Trading Notes for Today, October 30th

Notes to Note: 

The FOMC meeting was the star attraction following Facebook dropping 7% at the open on Wednesday. They voted to end the QE stimulus as planned and changed some of the talk about inflation, jobs and the economy. The initial reaction was selling, then some buying, and then some selling, but in the end not much changed after the announcement that had not taken place prior to the announcement. Today promises to be more concrete on how investors intend to respond to the Fed going forward.

The downside was the general direction for the broad indexes as they forfeited some of the gains from Tuesday. The NASDAQ was the leader on the downside thanks to Facebook, Twitter and Garmin. Today is important on how the larger indexes respond to the Fed, but also to the modest selling on Wednesday. Remember we have come a long way from the October 15th low and some rest or selling would not be out of line, in fact, it may be a good thing for the upside to continue.

GDP and Weekly Jobless Claims on tap today as well. The big revision lower in GDP estimates poses some interest relative the forward looking numbers for the fourth quarter estimates. Watch and see how that all unfolds today.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenged short term. Adding the FOMC meeting results this week is keeping it interesting. Some testing has¬†kept the indexes honest relative to the bounce,¬†but the move higher is keeping¬†the¬†upside in play micro term.¬†The¬†sellers took their best shot¬†and over the last month produced what amounted to a ten percent push lower prior to current¬†bounce in play. The micro trend downtrend has shift control to the buyers, but faces resistance levels that could derail the move. Monitor the bounce and take what trades work for your strategies, but remember the objective is to manage risk as well as making money.¬†Don’t let your emotions get the best of you and remain true to your investment strategy.

* FOMC meeting put some new things on the table, but will they add anything to what investors expect? My view is no. We will watch this to see how it unfolds looking forward, but for now a flip of the coin.

* ¬†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. We are in the process of building a second ‘V’ bottom potentially off the October 15th low. This would be a much deeper ‘V’ than the one in August if it completes the process.¬†So far it has passed the test and this week will tell how it comes out.

Sectors to Watch:

Consumer Discretionary (XLY) moved through resistance at the $66.65 mark and stalled. The 50 DMA is just overhead and the upside gained some ground through the $66.65 level on Tuesday. We will look to add this position today if we can follow through on the positive move. Tested on Wednesday and held the move. TODAY: entry $66.80 on S&P 500 model. Consumer confidence data should offer some help.

Preferred Stock Index (PFF) broke above the $39.50 level and holding. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Model.

Telecom (IYZ) hit¬†resistance at the $$29.50 level and moved through it on Tuesday’s push higher. Next¬†move to the $30.40 mark initially. Gaining some momentum from some of the laggards. Scanning the parts shows some positive moves on breakout. Nice test on Wednesday as interest rate fears show up in the markets overall. Large caps are still lagging in the sector.

Transports (IYT) moved through the resistance at the $152 mark and hit new high on Tuesday. Tested on Wednesday and held for now. The boost from airlines and trucking sectors has helped lead the broad index higher. We hit the target of $156 on Tuesday as well. Worth scanning the parts to find some good pattern setups currently.

Energy (XLE) the sector pushed to resistance short term at the $86.50 level and attempted to break higher on Wednesday, but stalled on the FOMC rattling. Tested lower on the concerns over crude oil prices, but working off the lows. The argument is about the price bottoming or heading lower on crude? The price of crude remain above the $80 support for now and worth our attention for direction in the sector going forward. This sector will require patience for this to unfold. Willing to add small allocation on break above the $87 mark.

Downside:

Gold (GLD) hit resistance at the 50 DMA and $120.25 mark. Bottom reversal in play and watch how this trades from here. Short opportunity in gold setting up. The reversal is in play with the move lower to $118 is test of near term support. Short trade is back? GLL entry $95 if the downside continues in the metal. Watch the dollar direction for some help on where gold will go short term. Wednesday hit the entry point and the dollar was a part of the catalyst relative to the Fed. Move stop to break even on the trade. (DUST short miners spiked today on the move in gold.)

Natural Gas (UNG) was on downside trek.¬†As we discussed in the weekend update you have to question how much lower natural gas can drop. The Farmers Almanac is predicting a colder winter and that would bode well for the commodity. Time will tell… take what the direction dictates and manage the risk. Bounce on Tuesday stalled the selling for the day, but watching now for a follow through on the upside. Got a nice follow through on Wednesday as the bounce has materialized for now. Looking for entry point if the reversal confirms and the opportunity arises.

Volatility Index (VIX)¬†The index made move back below 16 on Tuesday reflecting the willingness from buyers to put money to work short term. SVXY trade has been positive on the reversal of fear and more comfort building in the buying. Still watching to see if the anxiety returns as the bounce continues to play out as a ‘V’ bottom currently. Some anxiety relative to the FOMC announcement, but the buyers stepped in on the selling and the VIX tested the 14.2 support. Buyers remain willing at this point.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated, but bonds rallied following the FOMC announcement Wednesday. The current view is that rates will remain low as the Fed attempts to help everything from US income inequality to more jobs for global growth in Europe. The mandate has become too spread out and the effectiveness is equally as spread out. Watching for the downside in bonds to materialize, but patient for now. TLT hit $119.40 support and held. Added the entry at $51.80 on TBT. Trade is failing and we will have to raise our stop and see how the bonds trade out short term.

The speculation is for rates to rise in response to the Fed hiking rates next year… not happening as the Fed talks stalling the rise to late 2015. The Fed is worried about the stronger dollar… the impact of higher US rates to the global economies and low unemployment rates in the US. In other words the Fed wants rates to remain low longer to help the world economies. I believe the threat of higher interest rates¬†is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. If Humpty-Dumpty (treasury bonds) falls as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. Trade the swings until the direction defines itself.

Crude oil remains a big question mark relative to the price short term. The outlook offered from Goldman Sachs is in line with our thoughts on the topic. The stronger dollar has pushed prices lower along with weaker demand globally. It continues to hold above the $80 level for now. Goldman pegged the price at $75.¬†I would look at this as a possible target and then a move higher in time. Don’t be surprised if we bounce first and then sell lower. Too much uncertainty for my trading taste.

Crude Oil (USO) – moved off the low and setting up a trade on the bounce in oil prices. Needs to clear $31.50 to trade the upside short term. I am still inclined to short the rally once it bounces.

Impact of Crude oil on other sectors however is¬†important to watch. While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like DAL, AAL, SKYW, JBLU & LUV which are the current leaders.¬†You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward. Transports (IYT) and Trucking stocks are worth attention as well (USAK, YRCW, ARCB, PTSI, & MRTN).¬†This is already heading higher with all of these sectors. Manage your positions and enjoy the ride. It help you pay for¬†you next airline ticket.

Model Position Notes: 

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

  • Short Treasury Bonds (TBT) – TLT hit $119.40 support and held again for now. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Raise stop to break even trade at $51.80 on renewed worries with FOMC meeting.
  • Russell 2000 index (IWM)¬†Led the move off the lows and faces the 115¬†ish resistance. We have been looking for investors to take on risk in portfolios, but they are still hesitant to do so. Tuesday was a start with the 2.4% gain in the sector on the move higher to the 200 DMA. Some test of the¬†move with the FOMC meeting, but positive remain in¬†the index. Tested, held and we go forward.
  • Utilities (XLU) broke above the upper resistance at the $43.75 mark and confirmed the move higher. A reverse head and shoulder pattern was the breakout move and on test¬†and confirmation of the move to add a position to the S&P 500 model. Some testing lower on the FOMC results as the interest sensitive assets respond. Could test lower if rates rise… watch how it unfolds the balance of the week and move stop up.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the #116.50 resistance. Continued to move higher¬†tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. How much gas is in the tank for the move higher?¬†For now… enough.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Solid bounce continued right up to the FOMC meeting and tested lower hitting our stops in the EGG Model.¬†Still consolidating and watching the reaction to the Fed today.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, but it is still lagging as the earnings and outlook are still not attracting investors to any large degree. Clearing the $23 level is good point to add to position if you have not already done so.¬†$23.45 is next level to clear and then to the September high.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and looking for the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation read on the chart. Still like the upside move and the target on¬†the sector and we own XLV in the S&P 500 model. First sector to recapture the September highs and could be indicator for the balance of the market. Steady as it goes.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Adjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Long Term Opportunities – Managing earnings issues.
  4. Sector Rotation – Updated.
  5. ONLY ETF – Updated.

Pattern Trade Setups:

  1. Nice upside moves last week establishing the move off the low to be more than a bounce for now. Manage the positions and keep looking forward. Looking for a test of the current move off the lows and the Fed provided some movement, but today will be the real response to the action taken on Wednesday. Patience to let it unfold is the priority.
  2. QQQ – entry $100.56. Breakout to new high. Index continues to lead the upside move on the ‘V’ bottom and if we go higher it will be the leaders again.
  3. IWM – entry $115.10. Breakout through resistance. Continuation of the upside move in the current pattern. If we test back to the $111.50 mark we will adjust the entry.
  4. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes.
  5. TBT – entry $53.30. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position.
  6. FCG – entry $15.50. Double bottom and reversal on natural gas. Commodity made bounce off the lows and looking for the upside trade short term on stocks in response.

Pattern Trade Tracking:

  1. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $137.
  2. SCO – entry $37.85. (10/24) Flag pattern on the uptrend of the ETF… if we break higher look for the trade entry on the move. Stop $37. HIT STOP.
  3. BIB – entry $111. (10/24) Breakout. Be patient broke to new high on Thursday. If this confirms looking to add s short term trade on the leveraged ETF. need a test back of hold this level and move higher. Test is the preference for the trade entry. Stop $116. Nice move higher after entry manage the stop. HIT STOP
  4. TBT Рentry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.50 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  5. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday Рentry $125. (10/27) Stop $124.90.
  6. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50. Added¬†to the position on move through resistance at $66.42. Entry $66.45. (10/27) Stop $69.15 on all shares.
  7. SSO – entry $107.60. bottom reversal.¬†Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside –¬†entry $$117.10.(10/27) Stop $116 on all.
  8. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $83. Break above resistance (82.30) good point to add to position. Added to position Рentry $82.50 (added 2.5% 10/24) same stop on all.
  9. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. SOLD 1/2 on pop $84 Friday. Sold 1/4 at $93.70 Wednesday. Stop on balance $97.50. Managing out the tail of the holding for now with stop as exit.
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) – $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. Watching today for it to bottom out and add to position as it since. Patience today as other news will impact later in the day with FOMC. Flat lined after open… still like the upside and will be patient.
  • Twitter (TWTR) – $50 entry (10/20 1000 shares).¬†Removed stop with the gap lower pre-market of better than 12%. Added 500 shares at $42.80 (10/28) late morning as the dust settled. This is a long term holding and we trade around our position now and look at some option trades on this move.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85. Banks are selling in the current push lower, watch and manage the position.¬†Want to add our long positions in stocks back near term if we hold support and make some progress relative to sentiment. Added 2500 shares today at the $16.35 mark (10/21). Stop is $15.