Trading Notes for December 24-26th

Notes to Note: 

No big changes again on Tuesday as volume was again lower than Monday¬†with the major indexes mixed on the day, but not enough of a move to give any indications in either direction. Oil was the biggest mover on the day gaining 3.5% after dropping the same amount on Monday. The outlook for crude still flat to lower without any change in demand, but OPEC members were predicting a rise in demand which help the cause. Banks were up 0.8% on the day as well bouncing back from a sluggish Monday. Overall… boring and well it should be as traders, families and others are focused on spending time with their families to celebrate the season. And in that vein I would like to wish everyone a very Merry Christmas, Happiest of Hanukkah, or whatever celebration you have this time of year. This is the last update until the weekend update for Next week. ENJOY & RELAX!

The ten-year bond has been acting contrary to the moves higher in stocks, but yields moved to the 2.25% mark on Tuesday rising nearly 10 basis points. That is more in line with a rise in stock prices. The movement in bonds has been an indication that investors are looking for safety or a hedge to their portfolios, not a surge higher in the indexes. Still one key component on our watch list heading into next year.

The NASDAQ closed up 218 points from the low on Tuesday night. This puts the index at 4765 and just 26 points from the¬†November 28th high. The gap higher was one of interest and left plenty of issues to contend with in the gap. We attempted to buy the follow through on the pivot point low on Thursday, but I wasn’t willing to play the gap higher as it changed the risk/reward equation and unwilling to accept the risk of the trade.

TUESDAY:¬†Gave up 13 points on the day as no one was willing to put more money to work just yet. Wednesday is a half day of trading and will likely be similar to Tuesday…. not much change. Friday won’t be much different as traders and investors enjoy a break for the holidays.

The S&P 500 index closed at 2070 and gained an equally impressive 98 points from the close Tuesday. This also left a gap higher on Thursday making the entry a pass on the rise in risk of a trade if the pivot failed and the downside resumed. The Fed magic at work again. Is it sustainable? There in lies the reason we are still in a trading market and we will monitor this one day at a time.

TUESDAY:  gained 5 points and hitting new highs as well. Technology, Industrials, Consumer Discretionary and Staples were the leaders on Monday. That shifted to Energy, Consumer Staples, Basic Materials and Financials on Tuesday. Trying to get everyone in on the act for the holidays. Healthcare continued to sell lower on the day dropping more than 2%. Profit taking is the speculation as we end the year. XLV tested the $68 support level again on the Tuesday and one to watch heading into the final week of the year. IBB fell 4.2% on top of the 2% drop on Monday. Year end selling is definitely under way. This could offer an opportunity to start the new year.

The Russell 2000 index was¬†able to break through the 1190 resistance (upper end of the trading range) on the close Friday. This is the level we have discussed since the ‘V’ bottom reversal off the October lows. Looking for some leadership moving towards the year end and start of the new year. This is one of the indexes we have discussed and I like the upside move. Entry $119 IWM. Some discrepancy in price on Friday with options expiration.

TUESDAY: Attempted to keep the upside moving, but failed to hold the early gains. I still like the action in the sector and look for this to provide some upside leadership near term.

The Volatility index jumped to a high of 25.2 Tuesday and reversed to 16.5 on Friday. The swings were big, but finally calmed to reasonable on Friday. Watching this for a test lower if the indexes are to continue the upside move during the new week of trading. The withdrawal of uncertainty was enough to procduce the two day move higher, but it is still elevated and despite the last hour plus move higher the index remained elevated. With options expiration behind us this should move lower leaving an opportunity to trade SVXY this week. (ONLY ETF Strategy Watch List)

TUESDAY: SVXY attempted to continue the upside move as volatility subsides, but some late day movement in prices pushed the VIX higher on the day. Still expect this to test lower based on the current outlook and sentiment.

Dollar (UUP) reversed the downside move from the crude oil influence and returned to the 12/5 highs. I still like the dollar in all the mess that is the markets globally currently. Still looking for more upside strength in the buck. Showing continued strength in trading this week.

There is plenty of speculation in the markets currently on both the up and downside. This puts the market in a trading mindset and if you are not like minded in your approach it will only get worse short term. We start the week with an open mind, but guarded against all the potential issues facing the markets short term. One day at a time.

Economic News for the Week:

Plenty of data out today as the weeks news gets pushed forward due to the holiday.

Dumped the truck on Tuesday as it was the final reporting day of the week. GDP was better than expecte at 5% for Q3! Interesting turn of events on the number. Durable goods were negative 0.7% and well below the positive 3.3% growth expected… that didn’t set well. Consumer sentiment is in line with expectations at 93.6. Personal income and spending were in line with expectations. Inflation was at 0% and new home sales fell short of expectations as did the existing home sales. Again numbers continue to be mixed and not offering much in terms of confidence building going forward. This will unfold further as we conclude the final week of trading and the final quarter of the year. The data will set the tone for the new year.

Existing home sales were disappointing on Monday falling to 4.9 million and below expectations. Home sales have been up and down, but holding steady overall. Housing sector managed a modest gain following the news.

The most important news from last week was the FOMC meeting and the outcome was interesting, but the response was mind numbing. The Fed didn’t remove the language “considerable time”, but added “It can be patient”… before it starts to “normalize the stance of monetary policy”. Assumption that is related to raising interest rates from zero. This is like a addict saying they are gong to stop, please be patient and I will conquer this in time!

Yellen did elude to this meaning in would not happen at least for the first two meeting next year… which corresponds to the original six month comment by her at her first FOMC meeting as chairperson. No decision is a decision from the markets response meaning they are not going to do anything and we are going to invest that way until they do.

The consensus, from those understanding the outcome of this will eventually be bad, is doing nothing only makes the situation worse and risking a bigger problem. What is the Fed fearful of? Exacerbating the issues globally relative to oil? That is a temporary issue that will adjust over time. Yes, the markets may react to the initial comments on when rates will rise, but it will equally adjust and adapt over time. The best time to act is when you know what to do. Advise to the Fed, just hold your nose and jump in, you will adjust to the water temperature.

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

* Holidays are keeping volume low and the noise dull. We will let the holidays pass and this renew our look at what investors believe or at the least are doing with their money heading into the new year.

* 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.

* Crude oil bounced 5% on Friday to close the week, but still plenty of news and speculation driving the process. Oil needs to move back above $65 short term (my view) to ease the anxiety in the emerging markets, especially Russia. This issue is not over despite what transpired last week.

* 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…

This is Christmas week and the holiday will impact volume. Take what the markets offer, but be mindful of the period and manage your stops on positions as well as trading opportunities. I am traveling starting on December 23rd and as we announced the updates will be only to the trading notes and what is essential to address each day.

Volatility Index (VIX) moved off the highs and closed at the 16.5 mark. The move on Friday left some question marks about the uncertainty levels still in the market or did the options expiration cause some disruption? We will watch this on Monday with a bias towards the short trade with SVXY. Held the $64.50 level and looking for a extended move higher if the upside for stocks is going to continue. Adding it to the ONLY ETF Watch List.

TUESDAY: followed through on the downside move with volatility declining. SVXY is the short trade for the VIX.

Crude oil is still on the worry list to start the week. Closed at $56.52 ¬†and bounced off the lows to give some confidence to the buyer in the oil stocks (XLE). There is plenty of damage done and it will take time and energy to sift through the ashes and find what will work and what remains in trouble moving forward. One thing is for sure… the large cap stocks like XOM, CVX, COP, HES and others may be volatile, but they are not going anywhere short term. Still digging and looking for the opportunities both short and long term.

TUESDAY: The bounce on OPEC comments helped crude regain the 3.5% from Monday. Still building a base and watching how this unfold going forward. No reason to buy at this point, but could offer a short term trading opportunity.

Semiconductors (SOXX) hit support on Wednesday and proceeded to bounce back tot he $94 level closing at $93.79. Can the sector resume the leadership role it maintained prior to the drop? The question mark is the global markets and what impact that will have on demand moving into the new year. Only time will tell fundamentally, but the reversal technically setup a short term trade we added on Friday in the Pattern Trading Strategy below.

TUESDAY: Starts higher, but reverses along with the biotech sector. The move lower was modest and the upside remains a positive opportunity for the short term.

Retail is still a mixed bag of optimism and reality. The upside move after the sales data last week helped push XRT back to the $95 level and tested back near $94 on Friday. Auto parts and related stocks are the leadership currently. KMX was up 11.2% on Friday. ARO, GME, AWAY and ODP all posted solid gains on Friday as well. Looking for the parts as well as the whole at this point.

TUESDAY: Moving above the previous high and looking for final catalyst to push higher. Only 1 shopping day left! Expectations are for a good season for the retailers. I am still in the camp of specific winners versus the overall sector. Worth watching next week as more data surfaces.

Small Caps (IWM) hit the $119 entry posted for the EGG and the Pattern Trading Strategy on Friday. It did close slightly below that after a nice run to the $19.40 level. Watching the open on Monday and looking for the follow through on the upside to start the week. Need the leadership to help push the market higher short term.

TUESDAY: Held the move higher and IWM closed at $119.82 after moving above the $120 level earlier in the day. I like the sector as a possible leader to start the new year.

Biotech (IBB) tested early on Friday, but followed up with a move through the $315 entry level we posted in the Pattern Trading Strategy and close at a new high to end the week. I still like the renewed leadership for the sector and we are going with the upside as a key for the move int the broad indexes to continue.

TUESDAY: Selling accelerates from Monday and drops more than 4% on the day. Profit taking? Speculation? I like the opportunity this may create short term and watching to see how it unfolds into the new year.

Technology (XLK) made nice reversal on the pivot move on Wednesday and tested back on Friday. This is a sector that needs all the parts to join in if it is going to renew the upside leadership role. IGN, IGV, FDN, SOXX, SOCL and SKYY all need to follow up with moves higher short term. TECL entry $141.25 hit on Friday.

TUESDAY: Nice follow through on upside and push through resistance.  Networking and software made up for what lacked in semiconductors Tuesday, both were the leaders on upside.

Emerging markets (EEM) holding the bounce off the lows and I am watching how this unfolds in relationship to Russia, China and Latin America. They are all oversold short term in relationship to the oil worries, but need some upside movement to help the sector find buyers short term.

TUESDAY: Nice bump higher as the sector gained 1.5% on Monday. Failed to hold it with 1% drop on Tuesday. The uncertainty in China continues to be of interest and Russia is another issue all together for the sector to deal with. Still suspect until there is reasonable interest from investors to maintain a trend versus jumping on news.

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. Managing what we have and letting this all unfold into the new year. Not posting the balance of the week any new trades. We will manage what we have and look towards the new year to start anew.

Pattern Trade Tracking:

  1. KLIC – entry $14.45. Trading range breakout. Semiconductors are leading again and looking for upside follow through. Stop $14.20.
  2. IWM – entry $119. Trading range breakout. The sector has flirted with breaking through this resistance three times maybe it makes the upside move now. initial target $123. Hit entry, but late in day. Waited for the weekend to pass and will take on Monday assuming upside resumes. Stop $116.80
  3. SOXL – entry $135 test. pivot point reversal in the previous leader is positive sign. I would like a test to the bottom of the bar on Thursday at $133 ¬†ish and take the lower entry, but if that doesn’t happen a small test to $135 will be good. Another gap open pass. Initial target $146. Stop $135 – break-even on move Monday.
  4. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $13.50
  5. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $44
  6. 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
  7. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  8. 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 $24.70.
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: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • 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. TUESDAY: Gave back the gains and still holding and waiting for the upside to resume.
  • 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. MONDAY:¬†Sold our put option (even minus ticket charge) and added 500 shares to our position at $38. Looking for move back to $42. ¬†Small test on Tuesday and watching how that unfolds.¬†
  • 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. MONDAY: Back near the highs again and breakout could be good reason to add to the upside trading positions. Look for $17.75 as add point on break higher. Tuesday followed through with the move higher. New highs near term and it they hold all is good.
  • 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. MONDAY: Still looking for a definitive break above the $49 mark and continuation of the upside. Tried again on Monday.