Trading Notes for Today, November 13th

Notes to Note: 

More digestion for some and positive moves for other sectors. Indexes started the day in negative territory, but managed to push back toward the positive as the day progressed. Oil remains a overhang for the markets as crude moved near the $77 level. The challenge comes with OPEC not cutting production, the US market delivering more along with Canada and demand is falling…. thus the good old economic model of supply and demand are driving prices lower. The worry comes from the jobs created in the US in the sector and without demand the growth may decline or stagnate near term. Thus, worry about the economic impact is outweighing the economic benefit of cheaper oil prices to the consumer. This is a story we continue to watch as it unfolds.

All hail Macy’s as they beat earnings expectations and the retail sector rallied. We have been tracking XRT to move above the $90 level and that took place on Wednesday hitting a high at $91.50 on the day. The break higher completes the break through resistance and open the upside to further gains. American Eagle revised their forecast and push their stock up as well. Maybe a sign of good things to come from the sector and help from the consumer could be the missing catalyst currently.

Small caps made progress with IWM moving above $117.41 and starting a trek towards the June highs. Positive for the broad markets as the sector offers some modest leadership on the upside. Growth sectors taking on any leadership at this point is a positive.

Volatility moved back above the 13 mark, but not enough movement to spark any worries short term. We just keep trekking along one day at a time.

We were looking at the following this week, but…

Biotech put investors on notice that the leader on the move off the October 15th low may be topping. Blame the election, blame overbought signals, blame whatever you want, just pay attention to the sector moving forward if the downside move follows through. Rallied back on Monday and now we look for directional conclusion before committing anything to the sector. Tuesday & Wednesday offered some upside follow through, but light volume and left a doji on the close? Could elude to a directional change or we head higher short term. Watch and be patient as this sector defines direction relative to its leadership. 

Energy made a moved off the low thanks to oil prices showing some signs of life moving back towards the $80 level to end the week. XLE moved back above the $87 resistance level as a positive sign for the sector. Again you can blame the election results or a modest move higher in oil prices, but worth watching the outcome short term. Sank on oil prices falling relative to Saudi Arabia and the sector gave up the gains. Still need some conclusion on the direction. Started lower again on Tuesday, but closed modestly higher on the day and helped the stocks in the process. No conviction in the move and we will let this validate a upside bias before exercising too much in terms of capital to the sector. 

Commodities made a move off the lows the later part of last week and are on our list of potential trade opportunities with the life shown in gold, oil, natural gas, and base metals. Worth watching for any trades that develop like that in UNG and FCG to end the week. This is only a trade short term unless the dollar decides to decline going forward. Watch, trade and mange the risk of those trades. Moved back to support and looking for confirmation on the upside or downside? The movement is still fragmented as some is speculation and some is relative to longer term demand views being tweaked. The longer term views are the desired investment choice, but the short term will be volatile as the traders will speculate on direction. Patience is the key to the sector overall. 

Homebuilders followed through on the break through resistance as well on some positive data in the sector. We will get more data this week to confirm or deny any strength in the sector last month. Continued higher and looking positive on the break towards resistance at the $25.10 mark. Got the confirmation as the builders added to the upside on earnings outlook improving. We hit the entry point and stops should be brought to break-even at $24.40 (ITB). Testing the move higher? Watch and manage your risk. 

The broad markets are consolidating at the highs and looking for a catalyst to lead them higher as we march toward the year end. The sectors above are not going to be the ones to make a difference, but technology, financials, healthcare and the consumer stocks are, and that is where we will look for movement this week to confirm the continuation of the move off the October 15th low. Nothing changed on Monday. We did get some movement in the consumer discretionary (XLY) back to the upside. The balance are still looking for the catalyst to take them and the broad markets to higher levels. Earnings, Fed, Economic data or speculation are the only data points currently on the table to leverage the indexes higher. 

Remain patient and let the markets unfold where they intent to go.

Some thoughts on news/events impacting investor psyche:

* Oil prices remain at the center of attention relative to the US outlook. They are double edged sword relative to helping the economy with lower costs and hurting the economy as it has been the sector with the most job growth. If that stalls it would hurt the economic picture. We have to watch how this unfolds and act accordingly. ADD supply to that worry list as the concern over Saudi Arabia is back on the table for price competition and willingness to get into a price war.

* The¬†momentum in the markets¬†called¬†global stimulus continues as the central banks around the world continue ease and add to their stimulus packages. The dollar has jumped higher, commodities have fallen and US stocks have run on the prospects. 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.¬†This is offering some impact to the global ETFs as the upside is showing in the charts. Some of that is the leadership of the US markets and some is the stimulus. The risk remains high and I would take this as a trading opportunity only at this point, and let it evolve into more going forward.¬†

* The Fed put some new things on the table¬†relative to their collective outlook for economic growth in the US. Is it valid and will investors buy into the outlook?¬†My initial reaction was no, however, the GDP revisions higher than expected at 3.5% growth in Q3 did lend some credibility to what the Fed stated. That in turn has pushed stocks higher. The bigger question is does the news have sustainability?¬†I know the truth doesn’t apply to an emotional market, but it is another reason to keep your stops in balance with the risk at hand.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward.

Sectors to Watch this week:

Note the sectors outlined above as well for this week.

Energy (XLE) bounced back from selling lower and made a key move back above $87 (XLE) to end the week. Move to $77.20 on crude and XLE fell below $87? Jury is still out and watching to see how it unfolds going forward. Need crude to move back above the $80 level to keep the upside move in energy viable for putting money to work in the sector. 

Natural Gas (UNG)¬†made the move higher last week and broke through the $22.30 resistance level. Touched the 200 DMA on Friday and retreated to close at the $22.90 level on UNG. Fell back to $22.30 to test the breakout as support. Watching. The stocks finally moved on Friday as well with FCG gaining 5.8% to push back to the top end of the trading range and bottoming pattern. Monday FCG tested lower giving up 3.5%… still watching the outcome. Both opportunities should pan out further based on the “polar vortex” the meteorologist are prognosticating and the weather this week is showing a colder winter potential as record lows are expected later in the week. Still a commodity to watch for opportunity, but let the testing complete and some direction to be defined.¬†

Volatility Index (VIX) The index moved lower on the week and closed below 14 at 13.1 on the closing rally Friday. This puts the 12 level back in play and is showing no signs of worry as we make the turn towards the year end move. Got the move to 12.1 on Monday. SVXY is the short VIX ETF and may be the trade to hold going forward as volatility has been taken out of the market for now. Got the entry on the SVXY trade on Monday with nice bump higher as volatility is gone. Small bump back above the 13 level on Tuesday & Wednesday, but not enough to raise any current worries. 

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play, at least mentally. The drop in yields on Friday back to the 3.04% mark was a negative in my view for growth sectors. The buying of bonds corresponded with money rotating from the leaders like semiconductors, biotech and small caps. If this continues you could see another mini rally in long bond as a trading opportunity. Yields move up to 3.08% on Monday and TBT rose 1.8% on the shift. Stop still at $51.80 on the trade. Yields rose again on Wednesday, but failed to hold the move and still holding support at $118.30 on TLT. Manage the risk on the short bond trade with TBT. 

Crude oil remains a big question mark relative to the price short term. Crude Oil (USO) is attempting to build a bottom reversal pattern the last week, but it has not produced a change worth the upside trade risk at this point. It could get peer pressured higher short term, but the demand is certainly not there for now. I like the short the rally trade more than trading the bottom. Exactly what played out Monday. Sooner than I thought, but the OPEC willingness for have a price war wins over speculation. Not changes on Tuesday & Wednesday to report that make a difference. 

Gold bounced 2.8% on Friday as dollar tested lower and the global outlook sparked some buyer to step into the oversold metal. Does it last? Not likely, but could be a trade opportunity as gold, silver, platinum, uranium, copper, steel and aluminum all had a nice day. Oops, didn’t last and the selling in gold didn’t help the commodities overall. Stronger dollar as well on Monday. GLL came back near the previous high and watching to add back the selling continues.¬†Tuesday produced a bounce again near the $112.50 mark? Move above $112.75 is key if the upside is going to gain any traction and volume will be essential to any upside trade. More testing on Wednesday.¬†

MOO, Market Vectors Agribusiness ETF has been running nicely off the lows, but that is the industrial stocks like John Deere, Toro, Tractor Supply and Agrium moving higher. Added slightly on Monday, but it is still positive. Big plus on Tuesday on breakout with stronger relative strength on the move and held on Wednesday after small test. 

We still need the large sectors to carry the load while the small discussion above provide some trading opportunities. The Financials are taking on some leadership along with basic materials, industrials, consumer staples and utilities. That is fine, but healthcare, technology, consumer services, biotech and small caps need to step back into the role of leadership if the broad markets indexes are going to break higher. Take what the market gives and measure risk relative to the current market events both short and long term.

Interesting Move In…¬†

Utilities moved lower forfeiting 1.9% on Wednesday. Why the sudden change in sentiment? Dividend has dropped to 3.3% due to the rise in price of nearly 20% this year. Throw in some fundamentals like Price to forward earnings of 17.4, nearly ten year high, and you have an overbought situation fundamentally? Interest rates rising impact the sector has well, albeit we don’t see much on that front, but as we head to 2015 it does become an issue. Support is $45.50 currently and move below that could test the $43.75 mark.

Model Position Notes: 

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

  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through. We will look to add this position if trend gains more traction. Added to the S&P 500 Model. Retail move higher on earnings is now driving the follow through on the upside. (posted to the Sector Rotation Watch List)
  • 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¬†bounced on buying from rotation Friday, but reversed on Monday. We will take our exit if the stops are hit this week, but be patient and watch how this plays out. ¬†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. NEED TO BREAK ABOVE RESISTANCE at $53.55!
  • Russell 2000 index (IWM)¬†Led the move off the lows and cleared¬†the 115¬†ish resistance and stalled with consolidation near the highs. We have been looking for investors to take on risk in portfolios¬†and the sector may be showing signs of just that short term..¬†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. Holding and letting it run for now. S&P 500 Model.¬†Watch the volatility as it has picked up, but the upside remains the trend.
  • 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.¬†Manage your stops.
  • 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. Interest rates will play havoc with the sector, but for now content. Some topping signs continue this¬†week… watching how it plays out with $74.75 as support currently.
  • 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 following the FOMC meeting and now testing the highs? Stops at the $23.70 ¬†ish level to¬†manage the risk.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and got the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation 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. One question mark is the election… will the republicans attempt to overturn Obamacare or parts of it? The attempt could rattle and impact these stocks in turn.¬†Note the topping pattern and volume this week.
  • Retail (XRT) we are looking to the sector to take on some leadership into year and earnings were the catalyst thus far. Break above the $90 level was the entry point for the sector ETF, but take time to scan the holding and you will see some great pattern breakouts on Wednesday. Those are worth tracking for the follow through… especially on a test. Sales data out on Friday for October.
Watch List Opportunities:
  1. S&P 500 Model РAdded to watch list РAdjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Sector Rotation – Updated stops.
  4. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Still consolidating on the move through the previous highs. Watching, looking and planning on a catalyst to drive the indexes higher or else the test lower could evolve near term.
  2. MXWL – entry $11.37. bottom reversal consolidation. technology sector. it has been a leader and benefiting from improved earnings.
  3. CRAY – entry $34.70. Flag. Technology stock has run higher, but remains a leader in sector. resurgence in sector if NASDAQ moving higher.
  4. Breakout test from Wednesday from nice patterns. I am posting a couple of stocks in sectors with nice moves on the breakouts. If they test and give us a chance to buy them we will if not, don’t chase them. Three to watch: JD – 26.70 breakout point and $27 ish test of interest. This is in the internet content (FDN) which broke higher as well. RH – 80.60 breakout point and $81.30 ish test of interest. Retail space is picking up momentum. STX – $62 reversal entry point. Flag pattern and reversal is of interest on data storage company. needs to hold $61.50 on test and go.
  5. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets.
  6. CMI – entry $$147.50. Consolidation breakout. the sector has been leading as money rotates.

Pattern Trade Tracking:

  1. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $83.60
  2. HYG – entry $92.50. Break resistance and test. rally with stocks. Stop $91.95.
  3. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive. Stop $22.75.
  4. 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.
  5. 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 $114.75.
  6. 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.
  7. 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.
  8. 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 $128.65.
  9. 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.
  10. 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.
  11. 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 $86. 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.
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: 
Twitter is showing signs of breaking lower and need to manage the position relative protection. Facebook is acting better, but still worries around the stocks short term. Building some downside protection into our positions.
Bank of America is doing well on the move higher and we continue to manage the position accordingly. If the upside stalls we will lock in some profit on the options added and let the balance play out going forward.
  • 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. (watching the Jan $75 puts to add if we break support.)
  • 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). This is a long term holding and we trade around our position as the downside is back. (11/5 – Added Dec $40 puts at $2.50 – 10 contracts — HIT Stop $1.75 on contracts) – (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)
  • NEWS: Twitter announced they were adding a video service to launch in early 2015 and investors liked the idea. Stock jumped 8% on the day as a result.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks are finally gaining some ground and I like our position currently.¬†We add our long positions in stocks back as held support¬†and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15.
  • NEWS: Forex fines of $250 million from OCC – hit the price on the day. They also stated they would not lower their standards for high risk mortgages. (makes sense) Wall Street didn’t like the news as they want more earnings…. bank wants to avoid defaults.