Notes & Outlook for Week of February 9th

Jim’s Market Notes:

The major indexes posted positive gains last week and look to continue that trend this week. They jumped higher on Friday on the jobs report, but then reversed to close lower… that is the same as the response in January to the December report. Is this an omen? What looks good on the surface… may not be as good as the top line reported. Maybe the dip from the positive open was a result of¬†ECB take shots at Greece again about the repayment of debt and austerity programs relative to spending. Maybe it was simply everyone looking at a chart and seeing the resistance at 2062 and retreated back below that level? Regardless we have to watch how we start the week relative to sentiment and directional conviction. Any move towards resistance followed by a retreat within a trading range deserves attention on how it follows through.

Economic data was challenging despite the jobs report on Friday. Low end jobs dominate the data… oil patch layoffs still not factored in… 92 million plus working age out of the work force… 50% of working age population on disability… 52% of the US is collecting food stamps… 44% have full-time jobs of 30+ hours per week. Wages increased in the report, but based on the hike in minimum wages in January would explain the rise in the data. The numbers behind the numbers continue to be the challenge for me. It doesn’t add up, but it may explain¬†why the economic data overall remains flat.

Energy shows signs of life on bounce in oil prices. The question: Is this sustainable based on sound data or is it based on speculation of what is believed to be true in the future? XLE gained 5.6% for the week, hit resistance at $80.50 and is holding in the basing pattern. The trade on the speculation is in play, but the sustainability of the move will have to be validated to turn the bounce into a new trend.

Midcap sector hit a new high on Thursday, tested the move on Friday and held. The point being, this the leadership along with the small cap sector. If the broad indexes are going to push higher look for these sectors to provide the leadership in the move.

S&P 500 index ran to 2072 and just a couple of points from the December high before retreating to close lower on the day, but higher by three percent for the week. The test sets up a possible follow through on the upside as we start the week. Short set up below 2040, hold long positions if we maintain above that level and move higher.

NASDAQ index continues to lag as the large cap and technology sectors, primarily semiconductors, struggle to advance. Earnings have been the biggest hindrance along with comments about global growth within the earnings statements. Nothing we have not heard building up to this point, but the fact sometimes have a way of changing the perspective. 4275 is level to break above near term if the upside is to gain momentum.

This all adds up to clarity looking forward. The rise in oil last week helped give some perspective, but it is looking more speculation than reality. Time will tell how it plays out. In the meantime we have to view this remains a trading environment and not an investing one. Visibility is lasting 1-5 days currently and unless that perspective changes the traders remain in control.

Understanding the environment you are trading in is the first key to not losing your money without a fighting chance. The market is a battleground and you have to be well trained to fight

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

No additions on Friday to positions.

We did add the major indexes as opportunity on the upside and I am tightening the stops on the trades as we start the week.

Outlook for the Week:

Hope is not an investment strategy and the move last week, my view, was hope based. Hope that stimulus would work in Europe. Hope oil prices would rise again to validate demand is rising. Hope in earnings improving despite the data showing zero growth in bottom lines on average and top line revenue struggling relative to the global markets. Hope the Fed will not hike interest rates, but the jobs report on Friday would lean towards that happening going forward. Something just doesn’t past the smell test… I am still willing to be patient and let the direction define itself going forward.

The volatility index (VIX) showed the short term hope in clarity relative to oil price destruction. The VIX did test support near the 16 level and bounced to close at 17.2 Friday. The index shows concerns are still in play, but if the move on the upside can gain conviction the index it would likely retreat back to the 12-14 range. Watching how this unfolds as it shows investor confidence or distrust. Friday the index showed a return to intraday volatility and that is a concern to start the week.

If ever there were a time to be patient, it is now. I believe it is harder not to trade than to trade. The activity makes you feel like you are at least in the game versus sitting on the sidelines watching. The deception we take on is to confuse activity with success. Activity without progress is stress. Patience for the opportunity to take action founded in reality gives you the upper hand as well as confidence in the process. Now is a good time to practice patience and let the opportunities present themselves.

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 – added IWM
  5. Pattern Trading Strategy – Below
  6. Long Term Strategy – Below

Pattern Trade Setups:

  1. Volatility is back as concerns over earnings and data continue plague the outlook. Bounced on Thursday sold on Friday.  Manage risk with your stops and see where we go this week. It is a choppy market and reversals happen at the drop of the hat these days.

Pattern Trade Tracking:

  1. VIMC – entry $9.13. trading range. Semiconductor sector in position to move higher again with broader indexes. Stop $9.
  2. IJH – entry $147.25. Breakout from range. The move would put the sector at a new high and the leadership role. Stop $141 to give room for volatility.
  3. 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 $114.50 to give room for volatility.
  4. SPY – entry $204.80. Range trade. Looking for move back to the previous highs on the positive sentiment. Stop $198.50 to give room for volatility.
  5. FSLR Рentry $45.50. Bottom range breakout. Alternative energy sector bouncing with oil. Look for trade to $52 if momentum follows through. Stop $44.
  6. 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 $54.
  7. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  8. VIPS – entry $23. Flag. Break above short term resistance and trade to $24.75. Stop $22.
  9. 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 $12.25.
  10. GDX – entry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. Stop $21.75 HIT STOP
  11. 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 $51.50
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) 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 on Friday as investors confidence isn’t there short term.
  • 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. 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.¬†Got the follow through on Thursday and beat earnings! Jumped 16% on Friday and 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 Friday as 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.¬†Watch and see how broad indexes move and impact going forward. Ended trading week slightly positive and looking for the buyers to step in and take it higher.