Trading Notes for Today, January 16th

Notes to Note: 

Another negative day and investors get restless and selling resumes. The downside is in play and the VIX index is hitting levels that indicates fear creeping into the equation. The S&P 500 index closed at support 1992… NASDAQ 4570… Russell 2000 1155. Today the futures are pointing lower and the race is on. The sentiment has been turning negative over the last month and it is on the edge of becoming emotional. Earnings from the banks have been a big problem to start the season. They have missed on various reasons, but they have all been disappointing in their own way. The move in the Swiss Franc was the biggest story on Thursday and one that will continue to impact the markets today. Bottom line… the sellers are now in control and how low we go depends on the emotions associated with trading.

Oil is above $47 overnight, but not sure that is going to have much impact on the day. Global issues are on the top of the list now as the catalyst to swing stocks lower. But, oil is still one of the key areas to watch going forward.

It remains a traders market environment if you like volatility. News remains the catalyst driving analyst crazy as it controls the day-to-day action. We have tied the five down days in a row this week again testing support and the news looks to make it six today.

Earnings continue from the banks. Intel beat estimates overnight and will be in play today. It is setting up to be a selling day and one that will test the resolve of investors. A break of key support levels should embolden the sellers. The question: will the buyers be willing to step in and defend these levels? Will they wait until next week and wait for a climax sell off and intraday reversal? This is where the challenge on the short side of the market takes root. We all know markets move faster on the downside and the reversals can be equally as fast. Each move is different and has to be respected, don’t assume anything and use your discipline to trade the move.

MAJOR INDEXES:

The ten-year bond moved lower falling to¬†1.77% or or down 6¬†basis points on Thursday to continue the flight to quality or safety. The bond has hit¬†a new closing 52 week¬†high as well.¬†The question remains: is this move telling us something about stocks? To this point I have said no… it is simply acting as a defensive buffer when any selling takes place in equities or a flight to quality. Stocks are creating their own worries relative to future growth. That is something to watch as the Fed wants to hike interest rates… Investors are voting the¬†Fed¬†won’t do it in the short term and feel enough conviction to buy bonds. Throw in the global issues economically and additional money is moving to treasury bonds. The money flow into the bonds is the cause of the move in the yield lower. Watch and let it play out short term.

The NASDAQ closed at 4570 down 1.5% on the day and¬†down 133¬†points for¬†the week. A consolidation¬†pattern or trading¬†range for the index remains in place, but we are now at the bottom of the patter and testing support with the futures pointing lower?¬†We tested¬†support at 4555 and reversed off the low eight days ago and we are in position to retest that low or break it today? We have to watch how this unfolds on the day as the intraday swings have been more volatile than the over index over the last month.¬†¬†Respect the uncertainty and don’t force trades. QID entry hit as short trade against the index on Monday with stop at $40. Manage your risk.

The S&P 500 index closed at 1992 down 0.9% on the day and down 51 points this week. Remained below the 50 DMA and confirmed the break Wednesday below the uptrend line off the October lows. Leadership is one theme I discussed last week and selling has become the theme. Energy, Financials, Consumer Discretionary and Technology are leading the downside is one way we can phrase the leadership. Key support is 1992. Short trade in SDS hit entry point in trading Tuesday with stop at $22.50.

The Russell 2000 index fell 22 points on Wednesday to close at 1155 or the bottom of the trading range and support. It is still within the trading range, but the 200 DMA is the next downside level to watch as well. This was the on piece that was holding up well on the week, but it threw in the towel on Thursday. Downside could accelerate today. TZA at $13.60 entry today.

The Volatility index spiked higher to start the week earnings, oil and now Swiss monetary policy. It closed at 22.39 on Thursday and tested the 23 mark intraday. The 25 level is the high from the October move and it is within distance depending on how we open today.¬†Some fear definitely creeping in, and if it grows¬†enough it could pus¬†the panic button for investors to sell. We are seeing just how much investors don’t like uncertainty about the future. The default is to sell as panic sets in. We are at that crossroad again with a bias towards selling this¬†week.

The Dollar (UUP) is holding near the highs closing at $24.48 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 92.18. The stronger dollar remains a positive from my view looking longer term. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future.

Crude Oil remains one of the components that was a catalyst to the selling to start the new year. It settled in the $46-50 range and closed Thursday at $46.25 down 4.6%. That erased the 5% gain on the supposed short squeeze on Wednesday. Maybe some trading volatility creeping back into crude short term? The downtrend is well established. Too much risk for my taste as a trade. Patience.

There is plenty of speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The downside is back the last five days and we have to see how support plays out today. This remains a traders market with plenty of risk to confront in every trade.

What to watch¬†this week…

We started with¬†the jobs dilemma, that progressed to the decline in the price of crude, and Tuesday it was the weakness in housing from KB Homes comments! Wednesday’s move lower was credited to JP Morgan rains on the earnings outlook and December sales report was worse than expected. Thursday was banks and Swiss monetary policy adding to the downside and introducing new worries… The theme continues… Oh what a tangled web we weave! The move lower has tested¬†investor confidence and now we shift gears yet again relative to the longer term impact and how to play this scenario going forward. The trading range¬†is now in question and the downside shining ever brighter with the news pushing investors to the brink of selling

Banks (KBE) and financials (XLF) breaking support and the short trade in FAZ at $14.75 looks like the next opportunity. Unless Goldman Sachs has a rabbit in it’s hat for earnings this morning the selling is likely to take root short term.

Leading Sectors: XLU, IYZ and XLP – defensive sectors

Sectors worth Watching: XLU

Laggard Sectors: XLV

Loser Sectors: XLY, XLK, XLF, XLI, XLB and XLE

Sectors of Interest for Trading:

The homebuilders (ITB) jumped to new high, but that came to a halt on Tuesday as KB Homes comments on the analyst call looking forward sent the sector back to the breakout point ITB. Energy is getting the blame and Wednesday the selling started lower, but remained in a reasonable range to watch moving forward. Uptrend is still in play, but being challenged on the data. THURSDAY: Fell 5% as the towel got tossed against the data.

Semiconductors (SMH) are a sector that could offer some leadership along with technology overall if we can get off to a positive start on the week. THURSDAY: failed to keep¬†the positive start again and holding above the key support at $52 for now. Watch for an opportunity on the reversal if the buyers show up again. Held again on the day… watching¬†as it trades against support with everything else.

Gold Miners (GDX) The sector has benefited from the bounce in gold and moved through the resistance at the $20.50 mark on Monday to $21.40. Short lived as it dropped 4% on Tuesday despite no real losses in the metal. WEDNESDAY: followed through dropping 1.2% as Europe struggles with mining stocks — of course that is equal in the US. That is fear of stocks moving lower and thus sell now ask questions later was the theme. Still like the upside and the risk remains high. Thursday reversed and gained 5.7% to regain the upside move. Fear move money to gold.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. Upside in play and a test of the $79 level would be potential entry point. No test to speak of, but still moving to the upside as money looks for safety in the storm.

China (FXI) uptrend remains, albeit volatile, off the October low. Technically the upside is in favor and worth trading if we can move through resistance and stomach the volatility that is likely to remain. Still testing the highs, but sold overnight watching how it plays out today.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†updated
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Volatility is back… we have to remain patient and selective with any positions. Manage the risk accordingly.¬†Manage your stops along with the current volatility intraday. Not posting much as we will let this unfold.
  2. SDS Рentry $22.75. Triangle breakout. Weakness is building in the index and downside protection is prudent at this point to hedge positions. Gap open elevated the risk of the trade and passed. Tested on Thursday and gave an entry point near $23 if you were willing to step into the trade.
  3. QID Рentry $40.80. Triangle breakout. Weakness in the large cap NASDAQ stocks are building negative sentiment and breaking lower. Another hedge position. Gap open elevated the risk of the trade and passed. Watching how this unfolds today. Tested on Thursday and gave an entry point near $23 if you were willing to step into the trade.

Pattern Trade Tracking:

  1. VXX – entry $33.60. Resistance breakout. Volatility is picking up short term and looking for the follow through on the upside move as uncertainty rises. $333.60 (raised stop).
  2. SUNE – entry $20.15. trading range. 200 DMA resistance overhead. Break above this level on volume would be trade to $23 or previous high. Stop $19.80 (raised stop) HIT STOP
  3. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  4. ACAD – entry $33.60. triangle breakout. Looking to continue the upside trend following the break higher. Stop $33.60 HIT STOP
  5. TWTR – entry $39.30. Break from basing bottom. Trade off the long term position below. Stop $38 HIT STOP
  6. GDX Рentry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $19.50.
  7. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.
Long Term Opportunities: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning¬†were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Still trading sideways range as investors sort out the facts and fiction. Testing the bottom of the current range and bounced … bounce (we added to our positions. 500 @ $77.50 – 1/8) TODAY:¬†Watching how the downside plays out. (Bought 20 of¬†the $75 puts for March on¬†the downside break $4.25).
  • Twitter (TWTR) – ¬†Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (hit stops on our put contracts on the reversal last week.)¬†Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 Friday.) TODAY:¬†Follow through on the upside move last week would be a positive for the position going forward.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks were¬†gaining some ground and I still like our position going forward. We add our long positions in stocks back (Added 2500 shares at the $16.35 mark ¬†on 10/21). Stop is $15. (ADDED 2500 shares at $17.15 and target is $18 on the move short term as trade in¬†the position.) (50 Feb 17 puts @ 60 cents. ADDED) &¬†¬†(ADDED 250 June 16 put contracts @ 0.95 cents 1/14)¬†TODAY:¬†May need to add to our put contracts as this is not working out well as banks remain under pressure.
  • Whole Foods Market (WFM)¬†11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position.¬†Small range as market keeps stock in check. TODAY:¬†¬†Cleared the $50.80 resistance, and¬†holding up well for now as we remain patient. breakout confirmation needed today.