 1670ish. On Friday, the S&P actually had a “Red Dog Reversal” where we broke below 1677 and then reclaimed that level, closing near the highs of the day. It looks like we have a channel building as the 8- and 21-day moving averages play catch up and we navigate earnings season.

Earnings season will start to slow down a bit this week, and economic events will move to the fore. We have the Fed meeting on Tuesday and Wednesday, although not much change is expected. The September meeting is the one everyone seems to be eyeing for the start of QE tapering. The BOE also meets on Thursday and we have the jobs report Friday.

In today’s Morning Call we will check the temperature of some sectors and highlight levels to measure composure.

The Russell 2000 ETF (IWM) flashed some signals for investors to take caution after its potent down move on Wednesday that broke the recent ascending channel to the downside. However, the ETF managed to find some buyers at the 8-day at around $103.30ish and showed resilience on Thursday. The ETF is hovering around the 8-day to digest the recent volatility. Traders could use the upper floor of $103.30 as the new level of interest to trade against.

The Financial Sector ETF (XLF) saw a healthy pull back last week, as it held above the prior pivot high of $20.35. The 21-day moving average is standing at $20.30, which could be a buyable spot. If the ETF could do some work above that level it could be healthy for higher prices moving forward.

The Retail ETF (XRT) showed strong resilience last week, as it quickly erased all losses from Wednesday’s sell-off within the following session and closed on highs on Friday right in front of the short-term resistance of $81.55. It could see some upside momentum this week if it could clear this level.

On the weaker side of the tape, the Homebuilders ETF (XHB) was struggling last week after breaking below its 50-day with a big outside day on Wednesday. It also saw some downside follow-through on Thursday while many sectors found footing. The ETF is hanging by a thread at $29.24 level and has some down side room to the 200-day at $28.55.

The Agribusiness ETF (MOO) also led the sell-off in the market last week, as also broke below its 50-day on Wednesday and couldn’t find many buyers on Thursday and Friday. The ETF is currently trading below all key moving averages showing lots of relative weakness. Next support is sitting at $50.73 area, and $49.90 could be the last line of defense for this laggard sector ETF.

Earnings season has led to many divergences. Treat each name differently with different tactics based on your time frame.

Amazon (AMZN), despite the company’s surprising quarterly loss, got a pass from the Street (again) and rallied almost nine points on Friday to all-time highs at the $313 level. It closed on highs showing impressive relative strength. Technically the stock has been very strong, but many fight it based on valuation. Price action always trumps PE ratios. AMZN might need some time to show commitment over recent highs of $309ish.

Apple (AAPL) opened right at the gap support of $435.26 on Friday, and instantly found some buyers at this level as it went positive within the first 30 minutes. It was hovering around the flat line for the whole day until seeing a push into the close to finish the day up 0.57%. Look for potential continuation above $441. The current pivot high is $444.59 (another action area). Above this level we could see a nice move up to $455ish this week.

Linked (LNKD) saw an impressive three-day rally last week to put in a new high at $208.88 on Friday. The stock looks strong and as long as it holds above $203 support level, it could see some upside follow-through above $208.88. Great stock on all time-frames, now earnings will be key.

Netflix (NFLX) didn’t deliver another blockbuster earnings report, and has been taking a break to digest its recent move. It’s trying to build a new floor at $240, which active traders could use as a new point of reference to trade against. The $247.66 level could be another spot for action for a cash flow long.

Market leader Google (GOOG) also showed some signs of fatigue as it’s been pulling off of highs as well. It saw a gap down on Thursday and is struggling to hold the 50-day at $889.62 on Friday. A break below Friday’s low of $882 could lead to a retest of the recent pivot low of $875.61. Below that, $863.25 is a bigger support area.

Tesla (TSLA) gapped up on Friday on an upgrade with a target price of $160 from Deutsche Bank. It held the gap despite some volatile trading during the first hour, and closed well off the lows. There continues to be lots of nice action here. The snap back was impressive enough to keep new 2013 highs within view. I believe it needs to hold $126ish for a bit then take out $130.68 to be a tradable set-up.

Quick hits

Starbucks (SBUX) had a nice gap-and-go on Friday to close the day up 7.61% after the company beat its earnings expectation. Active traders now have the gap support at $71.85 as the new level of support to trade against. The stock closed on highs signaling the potential for upside follow-through above $73.52.

Cliff Natural Resources (CLF) ignited on Friday and closed above the 100-day MA. CLF started to show some signs of life recently as it reclaimed the 50-day moving average on Tuesday and held above it despite the pull-back on Wednesday. Last earnings report we saw a multi-week squeeze in this highly shorted stock, and we could get a repeat of that scenario. The stock could see some continuation above $20.05 as has room to the next resistance area at $22-23.75.

Monsanto (MON) could be a good candidate on the short side, in my opinion. The stock has been showing lots of relative weakness as it saw three big down days to break below all key moving averages. By Friday it was hanging by a thread at the $100 level. MON could build a bear flag on the coming sessions to digest the recent down move, which could then see a downside resolution as the stock has some room to the pivot low of $96.50.

Caterpillar (CAT) is also stair-stepping lower into big support level of $81.40. A break and close below this level could take it back to retest prior pivot low of $79.49 and possibly lower prices after that, as it has an intermediate Head and Shoulders pattern in place that is pointing to lower prices once it breaks below $79 level.

Metals continue to “hold where they have to” as they continue to provide better opportunities from the long side since the July 28th capitulation lows. Gold (GLD) holding above $126ish could keep traders interested for a potential upside follow-through move above $129.70-$130ish. SLV is lagging a bit, but you could trade this vs. 18.97.

At this point, it feels like most are trying to figure out how involved we need to be as the markets continue to “hold higher.” Japan which has been somewhat of a leading indicator in 2013 stalled in front of highs and created a small “double top.” If EWJ can’t hold $11.15ish, it could bring out some sellers.

Disclosure: Scott J. Redler is long AAPL, BAC, FB call spread.

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