Trading Notes or Today, December 18th

Notes to Note: 

Markets open higher, drift higher into the FOMC meeting and then jump higher into the close. The issue of interest rate hikes is nothing new it is just a market in denial over the reality of when it will truly begin. This is going to carry into today’s trading even with the futures pointing higher we could have to deal with the renewed intraday volatility and interpretation of every word uttered by the Yellen and the twelve dwarfs (looks kind of like Snow White and the 12 Dwarfs) ¬†Let’s just leave our summary as it did nothing to clarify the uncertainty in investors minds or outlook. The optimism over the Fed is just that and it is news for investors deal with and that is on the positive side for now.

The ten-year bond bumped to 2.14% and up nerly 8 basis points and pivots off the low on Tuesday. The movement to bonds has been an indication that investors are looking for safety or a hedge to their portfolios going forward. TMF or TLT were leading the way higher as a result of the decline at the long end of the yield curve. FOMC meeting Wednesday took some wind out of the sails, but there is still plenty of uncertainty to keep the bond in play.

The NASDAQ closed up  96 points or 2.1% at 4644 . The upside fell short of the 4652 level to recapture the upside momentum, but the futures are in position to take care of that today. Watching the upside move and potential trade of the move higher. (ONLY ETF Watch List)

The S&P 500 index closed at 2012 and pivoting off the low from Tuesday. The move back near the 2018 level is a start and a renewal of the upside would be a break through this level. Pivot point reversal confirmation today would off a trade on the move for those willing to monitor the short term move. (ONLY ETF Watch List)

As we discussed in the webinar on Tuesday night the rotation to the downside would need an event, catalyst or news to stem the downside acceleration, and the FOMC was part of the reason, oil holding near $55 was part of the reason and Russia becoming proactive towards the ruble was part of the reason… The next question is sustainable or temporary? For now I am going with temporary backed by some hope that things will improve longer term, but hope is not a trading strategy, thus I am going with temporary and that leads me to short term windows versus longer term horizons. Shift in strategy currently to account for the volatility and uncertainty that is become sustainable short term (0-13 week outlook).

The Russell 2000 index was up 2.6% leading the indexes higher and setting the bar for other to follow. We have discussed the move in this index the last two days showing signs of wanting to bounce and it did just that Wednesday. Because there was nothing more than a hunch on my part we couldn’t trade it, but it did follow through Wednesday on the attempted bounce Tuesday that failed. Back in the trading range and looking for follow through on the move today. There is a trade back to the 1190 mark or higher if you are willing to take the risk.

The Volatility index¬†jumped to a high of 25.2 Tuesday and¬†reversed to 19.4¬†on Wednesday. The swings are getting bigger and Wednesday was a news driven move that could take the immediate uncertainty out of the market. Again this is a trading opportunity, but a high risk one withe SVXY. The move is on conjecture that the Fed is here to help… that change with a bad sneeze from Yellen. Not posting this trade but watch for the VIX to drop further (15.50 target) and SVXY to respond in kind with move towards the $69 mark.

Dollar (UUP) is taking some heat from the market and broke the $23.35 level on Tuesday, but bounced back to $23.60 on Wednesday. The FOMC news helped as the threat of interest rates rising helped the buck.

There is¬†plenty of¬†speculation in the markets currently. This puts the market in a trading mindset and if you are not like minded in your approach currently you are taking some jabs on the chin daily. I know… it has taken me a couple of weeks to shift gears mentally in my approach to this current environment. My belief was the uncertainty and choppy market¬†was not a sustainable cycle… but it is proving to be just that for now. The ups and downs are only lasting a few days and until that changes I have to adjust to shorter term holding periods and take what the market gives versus the mindset of it holding a trendline for a longer time period. We are making those adjustments in the strategies as well. This is the very process I talk about when I say let the market tell you what it is doing versus forcing your will on it. A few jabs to the chin will get you attention! The goal is to not get knocked out!

Economic News for the Week:

FOMC meeting was all the buzz on Wednesday and investors liked what they heard about next summer and the Fed playing nice with interest rates as the US and the world markets adjust to what is happening in the oil sector currently. Rally time for the market and everyone is happy at least for today.

Adding to the worries on Tuesday with the housing starts coming in weaker than expect and lower than October. The Markit flash PMI was not in line with last month either and moved lower. Data isn’t helping thus far as the focus still remains the price crude oil… but, we do need the economy to improve… not remain flat.

Empire State index turned negative for December down 3.6. Industrial production rose 1.3% and better than expected. Homebuilders index dropped to 57 below expectations. Again the data remains mixed for the economy as we continue to filter through the data.

The producer price index dropping 0.2% as a result of cheaper oil prices, and the consumer sentiment jumped to 93.8 much better than expected. The consumer continues to hang tough and optimism springs eternal. The early benefits of cheaper oil on both accounts… but, analyst are equally as worried about the longer term impact to the economy. We will see how it all plays out going forward.

Retail sales numbers were posted and they were better than expected… up 0.7% and auto sales were up 1.7%. All around positive numbers and better than expected even with the weaker Black Friday numbers. Still optimism swirling about the holiday sales and we will see how that unfolds, but not until January. The good news did help push stocks higher in the morning.

Some thoughts on news/events and statistics impacting investor psyche:

* FOMC meeting was catalyst for the upside on Wednesday…watching to see if the new unfolds into an event trading cycle for the market or short term upside/micro trend. Patience and focus are key short term.

* Tug-o-war over as oil prices continue lower. The speculation that OPEC would fold has not materialized and the lower oil travels the more nervous investors are getting. I think Russia has a better chance of winning the Nobel Peace Prize than OPEC giving in personally. Plenty of pontification on how this will be destructive to the global economics, but there are no real facts on the outcome or destruction levels that can be validated.

* The Fed¬†is moving back center stage starting Wednesday¬†with the FOMC meeting… last one for 2015.¬†Not much is expected to change as everyone continues to drink the Kool-aide that all is well in the US economy.¬†¬†The discussion on interest rate hikes is on the table, but no definitive timeline currently. Any guidance will be greeted with interest and not likely positive interest.¬†

* Commodities across the board a causing havoc for global markets. This is not just speculation, but potentially can be destructive to the economics of countries like Canada, Australia, Brazil, Russia, etc. where a big share of their GDP is derived from export of commodities. The lower prices do impact the revenue base of the countries and all that ripples through that theme. This remains the primary issue facing the markets going forward and the uncertainty of the events unfolding is pushing stocks lower in response.

What to watch¬†this week…

The downside confirmation for the broad markets had caught a “bid” accelerating into Tuesday’s close. The move in oil early and Fed talk later¬†created a pivot point for the indexes¬†that¬†now has¬†to validate a short term¬†move on the upside moving forward. Pivot point potential is what we confirm today?

Crude was higher on the day hitting a peak of $59 early that closed at $56 to end the day. The positive news overlapped into the energy (XLE) stocks moving up 4% on the day. This was follow through on the move higher on Tuesday. Thus, we have established Monday as the pivot point with a follow through confirmed. Thus, let the trading begin, all is well right? For a trade, but anymore than that is purely speculation at this point. (ONLY ETF Watch List)

Natural gas had been declining, but did find a bottom and holding. $19.50 is the level to clear for the based to break higher. UNG is testing the $18.39 support level and looking for more help to avoid breaking lower as it pushed to $18.80 on Wednesday. The pressure from oil is overlapping towards natural gas, but patience here will likely be rewarded on the upside. Supply data continues to show draw downs keeping the hope alive that prices will rise in response.

Semiconductors (SOXX) stops are $91.50 on trades… hit Tuesday. Short side looks attractive, but need to confirm the move lower with some follow through near term.

WEDNESDAY: Reversal off the $89.40 ish support level. Shows pivot point, but needs to confirm the move.

Retail found some good news and XRT is holding above the $90 level for now. I still like the parts better than the whole for making money in the sector. Look at CVS, SPLS, RAD, and LE on Wednesday’s trading they followed through. Sector was up 2.4% and looking to clear the $93.50 move today.

Small caps (RUT-X) tested the break lower to the 1140 mark Monday and closed at 1139. Wanted to bounce on Monday, but failed to hold the move and now watching to see how it unfolds going forward. If all else fails this will accelerate to the downside. Be patient.

WEDNESDAY: Got the bounce and ran higher off the pivot point low. 3.1% move was great start at the 1190 resistance point to take out short term.

Biotech (IBB) failed to hold support at $297.25 and that confirmed some short opportunities for Monday trading. Watching BIS as opportunity to trade the downside. $49.15 entry on the stumble works.

WEDNESDAY: Reversal and pivot higher closing back above the $297.25 as the leader returns to the upside. Needs confirmation of the move, but positive day for the sector off the low.

Technology (XLK) took out the $40.95 support. Downside in play currently on the move. TECS is leveraged short trade on sector and in play.

WEDNESDAY: like the other sectors found the low and pivoted back to the upside. Needs follow through on the move to get my interest short term.

Volatility Index (VXX) The spike higher is on watch. Got an early fade, but it rallied back to push VXX back to high. Still watching how this unfolds as the volatility intraday chart shows unique move. Watching futures this morning.

WEDNESDAY: Reversal in the volatility on the Fed news. Sustainable? Trade-able yes, risk? Yes. SVXY is the upside trade short the VIX, but brings plenty of risk with it.

Emerging markets (EEM) short trade set up last week and followed through. Closed at  the next level of support on Friday and a broke lower on Monday opening the short trade. EUM. attempted to bounce early, but failed and posted further downside.

WEDNESDAY: Eight down days in a row… it had to bounce eventually. This is like watching the roulette table have eight red number in a row… eventually it has to black. Watching to see how this one unfolds relative to any reversal. My belief would be to short any rally currently.

Model Position Notes: 

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

  • Retail (XRT)¬†¬†the sector was to take on some leadership into year end with¬†earnings as¬†the catalyst. 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 in the parts.¬†TODAY:¬†Tested back near the $90 mark and held this week. Volatility picking up and we have to manage the outcome short term.
Watch List Opportunities:
  1. S&P 500 Model –¬†updated
  2. Sector Rotation –¬†updated
  3. ONLY ETF –¬†updated
  4. Pattern Trade Model – updated

Pattern Trade Setups:

  1. We have hit plenty of stops on the move lower and now we look to see if the reversal offers opportunities or not. The ONLY ETF Strategy has posted several trades on the move as they fit that strategy for trading. Because of the selling there are a lot of broken patterns and we need follow through to reestablish the opportunities. Watching to see how today unfolds and we will take what the market sets up.

Pattern Trade Tracking:

  1. SOXS – entry $15. Bottom reversal. Watching for the confirmation of the selling in the sector short term as trade. $17 target and we will manage the position on move. Stop $14.75. HIT STOP
  2. TZA – entry $13.80. Top of trading range. Cheating entry on this slightly as a couple of the indicators point to this level technically. $14 is the breakout and other option for entry. Stop 14. (ADD on break above $14 – Added 12/15 second positions at $14) HIT STOP on all.
  3. QID – entry $40. Bottom reversal. Selling is picking up in the technology stocks and if they break support short term will accelerate downside. Stop $40.80 (Add on break above $41 – Added 12/15 second position at $41)) HIT STOP on all.
  4. SDS Рentry $22.95. Double bottom confirmed with break higher. This is a trade on the current volatility in the market. Stop $22.95 (add on break above $23.50 РAdded on 12/15 second position) WATCH the OPEN today.
  5. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.95
  6. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $37.50.
  7. 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 $46.90
  8. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  9. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  10. 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 $23.70.
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: 
Tuesday took it’s toll on the positions and we will watch to see how today unfolds relative to the support, and hedging further any movement on the downside. The opportunity will be on the bounce once the noise settles and some clarity returns.
Wednesday bounced, helped keep the positions in good shape… now comes the issue of short term versus long term trading. Need to work through the noise short term to define what if any changes we make looking long term. Patience for now.
  • 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 as investors sort out the facts and fiction.
  • 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. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)¬†Broke down and trading lower, we exercise the put if no bounce. $36 is potential support. Watching how to trade this near term.¬†
  • 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.
  • 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.¬†Small range as market keeps stock in check.