Trading Notes for Today, November 4th

Notes to Note: 

Markets hold their gains from last week, but failed to make much in terms of an advance Monday. We did see more rotation to the defensive sector as Utilities, Consumer Staples and Telecom move higher on the day. The Treasury bond remains a question mark with a drop early only to push higher into the close. Again the money rotates to the defensive posture of Treasury bonds in the selling of equities. The run off the bottom has attained the objective and now comes the decision to take money off table or rotate to less risk. The later is setting up currently and we will see how it unfolds. As I have state the last week manage the risk of the run as the market is extended currently. We are trading 5.4% above the 200 DMA and at resistance.

Economic data started off with a positive manufacturing number hitting 59 and ahead of expectations. Very positive from my view. Construction spending was weak as well as the Markit PMI. Car sales were in line with expectations and overall the data remains mixed, but slightly positive. The most interesting stat around the construction data is the first-time home buyer was at a 27 year low. Plenty more to come this week and we will keep a tally of the impact to the market psychology going forward.

Bottom line on Monday was good as we held the move from last week, bad in that the data didn’t show much in terms of growth in the economy. Jobs remain a big issue as we continue to see a lack of business expansion, start ups and new technological advances. Middle class is disappearing as salaries continue to drop. This is a paradigm shift and will not reverse anytime soon. Not to get on my soapbox about this, but we have to factor in what is happening within the economic data as an influence and what it means looking forward.

Remember to VOTE today!

Notes to start the week: 

The NASDAQ produced a runaway gap on Friday and we will learn quickly what happens as we go forward. Test? Run higher? Flip-a-coin? There is plenty of data out this week that will have an influence on the outcome. The immediate response will be emotion driven… the longer term response will be influenced by logic or reality. Depending on your time horizon you have to act accordingly. Micro term (13 weeks or less) I would look at locking in some profit and let the rest run with a reasonable stop. Manage your risk. Long term view, raise your stops and let it work itself out.

Financials as a sector are gaining rotation traction. Money flow into the sector has risen with the optimism towards the economy and the Fed. This is one sector to watch moving forward this week. Dig into the sector to capture what is leading. Regional banks, insurance and brokers made gaps higher on Friday. looking at the parts produces some interesting pattern breakouts and setups.

Energy is putting in a bottom? XLE moved above $86.70 to clear the bottoming pattern? Watch for test and potential upside trade in the sector. The refiners have been performing well, but the earnings in the large cap stocks is showing up better than many expected. Still a trading sector with the price of oil a big question mark. Drop below $80 will put more pressure on the sector overall.

Gold and Silver are becoming a sunken treasure. The break of key support on the longer term chart only spells trouble for the precious metals. Short is the best trade, but chasing it could be dangerous with the emotions attached from all the analyst who still believe it is going to $2500 an ounce. Short the miners has been an equally profitable trade, but volatile as well.

Dollar is at a new multi-year high and looking better as stimulus globally gains traction. This is a double-edged sword and we need to be aware of the the longer term impacts as well as the short term benefits. Multinational companies will find it harder to compete globally and their US markets will have to pick up the slack… with a 3.5% GDP not making any big bets on that front. Beware of what will happen… review IBM’s results on earnings for some insight.

Homebuilders? Good news… rallied back to the previous resistance at $24.15 on ITB, but stalled. I am still not convinced this sector performs well going forward with a rising interest rate environment on the horizon. There is an inventory issue with existing homes competing and… downside test may be more of what to expect than a continued move higher. Worth watching.

Semiconductors sold on Thursday, accelerated on Friday? Which is right? I like the sector short term to rally back to the previous highs on the SOX index, but I would be cautious and trade with discipline.

As you can tell there is plenty of opportunity short term, it is the longer term worries that will be the disruption going forward. Trade what you believe and manage the risk of the reality as it unfolds.

Some thoughts on news/events impacting investor psyche:

* New event building momentum in the markets… global stimulus. The dollar has jumped higher, commodities have fallen and US stocks are running. How long does it go? Use the US Federal Reserve as a benchmark… they were engage in the latest stimulus for two full years. That leaves plenty of time globally for this to all unfold.

* Earnings are creating a game of take the good news and ignore the bad. We have witnessed plenty of examples of that issue this week and I expect it to continue short term. Watching how this unfolds going forward, but the optimism has returned to investor and analyst comments relative to growth and outlook for the economy and earnings.

* FOMC meeting put some new things on the table, but will they add anything to what investors expect? My initial reaction to this was no, however, we did see on Thursday the GDP revisions higher than expected at 3.5% growth and it did lend some credibility to the Fed. That in turn pushed stocks higher. There may be more benefit from the Fed comments as the October economic data is released. One reality check in the GDP data… government spending rose and accounted for 0.82% of the growth. That leaves 2.7% real growth. I know the truth doesn’t apply to an emotional market, but it is just another reason to keep your stops in check.

*  ‘V’ bottom completion, move to new high as stimulus adds momentum. The directional move going forward is higher or sideways initially, but a test has to show up sooner than later. Manage your stops accordingly.

* Dollar gains are kicking golds butt! 5.7% drop in GLD last week. Friday broke the long term support at $114.50 on the selling accelerated. This is also a concern for other commodities and the emerging markets. Oil moved below $80… Keep in mind how and what reacts to a stronger dollar.

Sectors to Watch:

Telecom (IYZ) hit resistance at the $29.50 level and moved through it last week on push higher. Made move through the $30.40 mark Monday. Gaining some momentum from some of the laggards. Scanning the parts shows some positive moves on breakout. Sprint fell after hours on earnings… how much if any impact on the sector? Still work to do if it is going to hit the $31 level on this move higher.

Transports (IYT) moved through the resistance at the $152 mark and hit new high on week. Watch the consolidation near the high currently? The boost from airlines and trucking sectors has helped lead the broad index higher. We hit the target of $156 and sell half of the positions and managing the stop on the balance. Worth scanning the parts to find what is working and what isn’t.

Natural Gas (UNG) was on the downside trek. As we discussed in the updates 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. We finally got a nice bounce off the lows last week and heading to the next resistance level on UNG.  Positive move on Monday with gap higher and held on the close. FCG is the stock ETF to watch as well in a bottom consolidation pattern.


Volatility Index (VIX) The index moved lower on the week and tested below the 14 mark on Friday, but pushed to 14.8 on Monday. The challenge is now back on the sellers as to how they will approach the found optimism about the markets overall. For now watch the volatility and see if it provides any clues on direction near term. VXX at $30.90 could be of interest if the sellers show up to test the move short term.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated, but bonds rallied following the FOMC announcement. 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. TLT hit $119.40 support and has held the last five trading days, but tested lower on Monday? Added the entry at $51.80 on TBT. Trade is failing to accelerate and we will raise our stop and see how the bonds trade 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. Crude Oil (USO) – moved lower and broke lower from the consolidation pattern from the last three weeks. This keeps the downtrend in play as stronger dollar and weaker demand outlook keeps the pressure on the price of oil. Shorting the rally was the right call. Watch for more downside to evolve. Priced at $77.42 currently down another 1.4% to start the day. Good at the pump, but watching the impact to stocks.

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:

  • Energy (XLE) the sector pushed to resistance short term at the $86.50 level and attempted to break higher this week, 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 needs to remain above the $80 support (broke lower on Monday to $78.80) for the direction to have chance of pushing higher short term. This sector will require patience for this to unfold. Willing to add small allocation on break above the $87 mark if that takes place. Added early on Monday (Sector Rotation Model) and fell later as oil ticked lower. Manage our risk short term.
  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through on Friday. We will look to add this position if we can follow through on the positive move. Added to the S&P 500 Model.
  • Gold (GLL) hit resistance at the 50 DMA and $120.25 mark. The move lower offers downside risk to the metal. Short opportunity in gold set up. The reversal is in play with the move lower 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.  Move stop to $102 on the trade. Added ONLY ETF Model (DUST short miners spiked 40% on the move in gold.)
  • 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.
  • 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 cleared the 115 ish resistance on gap higher Friday. We have been looking for investors to take on risk in portfolios and this week the stepped out. Taking on some new leadership… adjust your stop accordingly.
  • 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. Big move higher as rates settle and buyers were engaged. Holding and letting it run for now. S&P 500 Model. (Watch any move higher in interest rates to impact the sector short term.)
  • 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. Now at new high.
  • 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 and bounced back to end the week. (Watch interest rates as a move higher will impact the sector.)
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was lagging as the earnings and outlook were not attractive to investors. That changed follwoing the FOMC meeting and now testing the highs. Adjust your stops and manage the risk.
  • 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 is setting the pace on the upside move. Lead by example.
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 completing the ‘V’ bottom and hitting new highs. Now we have to manage the positions and keep looking forward. Looking for a test of the current move off the lows at some point going forward. Patience to let it unfold is the priority while managing our stops.
  2. SDS – entry $23.55. Bottom reversal. Overbought technically on the index and a test would not be out of the question relative to the move. Hedge to our positions below as well.
  3. VXX – entry $30.90. Support test and reversal. Some activity on Monday… if follows through trade to hedge positions below would be prudent.
  4. 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. Natural gas moved higher and energy stocks holding up… patience to see if this plays out.

Pattern Trade Tracking:

  1. XLE – entry $87. Ascending triangle breakout. Looking for test of the move higher and an opportunity on the test to take the entry. Risk is oil going forward, thus trade setup. Stop $84.60
  2. TBT – entry $52.85. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position. Stop $51.80.
  3. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $110.
  4. 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 $140.50.
  5. TBT – entry $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 – entry $52.20 (2.5% add 10/24). Stop same on all of the position.
  6. QLD – entry $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 – entry $125. (10/27) Stop $128.65.
  7. 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 $72 on all shares.
  8. 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 $120.35 on all.
  9. SOXX – entry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $86. Break above resistance (82.30) good point to add to position. Added to position – entry $82.50 (added 2.5% 10/24) same stop on all.
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. Add Dec $75 puts @ $3.50 – 10 contracts.
  • 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. Add Dec $40 puts at $2.50 – 10 contracts
  • 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 at the $16.35 mark (10/21). Stop is $15. Added to our Jan 16 calls same price.