Trading Note for Today, October 3rd

Notes to Note: 

We follow up the aggressive sell off with more selling early to test lows, rally back into the positive territory with the buyers stepping in, and close essentially flat on the day as the direction continues to challenged by news, events and data. We continue the data trail today with the Jobs Report. How much impact we have from the data will depend on where the number comes in. If it is as expected not much positive will come from it and a negative report might stir the sellers to be more aggressive… but then there are those who think that would delay the Fed in acting on hiking interest rates and they take that as a plus. Bottom line we will have to watch and see how it unfolds following the report today. I am not expecting much to change in terms of the data or the current market environment.

Small caps were the leader on the Thursday as they found bottom and bounced back above the 1090 support broken on Wednesday. The sector was very oversold technically and the bounce was almost expected. The bigger question is will it continue? 1115-1130 may be a possibility and then resume selling? Watching to see how it unfolds along with the other indexes. Patterns are not that great nor is the sentiment, a positive jobs report isn’t going to change the underlying psychology of the markets and a bounce off the lows is all part of the selling process. Be patient today, and let this all unfold. The micro trend is lower, the longer term trends held the support of the trendlines and forward we go.

Repeating from earlier this week… The fourth quarter outlook remains volatile due to the lack of clarity in reference to growth in the economic picture domestically and globally (data confirmed that on Wednesday). We have posted data all week that is the type of news to create an environment that will eventually collapse under it’s own weight (down 1.4% on Wednesday was a start). Some good news needs to show up soon if the broad markets are going to have a chance to recover or the trendlines will become endangered species. Maybe the jobs report today will offer some upside relief.

Repeating from the weekend post …. I stated that there are three primary trading strategies most investors follow… Long-term (passive investing), short to intermediate-term (active investing), and trading (micro to short-term). Most investors will participate in all three or a combination of the three. Very rarely do they only select one style of investing. This in itself many times is the problem. We confuse strategies and time frames which feeds emotions, leading us to react to market events versus being proactive to managing our portfolio based on a defined strategy. Throw in help from a “professional”, and it gets more confusing. Bottom line define what you want and then create a strategy to obtain it. The current environment is focused on the micro-short term trading strategies to take advantage of the opportunities that fit the current movement. Trading/investing is a journey not a destination there is still plenty of opportunity to unfold in this current cycle as it plays out short term.

Some thoughts on news/events impacting investor psyche:

* Wednesday adds fuel that starts the selling fire. Market PMI lower in September, ISM manufacturing 56.6% versus the 58.5% expected and was big negative, car sales were disappointing especially from Ford down 3%, and construction spending fell 0.8%. Again this is economic data showing weakness again or stagnant growth.

*  Tuesday adds to the China story with weak manufacturing data and the Eurozone shows little to no inflation. Monday brought new geopolitical risk in Hong Kong with protests. Watching to see how much impact this is in the global markets near term and the US markets in response.

*  Pending home sales unsettles the projections about the housing markets… again. The home sales data released Tuesday show the slowing in prices in the large cities which previously had the fastest growth. This is creating more worries for stocks as ITB continued to stumble lower on the news.

*  Syria bombing was added to the list of worries as Obama call for the elimination of the Islamic State. The attacks are having an impact on oil prices and we have to watch going forward.

*  Tax inversion fight in Washington. While the immediate impact is of more interest to the tax implications, the longer term impact to mergers and acquisitions may have bad unintended consequences. I will not get into the issues stomping on the Constitution to enact this law. Three branches of government were created for balance, these decisions teeter on being a Monarchy or worse a Dictatorship. It will all be interesting to see how it unfolds, but at some point we have to return to a government of the people, by the people and for the people.

*  Trading environment is compressing holding periods on trading positions again. Thus, the choppy markets are in play and we have to respect that relative to trading. Now we are down to one day moves in direction with increased volatility. Throw in the bubble warnings from analyst and it makes for fun times.

*  Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. You either hold through the chop with a longer term focus or you sit on the sidelines and await clarity to develop. The latter allows me to maintain my sanity and is my preference relative to short term holdings.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level last Thursday and bounced back above that level on Friday… Monday tested the low early and bounced back to close at 1977, but Tuesday took the support level out again closing at 1972 and below the 50 DMA. Wednesday follows through on the selling and closes at 1946. Thursday ended flat, but was active on the day. The downside target remains the 1910 level near term, but there is always a slight chance of a bumpy ride on the way there. The short trade is SDS which we added in the Pattern Model below. Added to that position Wednesday as we confirmed the downside opportunity.

Bonds (TLT & IEF) The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. The response to the Fed not moving on interest rates was a push lower in yields. TLT pushed to $116.93 on the long bond rally Monday, but settled at $116.27 on Tuesday. Fear rallied TLT $118.42 and near the previous highs. Watch to see how this volatility works out short term. TODAY: Money is trading in and out of bonds, but the yield movement is still on the downside this week. Watch to see how the jobs report impacts this move.

Semiconductors (SOXX) Hit stops as well and downside accelerated. Watching for short set up in the sector as well.  TODAY: Hold $84.75 support or the downside becomes attractive as trade. Entry $12.30 SSG or Short SMH at $49.85. Down early on Thursday and rallied off the lows. manage the outcome short term as the sellers are gaining control. Patience required.

Small Caps (IWM) they are down four weeks and technically oversold. On balance volume has dropped, relative strength is ugly and 50 DMA continues below the 200. Short has been the position and support at the $107.45 level is now in play. A move lower could get ugly relative long positions, which in turn is good for the short plays. Thursday created the oversold bounce and we watch how the 1090 level holds on the Russell 2000 index going forward. A move back on the downside could accelerate the selling. Watch for near term consolidation.

NASDAQ index moved to the 4405 support and and produced modest bounce on Thursday. Watching to see if the bounce means more short term and if we get upside movement? Sellers still have the bias for now.

Midcap 400 index broke the 200 DMA and support at the 1365 level. Broke trendline as well and playing catch up to the small call index. Watching to see how the intraday move lower and reversal impacts the move going forward.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • S&P 500 Index (SDS) Made the break lower on Thursday and looking to add to the position is selling resumes. Took entry of $24.85 on negative sentiment in the AM. (SH on S&P 500 Model) TODAY: Watch and manage the risk of the trades and watch how the trendline fares in the current move.
  • Consumer Services (XLY) after a set up to break higher the sector broke support on the downside and the short term trade. The $67.60 mark was the downside break and added the short trade short term. Patience and let this unfold as the volatility plays out. (Pattern Trade Model)  Got the downside follow through and now manage our risk on the short trade. TODAY: Follow through on the downside? pushing our stop to $66.25.
  • Energy (XLE) the weakness in the sector is expected as crude oil prices have declined. There is some volatility in prices, but the downtrend is well confirmed in oil and now in the energy sector. Added the short side trade (Pattern Trade) and managing the risk. The short trades with DUG added as well. (ONLY ETF Model) Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid that reverses the trend. Watch the issues in the Middle East as they will have an impact on oil prices if worry gains traction. Short side played out well and holding. TODAY: Looking for any follow through on the downside selling from Wednesday. Adjust stop to $88.80.
Watch List Opportunities:
  1. Downside establishing itself as we head lower below support. With the downside in play you still have to be aware of the reversal and resumption of the uptrend. It is important to remember the underlying psychology of the stock market is to be long stocks not short. Thus why selling cycles are shorter than buying cycles. I find it important to remind myself of the obvious at times like this.
  2. Adjust your stops and watch how the jobs data impacts the day.

Pattern Trade Setups:

  1. Intraday reversal? closed on a doji candle and could offer a change or bounce off the lows. Jobs report will have some influence on the open.
  2. Adjusted stop and watch to see how this unfolds.

Pattern Trade Tracking:

  1. FAZ – entry $16.90. Trade reversal break of support at $23 on XLF. Stop $16.90.
  2. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $49.80
  3. UNG – entry $22.15. trading range breakout. Good base on the commodity and a breakout would be a trade on the upside move. Willing to add to the position on a positive test look longer term than trade. Stop $20.65
  4. QID – entry $44.65. Break above resistance off five week base. Stop $45.40
  5. QID – entry $45.50. Add to position if the downside accelerates through support of 50 DMA. stop $45.40.
  6. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK after stop had it too tight) Stop $24.75.
  7. SDS – entry $24.85. Add to position if the downside continues. Stop $24.75
  8. XLY – Short entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $66.25.
  9. XLE – short entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $88.80. Reversal candle sitting on the 200 DMA – watch to see if it confirms in the AM and manage the stop.
  10. TZA – entry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $16.70
  11. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
  12. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $175 HIT STOP
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: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $73.80. Joined the distribution process. However, still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to $47.25 for now on position and we will make adjustments as we go forward.