Market Outlook:

Equities ended last week on a positive note after suffering losses earlier in the week in relation to the Evergrande crisis. Despite the strong rebound last week, rates continue to rise and the rise in the dollar index (DXY) indicates that risk sentiment is fading as the Greenback remains in consolidation just below the $93.50 resistance level. Sector leadership remains narrow with only Energy and Discretionary in the leading categories. 8 of the 11 SPDR sectors are showing low momentum with 5 of them already in the lagging category. Bonds sold off after the Fed announcement last week with the 20+ Year Treasury Bond ETF (TLT) ending the week 1.52% lower. This week should paint a clearer picture of where equities are headed next and whether a “risk-off” environment may come into play.

LUV Bullish Trade Idea:
Our bullish trade is Southwest Airlines Co (LUV). After a multi-month decline and consolidation period, LUV experienced a strong uptick in momentum on both the daily and weekly timeframes. Price broke above the $52.14 resistance level after a bottoming formation at $47.50. This comes after a strong rotation back into travel stocks last week. From a fundamental perspective, LUV has the best balance sheet in the airline industry and even has a net negative debt position, a strong contrast to its highly leveraged industry peers. LUV is the best-positioned airline stock for a reopening play. 

As this is a Debit Spread, look to take profits at 75%-100% gain and cut losses at 50%:

Take Profit: $4.55 – $5.20 Credit

Stop Loss: $1.30 Credit

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that a narrowing sector leadership with only 5 sectors in the Improving and Leading categories and 6 sectors in the Lagging and Weakening categories.

Leading (positive relative trend and positive relative momentum): Discretionary and Energy are in the Leading category. Energy is showing strong momentum and relative strength while momentum in Discretionary is declining. 

Weakening (positive relative strength and negative relative momentum): Real Estate and Technology are in this category. Both sectors are exhibiting poor momentum and relative strength. This could lead to both sectors moving into the lagging category this week. 

Lagging (negative relative trend and negative relative momentum): 4 sectors are in the lagging category – Utilities, Materials, Communications and Healthcare. All sectors have declining momentum. Look for further weakness in these sectors this week. 

XLP

Defensive sectors continue to exhibit weakness with Staples breaking below the 100 D MA and failing the retest on multiple attempts last week. This indicates a move lower. Next support is at $68.80. 

XLE

The Energy sector broke above the $50.50 resistance level mentioned last week and is now testing the 100 D MA. Price formed an inverted head and shoulders pattern on the daily chart. Strong momentum and relative strength could see the sector break above the 100 D MA and start an uptrend back to $55. 

The bullish DailyPlay for Thursday, September 9th is Fidelity National Information Services Inc (FIS). FIS is part of the Technology sector which has experienced a 2.9% rally in the last month.  

Technical View

• Bullish engulfing candles on both daily and weekly timeframes indicate a possible reversal
• Price has declined to a strong area of weekly support and bouncing higher.
• Mean reversion – price has significantly deviated from the 200 D MA to the downside and an upside correction in the range can be expected

Fundamental View

• Merger with WP allows for revenue growth and cost synergies
• FIS offers secular exposure to banking as well as cyclical exposure with emphasis on consumers
• Earnings: Oct 28 (49 Days)

As this is a Debit Spread, look to take profits at 75%-100% and cut losses at 50%:

• Take Profit: $8.36 – $9.56
• Stop Loss: $2.39

View FIS Trade

Taking Profits

• HON – 65% Gain: Short Oct 1, 2021 $230/$240 Call Vertical​  @ $1.31 Debit
• MOS – 17% Loss: Short Sep 24, 2021 $30/$33 Put Vertical​  @ $1.19 Debit

DailyPlay Positions Outlook:

Equities remain elevated but signs of risk aversion are seeping in with the US Doller Index (DXY) gaining momentum as investors start to worry about the Delta variant impacting the ongoing recovery. The expectation for equities is that the next few months may be bumpy which comes after the S&P 500 gained 20% YTD. We see outperformance in the Nasdaq 100 as rotation into Tech provides a defense against a slowdown in other sectors. We take this opportunity to take profits on HON which surpassed our TP level and mitigate minor losses on MOS in accordance with closing our trades near 21 days to expiration.