Notes & Outlook for Week of February 16th

Jim’s Market Notes:

The week starts with a holiday and with a shortened four day week we will focus on how we open on Tuesday. The break to new highs on big four indexes needs to follow through and show some conviction within the move and the new trend. SPY, QQQ, DIA, IWM all in position to move higher.

Despite the moves to new highs there is still an element of worry hanging over the market. It is in those worries that many traders continue to tread lightly… me included. Consider the following issues going forward… not just this week, but going forward!

1)  Interest rates and the Federal Reserve. This has been on the table since the September 2014 meeting. In many ways it has been the one giant unknown for the markets looking forward. When will they, the Fed, take action? How fast will they act in hiking rates? How will the economy respond? The questions come fast and furious when you consider this issue. The biggest concern is how big will the price destruction be in the bond market? We are getting a glimpse right now TLT (20+ year bond) fell 7% the last two week and IEF (7-10 year bond) was off 3.2%. The treasury bonds are the most interest sensitive of the class, BND fell 3.6% as largest bond fund benchmark. This sector poses the most risk moving forward from my view. The price destruction as rates rise will first come from fear or uncertainty and then level out going forward. This is a key sector to watch and manage the risk.

2)  Related to the first concern is real estate. The housing market is very interest sensitive as it impacts the affordability of housing for those wanting to buy. It is important to remember that housing is a key part of the US economic cycle. Home construction (ITB) has move up more than 12% off the January lows as the outlook for the sector gained some traction on lower rates. This again is a sector to watch as it relates to the rate changes.

3) ¬†Oil remains a love/hate thing for investors. One key element of this argument to remember is demand has not fallen… supply has increased to out pace¬†demand. Thus, if the supply side gains control of production and levels the playing field with demand the balance in pricing will return. It is a simple equation, it is just hard to implement. I would expect the volatility in the sector to remain, but we are establishing a bottom from which the future will be measured by. The opportunities in oil, drilling, refining and related technology will remain going forward we will have to be more selective in the process. This remains a sector full of opportunities on the horizon.

4)  Geopolitical issues in Europe and around the globe. Friday gave some signs of peace with Russia/Ukraine. Greece and the EU may find a solution. But, when it is all said and done these and other issues are similar to the oil sector, bottom may be in for now and hope is on the horizon, but it is far from over. Volatility will be elevated and there will be plenty of opportunities as we move forward. The key for you and I is to be patient and be nimble. Treat this as a trading sector until it evolves into a longer term investment. Most importantly is to not let the headlines or the talking heads keep you from taking advantage of the opportunities that will be presented.

It does remain a news driven world and the market/investors are cheering things that really don’t impact earnings or revenue near term¬†going forward. They do provide less worries in the immediate view, but that is window dressing. It will come down to fundamental improvements in the economic data as we go forward.¬†At what point will the fundamentals matter to the market? That is something that will be answered going forward, for now we treat this as news driven market with short term opportunities, until the clarity is gained and the longer term views make sense.

Action Taken: “Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.

Adjusted stops on positions taken. The question for me to start the week: will the uptrend accelerate or reverse back into the range. Thus, raised stops.

Added SUNE, TRLA and SVXY to the pattern trading strategy. The list has expanded with the rise off the recent lows and we did adjust the stops accordingly to start the week.

Sectors-to-Watch:

Utilities have taken on the role of selling lower this week. XLU has dropped 6.8% the last two weeks. The driver on the downside? Interest rates have climbed. Two variables at work in the sector… first, the income or dividend side which doesn’t like the thought of interest rates moving higher. Second, the industry or product produced by the utility relative to the demand. The first, interest rates, are the current drag on the sector the later will come into play as we move forward. Stops were hit at $47 or $48 for any positions… if you still own the sector make sure you understand the risk and set your exit points accordingly.

The volatility index (VIX) broke the uptrend line on the rally in stocks. SVXY is the trade on this move. We added it to the SP500 strategy and Pattern Trading strategy. Nice gain on move, but watching as we start the new week. .

Money Management Strategies Links:

  1. S&P 500 Strategy¬†–¬†Watching
  2. Sector Rotation StrategyР Watching
  3. ONLY ETF Strategy–¬†Watching
  4. ONE EGG Strategy –¬†Watching – Managing¬†IWM
  5. Pattern Trading Strategy – Below added new plays.
  6. Long Term Strategy – Below

Pattern Trade Setups:

  1. Move higher gives hope to investors, but stop management to me. We cannot argue with the trend, but we can manage our risk each day as we move forward. Taking what the market gives and remaining focused is the key as we adjusted stops below.
  2. INFI – entry $15.15. wedge consolidation breakout. biotech has been struggling of late, but looking for upside to resume.
  3. UNG – entry $14.40. bottom reversal. energy sector gaining some momentum. Weather related move for this trade.
  4. SLW – entry 23. consolidation in uptrend. Held support and looking for the upside to resume on test back to $24.25 high or higher.

Pattern Trade Tracking:

  1. SUNE – entry $21.20. trading range breakout. Semi’s are moving higher and regaining leadership role. Target $23. Stop $20.70.
  2. TRLA – entry $46.80. bottom reversal consolidation break. Target is $52 short term. Sector has been active with M&A. Stop $45.75
  3. SVXY – entry $57. Downtrend line break. Broke the uptrend line on VIX. The short trade as the momentum shifts is the trade currently. target $61.50. Stop $55.50
  4. C Рentry $49.80. break from double bottom base. Upside momentum in the sector short term. $52.50 target on move. Stop $49.15
  5. BAC – entry $16.50. test of double bottom breakout. banks getting momentum from the potential rate hikes. $17.50 target on move. Stop $15
  6. AKAM – entry $64.50. double bottom breakout. Looking for move back to the previous high if technology resumes leadership role. Took position on opening strength today. Against my emotions, but I like the earnings. Stop $65.
  7. NXPI – entry $82.30. trading range breakout. The earnings report helped the upside and looking for the follow through short term. Semiconductor sector. Target $88. Stop $82.30
  8. F Рentry 16.12. trend reversal and break above 200 DMA. upside momentum from sales and target of $17.25 in play. Stop $15.80
  9. AMD – entry $3.07. trading range breakout test. Broke higher and testing the move in pennant pattern. Upside trade on the confirmation. Stop $2.93.
  10. NFLX – entry $460. trading range or flag breakout. Confirmation of the upside move from earnings in the consolidation. $485 target short term. Stop $440.
  11. IJH – entry $147.25. Breakout from range. The move would put the sector at a new high and the leadership role. Stop $146
  12. IWM – entry $119.50. break in range. The move through this level puts the upside back in play and expect leadership from the sector going forward. Stop $118.50
  13. SPY – entry $204.80. Range trade. Looking for move back to the previous highs on the positive sentiment. Stop $205
  14. FSLR Рentry $45.50. Bottom range breakout. Alternative energy sector bouncing with oil. Look for trade to $52 if momentum follows through. Stop $46.
  15. ERX –¬†entry $56. Bottom range breakout. We have been faked out before on oil, but still made money. Looking for the bounce to gain some momentum short term on crude prices. Give some room for volatility. Stop $60.
  16. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  17. ENPH – entry $11.10. bottom reversal within the trading range. Semiconductors have been a leader and looking for move at least midway in the range to $12.60. Stop $13.80.
  18. 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 $52.50
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: 
Long term positions take time to manage and patience to let them unfold. The short term can be managed with hedging or trading off the longer term positions. The goal is to build the position and manage the risk. Sometimes the short term news and events cause anxiety… the goal is to mitigate the risk and protect the downside as we allow the stock time and room to grow. If you don’t like long term holdings don’t read the data below.
  • Facebook (FB) – $73.15 entry (10/16/14) 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. (we added to our positions. 500 @ $77.50 – 1/8) Watching how the downside plays out. (Bought 20 of¬†the $75 puts for March on¬†the downside break $4.25 – looking to roll them forward if we test the bounce).¬†TODAY:¬† Earnings¬†beat, but like last quarter speculation on expenses weighing down the stock.¬†Sold lower as investors confidence isn’t there short term. Held support, but no volume or momentum in the stock.
  • Twitter (TWTR) – ¬†Added 500 shares at $42.80 (10/28/14). This is a long term holding and we will manage the downside risk going forward. Looking to buy shares on break above $39.20. (Added 500 shares at $39.20¬†on¬†1/9.) 2/4 Added 500 shares at $40.25 for trade to $42.25 short term.¬†TODAY:¬†Made¬†break from¬†top end of the trade range in the bottoming pattern. Jumped 16% on earnings and we¬†need to adjust the stop on the added shares we traded to $45.50. The target was¬†$42.25 on those shares and we will protect the gain, but let it run.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.15 (avg price)/300 contracts. 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. TODAY:¬†¬†Testing support again and¬†investor resolve.¬†Nice bounce on the outlook for action from the Fed relative to interest rates sparked a rally in the bank stocks. Looking to add to position if this bounce holds and gains momentum.
  • 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. TODAY: Cleared the $52¬†resistance and moved up to maintain the uptrend after beating earning. Keep focused on the upside not the short term gains on this position.