Trying something new, going to post my weekend thoughts each week. Please be patient for a few weeks as I make the formatting/content more reader friendly, I’m usually the only one reading these notes.

Here are my thoughts as we head into this week:

I went through all of the major US indices, as well as the sectors and am seeing a lot of the same things. Prices retesting the lows, or making new marginal lows near support, with momentum positively diverging. This sets us up for a nice tactical, counter-trend bounce which we saw start last week. Whether or not this is the overall bottom, I don’t think we have any enough evidence of that yet, but I think this type of whipsaw action is typical of markets trading below downward sloping 200 day moving averages.

So within that context, I wanted to figure out how I should approach this week given I am only long some Coffee via JO and didn’t get any stock exposure last week as we came into support. Well, the issue is that although I think we can continue to bounce here, we’re already 80+ points off the lows in the S&P 500, and the major indices are up four days in a row. Not only that, but every chart I look at has a ton of overhead resistance/supply just a few percentage points. Given my strategy, I don’t think that entering stocks on the long side while they’re more or less in “no man’s land”, equally as extended from immediate support as they are from resistance, offers an attractive risk/reward scenario.

Since that puts me in the neutral camp on stocks based on the daily timeframe, I took a look at the intraday timeframe (65 minute bars) to get an idea of whether we’re going to continue higher or are due for a bit of consolidation. Many of the indices/sector ETFs I looked at are trading right near their downward sloping 200 period moving average on the 65 minute chart, which tells me one of two things should happen. Either prices need to consolidate up here or pullback to allow that moving average to flatten out / begin rising, or prices are going to continue to the downside, as that moving average is a major headwind. Either way, if they consolidate or retest support once again, I think that’ll provide a much better opportunity at trying things on the long side from a risk/reward perspective. If they continue higher without me, that’s fine, I can then use the move into resistance to test out some positions on the short side where my risk is more well-defined.

Given that attitude, how do I know what indices or sectors to buy/sell if the opportunity presents itself? There are two ways of thinking about this. I can either own the Nasdaq and S&P 500 that have held up better than their counterparts, or I can own the Russell 2000 or Micro-Caps (IWC), which have been laggards, where risk is more well defined and overhead resistance is further away than in those indices/sectors showing strength. I don’t know if this is the right answer, but I’d rather own the laggards here because the risk is more well defined than the stronger indices that are hanging out in “no man’s land”. Given that, I’m looking to play some of the following sectors for a bounce if I get an entry with decent risk/reward: (IWC, IWM, MOO, GDX, XLE, OIH, XOP). Commodity related sectors look ripe for a bounce, which you will see is a major theme throughout the remainder of the post.

In the Foreign Equity ETF space, I’m seeing a lot of the same positive momentum divergees across all continents, but what particularly interests me is those countries with commodity exposure. In the Latin America space, I think Colombia (GXG), Latin America (ILF), Brazil (EWZ), Mexico (EWW), and Chile (ECH) look good for a mean reversion as copper bounces a bit. I like GXG and ECH the best as the risk is well defined. In Asia I like the way Vietnam (VNM), Thailand (THD), and Indonesia (EIDO) look for a mean reversion. I also like New Zealand (ENZL), as it’s highly correlated to the NZD/USD currency pair which I’m also bullish on. Also, Nigeria (NGE) is on another one to watch over the long term as it looks to put in a structural bottom. Again, a lot of these countries are setting up for bounces, but I like these in particular because the risk is well defined, and there is still a significant amount of upside by my measure. If I am going to put on a counter-trend (lower probability) swing trade, which these are, I want the risk to be well defined and the risk/reward to be high.

In the commodities and currencies space I remain long Coffee for a mean reversion toward the 200 day, and am patiently waiting for a breakout in Soybean and Yen futures. I do think that Copper can continue to bounce before continuing lower within its structural downtrend, but I’d rather play that through the Foreign Equity exposure listed above. Also, I continue to think the Energy Complex (ex-natural gas), looks interesting on the long side. After a long consolidation in Crude, Gasoline, and Heating Oil, I think the strength in energy stocks and the Canadian Dollar last week are suggesting that these patterns will resolve themselves to the upside in the coming days. For me however, I want to be playing it via the Canadian Dollar, where sentiment and commercial hedger positioning paired with a failse breakdown make the risk well defined for a mean reversion. Also, I think the Australian Dollar (another commodity-related currency pair) can catch a bit as well for some mean reversion as momentum diverges on multiple timeframes while it tests key LT support near .69-.70.

If you’re wondering what the charts discussed above look like, please check my stocktwits/twitter stream where I shared most of them. I do not have any shorts on the list simply because I didn’t see anything actionable that fit my strategy. Also, my sample size this weekend was a lot smaller because I did not do much/any analysis on individual stocks.

Watchlist:

Longs: IWC, IWM, MOO, GDX, GXG, ECH, VNM, THD, EIDO, ENZL, NZD/USD, AUD/USD, Yen Futures, Canadian Dollar Futures.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Weekend Thoughts 10/4/15