Bears Will Try to Sustain a Drive

World markets are mixed this morning but China is now at seven-week highs, pointing to some signs of stabilization in the region (if you believe the data). The news out of Europe continues to be constructive but those markets couldn’t stay green so far today. Japan continues to struggle and is weak this morning on lower-than-expected growth data.

S&P futures are down 6-8 handles below last week’s pivot support of 1684. It will be interesting to see if the bears can get a close below that level and bring out more sellers. Next micro support is 1676 with a bigger area at 1671. Last week we talked about taking risk down when the bulls gave up the “line-in-the-sand pivot, which for me was 1698-1702.

Barron’s ran negative article this weekend on the S&P & the top trending story on several media outlets was Marc Faber’s call for a 1987 style crash, which I think is incredibly irresponsible. I personally don’t think the highs of the year are in, but I’m back to tactical mode. With it being August-September after a 19% run in 2013, it makes sense to sit on your hands a little bit. On an intermediate-term basis, the Bears have a little bit of control right now and the onus is on them to keep it. On A Macro basis, the bulls are still in full control.

There has been great individual stock action this year and it continued through the July earnings season. At this point some stocks look like they need a rest and some look like they are simply “avoids.” You could make some money tactically during this corrective process and also find pivot entries for the longer-term entries, but I don’t think you need to be in a rush for those right here.

In today’s Morning Call we will check the temperature of some sectors for clues on short-term direction.

Check temperature of the sectors

The Russell 2000 ETF (IWM) pulled in off highs last week but found support along its 21-day for the last few sessions. Intermediate-term traders could use last week’s pivot low of $103.47 as a spot to watch. The small cap index ETF that has been leading the market has been showing signs of fatigue, but it’s opening below that pivot. If it can’t reclaim it today then $101.94 is the next spot to watch.

The Nasdaq ETF (QQQ) took a break last week but is resting above its 8-day. Last week’s pivot low is $75.87, if that level doesn’t get reclaimed this morning, the 21-day is $75.53.

The Financial Sector ETF (XLF) already broke below its 21-day at $20.34. The sector has been a bit faulty lately and has given us some clues to take risk down. The 50-day will be important around $20.03.

The Retails ETF (XRT) is also resting above its 21-day. There is also a bear flag formation developing in this sector ETF. Last week’s pivot low of $80.61 is a spot to trade against, and I believe the ETF could see the 50-day at $79.19.

The Homebuilders ETF (XHB) is hanging by a thread at the $29.20 area. A break below this important support level could take it down to retest the 200-day at around $28.78, which could be its first stop to the down side. This group led the market in early 2013 and since the May 22nd top, it’s been lagging considerably.

Below are some stocks that gapped up after earnings and we will monitor them to see if they hold and let some nice patterns develop for entries.

LinkedIn (LNKD) has been digesting above its earnings gap for about a week, showing some commitment. So far it has been healthy digestion to allow its 8-day moving average to play some catch-up. Holding above $228-230 for another few sessions could lead to another leg higher above $236.

Tesla (TSLA) broke out to new highs on Thursday on impressive earnings numbers. The stock consolidated above the earnings gap well on Friday. The longer it holds above $150-151, the higher probability we could see some upside follow-through. Barron’s did have a negative piece over the weekend, let’s see how it handles that.

VMWare (VMW) saw a nice break out at $82-83 area that was highlighted on our price point sheet as action area on Thursday after basing above its earnings gap for about 10 sessions to allow the 8-day moving average to play some catch-up. It looks like it could make another move higher above $86.

L Brands (LTD) broke out to new highs on Thursday on a big gap up, then saw nice upside follow-through on Friday. It might need some time to digest these recent impressive gains, but the longer it holds above $59.60-60, the greater the chances we could see some continuation to the upside.

Goodyear (GT) saw a nice gap up on earnings on July 30, then basing above the earnings gap and above its 8-day moving average, showing healthy digestion. Look for potential upside momentum above $19.18 as it has a tight set-up for a break out at this level.

Apple (AAPL) came out with a date for its New iPhone – September 10th. Stock just had a controlled pull-back after peaking around $471. Let’s see if some enthusiasm comes back in at this level around $450-454. The $453.65 level is last week’s pivot.

Google (GOOG) has been showing some signs of fatigue. A break and close below $885 could send this lower.

Amazon (AMZN) has been grinding lower since earnings and is basically out of play for now. The $292.50 pivot is last week’s low – if that doesn’t hold, then the 50-day is at $288.

Facebook (FB) has enjoyed a tremendous run and I don’t think the highs of the year are in. Last week was healthy digestion, now let’s see if $37.70 holds or if it needs a bit more corrective time. Resistance stands at $39.32.

Metals continue to be tradable since lows on June 28th.

Gold (GLD) continues to show some commitment at these lower levels. It woke up with a potent move on August 8th, when it reclaimed all of its moving averages. Metals are up this morning, the next level is $130ish. A close above this and macro gold guys will get a bit more excited rather than just trading it tactically.

Silver (SLV) did prove a better buy than sell – we titled our Morning Note on June 27th “Silver-Lining’s Playbook” and discussed a potential calculated contrarian trade. Now it’s over $20, and the gap gets filled up to $20.53.

Both bulls and bears would welcome some volatility and two-way way action right now as it’s getting into late August. It could also be a good time to sit on your hands a little bit and enjoy the last month of Summer.

Disclosure: Scott Redler is long GLD, FB, VMW, MSFT, IBM puts. Short SPY.

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