Stock Market: Time to Look for Reversal?

World markets are mixed this morning as investors try to figure out what’s next. Last week we discussed the small head and shoulders pattern that was forming in the market and some weakness in sectors that could lead to a pull-back. The signal to pare down some risk on a short time-frame came when the S&P couldn’t hold 1698 on August 6th. The market did have a gap and go to the downside Thursday, and then hit a natural target at the 50-day MA on Friday.

Today, futures are hovering around flat line as oscillators are in the type of oversold territory that we’ve seen only twice in 2013. The oversold conditions make it very hard to sit short, but playing a bounce can also be very tricky. If you are going to look to catch a bounce, I would use a “Red Dog Reversal” type strategy, which is a method for buying a stock vs. a level with a plan. A reversal can sometimes lead to a day and a half move, or more depending on each individual set-up.

SPY has a pivot low from Friday at $165.50 and then your next point of reference under this is $164.63. The next major spot is the gap from July 8th that has support at $163.50 and that also lines up to the 100day at $163.20. If a bounce starts- you have resistance at $166.63 and then the gap at $167.43-

In today’s Morning Call we will check the temperature in some key sectors.

The Industrials ETF (NYSE:XLI) showed relative strength after last week’s sell-off in the market, as it’s still hovering around the 21-day and well above the 50-day. This group hasn’t got much volatility as it’s been on a steady uptrend since November 2012. It’s trying to build a base at $44.77 area. Below that $44.24 is a bigger support zone.

The Russell 2000 ETF (NYSE:IWM) also saw a big gap down on Thursday but is still holding above its 50-day. However, the IWM doesn’t look like it has found its footing yet. Another push lower into the 50-day, which stands at $101.16, could give us a new pivot to trade against as this is a big support area. This sector could be an avoid until then.

The Retails ETF (NYSE:XRT) was hovering near highs and showing relative strength during the months of July/August until last week it dropped below the 50-day following a big gap down. It’s struggling to get back above this key moving average. The longer it stays below the 50-day at $53.89, the higher the probability it could see lower prices.

The Financials ETF (NYSE:XLF) got hit big and broke below its 50-day. It’s struggling around this key moving average. If it can’t find a friend at this $20 level, it could retest the 100-day at around $19.51.

The Homebuilders ETF (NYSE:XHB) traded inversely with the market last week as it saw a strong bounce on Thursday to get back above the 200-day moving average. It had nice follow-through on Friday but also finished on lows. This was a good example of a Red Dog Reversal day and a half strategy. It’s currently sitting at the 200-day at $28.87. If dip buyers don’t step in at this area, the chances are it could be a short-lived bounce that could lead to lower prices.

The Utilities (NYSE:XLU) are a defensive, dividend-oriented sector that suffers in a rising interest rate environment. The XLU have been leading the market down since May and experienced another sharp sell-off last week which brought it back to retest the 200-day at $37.56. It has bigger support at $35.80 from June 21st’s pivot low. Overall, this is among the weakest sectors that need time to repair.

We will also talk about what’s going on in High beta tech.

Apple (NASDAQ:AAPL) digested the huge move on Tuesday’s Icahn tweet, as it continued to stay above $493.40 level. It was impressive to see this stock holding up well during the big pull-back of the market. We now have Friday’s low of $498.86 as the new pivot to trade against. If it continues to hold above this pivot low, we could see a quick push through last week’s pivot high of $504.25. The stock has been a great technical long since it reported earnings. I believe it could see the $535 area.

Netflix (NASDAQ:NFLX) continued to find buyers at the 21-day. The stock retested this key short-term moving average at $251ish on Thursday, then buyers stepped in at this level early Friday to lift the stock up. The stock closed well off of lows. It could see some continuation above $260.50.

LinkedIn (NYSE:LNKD) entered its earnings gap after gapping down on Thursday’s open then had some downside follow-through on Friday to retest the 21-day, where it quickly met some buyers. However, it couldn’t find momentum above $230 as it hovered in front of this resistance area for the whole session on Friday. Use this level as the new action area. Needs time.

Google (NASDAQ:GOOG) showed relative weakness as it broke below the 100-day on Thursday and struggled to reclaim this key moving average on Friday. Use Friday’s low of $856.54 as the new point of reference. Overall, the action has been bearish and a bit of an avoid since its outside day in the $905 area

Tesla (NASDAQ:TSLA) broke above the downtrend resistance that was in control since the earnings peak of $158.88 on a gap up on Friday. However, it has some resistance at $144 area. It held above the opening’s gap at $141 well showing some commitment. The longer it holds above Friday’s low of $141, the higher the probability we could see some upside momentum above $144.

Facebook (NASDAQ:FB) also showed some relative strength on Friday, as it saw a big gap up and held above it. The longer it stays above $36.90, the higher the probability we could see higher prices in the coming sessions. A break and close above $37.50 could bring in some buyers.

Metals have performed well since making lows on June 28th, then gave us another nice set up on August 14th.

Gold (NYSE:GLD) had a nice igniting move on Thursday and digested very well on Friday even though it ran into some resistance from the 100-day moving average at $133.46. A break and close above this level could open the door for some upside follow-through. Next resistance is standing at $136.75.

Silver (NYSE:SLV) showed relative strength as it had a bigger move and is already well above the 100-day at $21.55. It held in well during Friday’s session, showing some commitment. The longer it stays above the 100-day, the higher the probability we could see some continuation above $22.59. Next real resistance doesn’t come in until $23.70. Above that we have the 200-day at $25.76ish.

Bonds continue to drift lower, pushing the Inverse 2X Bond ETF (NYSE:TBT) higher. This could be foreshadowing market expectations that the Fed will taper QE in September, but overall we have been getting mixed signals about potential tapering.

My gameplan today will be to look for some type of bounce, but I will keep it pretty light. I hope everyone is enjoying their Summer.

Disclosure: Scott J. Redler is long SPY puts, IBM puts.

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