More Trading Notes, July 21st

Notes from Monday’s Trading:¬†

As we start a new trading week I am posting a supplement to the weekend post. Some of the notes are repeated, but the sector notes and pattern setups are updated from further research this weekend. As stated in the previous update on Friday we have to proceed with caution. The volatility is still in play. Unless everyone made a decision that all is well on Friday, there is still plenty of worries that can disrupt the flow of a normal market cycle. During these periods we will use short time horizons and be quicker to take profits and losses. As the trend unfolds and calm returns we will make the necessary adjustments.

Sector Notes: 

Below are notes of interest and what we are watching looking forward:

  • Energy¬†is trading at the bottom of the current range and looking weaker from the technical data. Sentiment looks to be shifting more to the uncertainty to negative status. This is time to watch how it unfolds and look for the potential trades. Don’t assume we bounce back to the upside in the sector short term.
  • Biotech (IBB)¬†oversold bounce off the lows Thursday and Friday. I would expect some consolidation short term before any direction is played out.
  • Gold¬†is in a position to bounce higher, but I would expect it do so with volatility. Looking for trades in the metals and miners as this unfolds.
  • Oil moved back above $103 and could move back to the previous highs on speculation and production disruption in Iraq and Ukraine. Natural gas (UNG) is reaction as well on the downside as shipments to these troubled areas will decline.
  • China (FXI) still testing the moves on the upside as the geopolitical issues settle. We added the position, but we are watching for an upside follow through if the “news” settles. See EGG Model Notes.
  • Transports (IYT)¬†tested lower on the events, but moved back near the highs to end the week. Still positive trend in play and the upside remain in play.
  • Small Caps (IWM) are the weak link as the index tests below the 200 DMA again. The rotation from growth to value is still the question. Do we continue to see money move toward safety or will investors embrace growth again going forward. This is the key rotation play currently. Watch to see how it unfolds. Move back above $115 is key to the upside and a break of $112 will embolden the downside plays.
  • Retail (XRT) broke support at $84.50 and bounced back on Friday. Weakness in sales, weak outlook for the consumer, lower wages, higher energy prices, etc. Any wonder why the numbers are not lining up relative to growth. I believe this is a better sector for picking stocks than by the whole sector. Game Stop (GME) nice continuation on break above $42. Trip Advisor (TRIP) holding support at $100.70, but also has head-and-shoulder pattern in play. Expedia (EXPE) uptrend remains in play and testing support at $77. Point is there are opportunities and easier to manage the risk of the sector.
  • Midcap (MDY) $254 support in play. Head-and-shoulder pattern set up.

Practice patience and let this new chapter of the markets story unfold.

Market Story & Outlook:
Current Story of the market still involves uncertainty looking forward¬†and the second quarter results officially underway relative¬†to the data reports and earnings. The broad indexes have made a statement that investors believe the Fed is correct in their assumptions relative to growth forecasts. Albeit there were outside market events to deal with this past week, but the buyers believe growth is building in the US economy. The sellers¬†continue to¬†believe the market is stuck in a 1-2% growth cycle and not much is changing relative to the outlook for growth.¬†The¬†Fed forecast for the second quarter of 4% isn’t looking to line up with the current data releases, but the true believers are still engaged in buying the dips as seen on Friday. The sellers took a shot this week, but the move¬†was based on an event, and did not result in any type of trend change. The buyers remain in control as they create a bounce point for the¬†indexes¬†and remain in a uptrend.
The second phase of the story line is bond yields which were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields at the¬†start the year on the thirty-year bond were 3.94%. They moved to a low of 3.27% (Thursday). They rose two weeks ago¬†to the¬†3.48% mark, but that has reversed yet again on the downside. The move higher was prompted by the jobs report and economic data pointing to the Fed following through with rate hikes early in 2015. The move shifted lower this week forfeiting all of the grains as geopolitical issues heat up.¬†The Fed has remained committed to low interest rates thus keeping¬†the yields low. The big question for now… will the Fed actually follow through on the extinction of QE? And, does the economic growth validate the need to raise rates moving forward sooner? Phase two remains a talking point which has not produced changes yet to a¬†point of market disturbance. We like the rest of the world will watch and see.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data growth. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over, the reports are coming in and in the coming weeks we will get a feel for the real data. Earnings are and remain a concern for investors longer term.

This all adds up to worry relative to a lack of clarity and the belief. The underlying concerns have not been removed or dealt with and if anything they were brought to life again this week. We ended the second quarter and the next phase of reports have begun. So far investors have embraced the data as positive, but at the same time worrisome relative to the Fed hiking interest rates. Throw in growing geopolitical issues impacting oil prices and economic uncertainty. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.


The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated Р7/18/14)

ONLY ETF Model (updated Р7/18/14)

S&P 500 Index Model (Updated Р7/18/14)

ONE EGG Model (updated Р7/18/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. The bounce back on Friday was positive and left some interesting pattern setups. We are posting some below, but we do so with caution. The need for a upside follow through is key if we are to resume the upside move. The markets remain challenged on many sides and that creates false signals in the charts as the anxiety day to day creates a choppy market.
  2. SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive.
  3. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher.

Pattern Trade Tracking & Follow Up:

  1. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $42.30
  2. T Рentry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $34.75.
  3. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 17.25.
  4. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
  5. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.55

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)

  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.30.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.
  • 6/10 – Adding shares today on the move higher in pre-market. Added 500 @ $64.20 on Tuesday. News of Facebook adding the President of PayPal to staff prompted investors off the sideline on the idea. Watch and manage the risk after the euphoria evaporates.
  • 7/11 – Added the position back of 1000 shares at $65.15. Upside opportunity is still in play.