Will the Fed Taper or Not?

World markets are mixed this morning but generally little-changed. The big economic event over the weekend was the annual monetary policy summit in Jackson Hole, Wyoming, where many world policy leaders met to discuss the state of the world economy. As is generally the case with monetary policy issues, there were mixed messages emanating from the summit, some opining that the US economy has improved enough to start trimming the size of monthly QE asset purchases, while others cautioned against remvoing “easy money” while recoveries are still fragile.

US stock futures are basically flat heading into what could be a quiet week for stocks prior to the Labor Day holiday weekend. This is typically a week that many traders choose to sit out because of the combination of light volume and good weather. With many looking ahead anxiously to the September Fed rate decision, there could also be a tendency to stand pat rather than make new bets in either direction.

US markets found their footing on Thursday and Friday as the S&P was able to bounce back above its 8- and 50-day moving averages on Friday. I would attribute that bounce more to the fact that we had some of the most oversold conditions of 2013, rather than keen buying interest down at those levels. Despite the fact that the indices have avoided some of the sharp sell-offs that characterize the modern market, there has been some weakness under the surface – as well as outperformance by a handful of stocks that have made things look maybe even slightly better than they actually are.

Tech standouts in particular are dragging the market higher.

Facebook (FB) was the rock star of the market on Friday as it broke out to new highs with impressive gains of 5.2%. This stock has been on our radar for additional buy set-ups since the explosive earnings gap-and-go where it really changed its stripes. FB was highlighted prominently in our Off The Charts newsletter and Price Point Sheet last week as the stock continued to show healthy digestion. Our new point of reference is Friday’s high of $40.63. Although it is short-term extended, I believe you could look for potential continuation to the upside after a period of rest. I definitely think FB has higher prices in its future this year.

Tesla (TSLA) built on Thursday’s impressive strength with 3% of gains to put in a all-time new high at $162.30 on Friday. The stock closed on highs, showing commitment to the move. It could get going for another day or so before we could see some type of pull back to digest this big move. In a low-volume tape, though, sometimes its best to pare down expectations on short-term trades, though. Holding above prior pivot high of $158.88 would keep momentum firmly intact today.

Apple (AAPL) has been holding above its 8-day impressively since Carl Icahn’s first tweet helped it regain the 200-day moving average. The stock has returned to the front of traders’ watchlists as it once again provides opportunities in both directions. Overall, the stock has shown healthy digestion and constructive strength. As long as it holds above last week’s pivot low of $498.20, it could give us another entry from the long side at $505ish where it clears the short-term downtrend resistance.

Microsoft (MSFT) surged 7.3% on Friday, its best daily percentage gain since April 2009, after CEO Steve Ballmer announced before the open that he will step down within the next 12 months once his successor has been identified. The stock did fill a portion of the pre-market gap, but buyers stepped in at $34 to contain the sell-off. Next resistance is standing at $35.78. After that $36.43 is the current 2013 high. With the speed and power of Friday’s move, I wouldn’t be surprised to see the stock put in a new 2012 highs in the coming weeks. Keep this stock on your radar.

Netflix (NFLX) also led the market up on Friday with a 3.2% gain as the stock broke out of the bull flag pattern to new highs. It closed on dead highs of the day, signaling potential upside follow-through above Friday’s high of $278.39, so keep this on your radar as it could see another fast move to the upside with some shorts rolling out.

Will the Fed taper or not? We are getting mixed signals.

The Inverse Bond ETF (TBT) sold off 2.3% on Friday to break below its 8-day moving average, as perhaps traders aren’t convinced that the Fed will taper QE in September. Next short-term support is sitting at $78.40. Rather than short the TBT you could also play the TLT long if you think the bond snap-back could continue. Traders could use its recent pivot low of $102.11 as the new point of reference to trade against.

Gold (GLD) got another push higher on Friday to break above its short-term resistance of $133.46 and registered nice 1.6% gains. GLD has been on our radar in the past few weeks and its started to get some attention again. Look for potential upside follow-through above $135.24.

Cyclicals and others sectors that typically underperform in a rising interest rate environment have been weak under the surface.

The Utilities ETF (XLU) has been lagging the market since May. XLU put in a lower highs in July showing relative weakness. The ETF is struggling to hold its 200-day. A break below last week’s pivot low of $36.98 could bring out some sellers. Defensive, high dividend sectors like the Utilities tend to underperform in rising interest rate environments.

The Homebuilders ETF (XHB) got a nice bounce on August 15th after dropping below its 200-day which was a bit surprising to some technicians. However, its been a weak bounce as the ETF couldn’t find much upside follow-through to reclaim its 21-day at $29.45. It shed 1.4% to see its 200-day on Friday. A break below the recent pivot low of $28.16 could send the stock lower, as we still have the Head and Shoulders pattern in place since beginning of this year to be worried about.

The Consumer Staples ETF (XLP) also dragged the market down over the past few weeks, as it broke below its 100-day on Aug 15th, and is currently trading well below this key moving average. Next important support is the 200-day at $38.83, which lines up with the prior pivot lows from June.

The Financials ETF (XLF) have been another pocket of weakness, as they started to slide off of highs since August 5th, and has been struggling to reclaim its 50-day moving average. The longer it stays below this key moving average at $20.10, the higher the probability we could see lower prices moving forward. Weakness in the banks is a major warning sign, in my opinion.

Disclosure: Scott Redler is long XOM, GE, AAPL, FB, WYNN, LVS, TSLA, BAC.

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