Trading Notes for Monday, May 19th

Notes for Monday:

The lack of direction continues as we closed Friday with a rally off the lows of the day. The lack of conviction remains as we begin a new week of trading, leading me to believe we will experience more of the same.  As we start a new week of trading nothing has changed and the outlook is for more of the same. We have to remain patient and let all of this unfold one day at a time. Not exactly what any of us want to hear, but it is the current reality.

As we have discussed the current Story of the market boils down to uncertainty. As we have discussed the current choppy markets are being pushed by the news of the day. However, the underlying challenge is the economy. The buyers believe the economic improvements being prognosticated at 4% growth for the second quarter. The sellers believe the economy is growing slower at maybe 1-1.5%. The buyers are winning as the uptrend remains in play. The April economic data is causing some heartburn as the growth has still not shown up in the numbers. Thus, the current choppy markets. The longer term outlook is for growth to return, if it fails to show up, eventually the sellers win and the correction takes place. We continue to track this story line and will act accordingly as it unfolds.

The issues we are watching are the same, interest rates, geopolitical issues with Russia, economic expansion or lack of, conviction from investors about owning stocks, and some clarity overall of direction. The day to day news driven market cycle isn’t likely to change as we start the week, but we can hope… right. Remain patient and take what the market gives going forward.

Outlook for the Week of May 19th:

Sectors to Watch:

  1. Small Caps (IWM) – Again opened negative and¬†tested the¬†$108 support. The late day bounce off the lows was ¬†a positive, but the selling still got plenty of attention. The downtrend is firmly in place and this now becomes a wait and see…¬†confirm a move lower and the short trade with TZA comes into play. A possible bounce and move back above $111 on the upside isn’t out of the question either based on the support bounce the last two trading days. Watch and see how it plays out.
  2. REITs –¬†The¬†sector remains in a uptrend, but has spent the last five trading days moving sideways with a nice move higher on Friday. Still interested in holding¬†and managing this position with a longer term time horizon, but the time has come for the worry to step in. Set your stops according to the risk you are willing to accept as this unfolds.¬†Hold positions and set your stops.
  3. Emerging Markets РThe sector broke above the April high, but tested that move on Thursday. Testing the move and holding the upside mover for now. Still have a 12-36 month outlook on the sector to move higher. Nice move back to the upside on Friday to resume the uptrend and should continue this trek higher. Hold and manage your risk.
  4. Bond yields moved to new lows on the thirty year bond and currently at 3.34% with reversal on the downside the last four days. So much for the rise in yields that started briefly two weeks ago. That is now erased and heading towards a new low. The ten-year hit 2.51% with a move below the bottom end of the current trading range. Holding our bond positions as the worry about the rise in yields has all but disappeared.
  5. Energy (XLE) remains a leader, but has picked up some volatility short term and is in a consolidation period. Be cautious and adjust your stops according to your time horizon. Technically overbought, but watching and managing the stops. Crude is moving higher on worries again and could give some upside to the stocks as we start the trading week.
  6. Semiconductors broke from the wedge consolidation pattern. This sets up the downside short term with support at the 560 level on the SOX index. Break that level and the short side potentially accelerates. Bounced on Friday, but still no clarity on direction.
  7. Major indexes cracking following the new highs. Dow and the S&P 500 both retreated to the 50 DMA. A break of this level puts the indexes on the downside path. Watching for follow through or bounce? Volume spiked in the short ETFs DXD and SDS. Watch to see if they continue to accelerate.


Sector Rotation Model (updated Р5/15/14)

ONLY ETF Model (updated Р5/15/14)

S&P 500 Index Model (Updated Р5/15/14)

ONE EGG Model¬†(New Scan Results Posted –¬†5/15/14)¬†TZA posted

Pattern Trading Setup:

Today’s opportunities:

  1. Market remains challenged relative to clarity and confidence. Remain disciplined in your approach and manage the risk of the current market environment. Pattern trades get very choppy in this type of environment and we will make less trades as a result. Be patient and let this all unfold in the coming days and weeks.
  2. SDS – entry $28.35. Negative sentiment returns. bottom reversal. Patient and don’t chase if gaps open in the morning.
  3. DXD – entry $$27.25. Negative sentiment. bottom reversal. Patient with entry don’t chase.

Pattern Trade Tracking & Follow Up:

  1. ERUS – entry $$18.75. ascending triangle breakout. Russia has moved off the lows on positive comments from Putin. Move above $18.64 would be breakout point for the ETF. Stop $18.20.
  2. VIPS – entry $147. trading range bounce off low. Trade back to the topside of the range. Stop $157.10.
  3. AMGN – entry$112.75. Bottom reversal and break from consolidation. Stop $110.70 HIT STOP
  4. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $580.20.
  5. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Stop $14.70.
  6. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  7. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  8. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  9. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $34.20.
  10. GE – entry $26.30. Trading range breakout. Value stock coming back into favor. Gapped on earnings above the entry… patience. Got the test early and added the position. Stop $25.70.

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.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 4/28 – Tested support at the $54.85 level. Watch to see if it breaks support. If it does the downside trade in order. (Trade result…¬†FB –¬†sold to support at the $54.80 level held and working higher. The bounce has worked its way to $59.78 and added some shares on a move to $60.05.¬†The target would be $63.50 or top end of the trading range currently trading in. Stop $58.30. HIT STOP)
  • 5/12 – solid bounce off the low, but remains within the trading range. could trade the move back to the upper end of the range at $63. Watch today to see how it moves. 5/15 – The move lower stays within the range, but pressure is being put on the growth stocks again. Watch for a short trade if we break from the current trading range.
  • 5/19 – Definitely has moved into a consolidation period and not much happening worthy of the risk at this point. The range has narrowed and the risk of trading has risen without some clarity in the stock as well as the sector. SOCL has dropped more than 20% the last two months, and in light of that move, FB is looking good short term. Be patient for now and let this all unfold.