Trading Notes for January 6th

Notes to Note: 

The first day of trading was not pretty. If fact, it was down right ugly! The drop in the major indexes showed a continuation of the selling that took place on Friday with the primary difference being no rally into the close. Cause, uncertainty. Effect, more selling. Outlook, sellers have control. That’s as simple as I can make it looking toward today’s trading. Without getting long winded and emotional about how we got here the key is the 1972 level near term. The double top pattern shows a reversal in play and that put the sellers, as stated, in the drivers seat for now. Approach the day with a plan and implement the plan with discipline.

The ten-year bond advanced in price again as the yields continue to find reasons to move lower and closing Monday at 2.04% or down 8 basis points. The bond gained 0.6% and back at the December high. As we discussed last week this is acting as a contrary indicator to stocks going higher and now stocks are moving lower as you would normally expect. Proceed with caution as the yields are testing a support point.

The NASDAQ closed at 4652 to start the week down 74 point or 1.5% on Monday. A nice double top pattern has formed on the chart currently and we closed at a key level of support near term. The index was 80 points or 1.6% last week showing the weakness in play currently. A break of this level opens a test of the December low near 4540.

The S&P 500 index closed at 2020 or down 37 points or 1.8%. The index has struggled of late with leadership shifting back and forth depending on the day, but Monday they all moved lower and in one day fell more than all of last week. Energy was the downside leaders losing 4%. That rippled into basic materials and industrials both losing 2.5% on the day. Financials gave up 2% showing more weakness. Consumer staples and healthcare (defensive sectors) held up the best forfeiting only 0.7%. What do we make of the action? Uncertainty at its best plain and simple which puts the sellers in control for now.

The Russell 2000 index broke below the 1190 level after a nice move through this mark to end the year. It did manage to hit a new high near the 1220 mark before reversing back below the 1190 level again. So much for the breakout from the trading range to a new high for the index. Still watching the trading range and what opportunities this will present short term. Watch a break below 1180 to short back to the 1150 mark.

The Volatility index tested support at the 14 level, but when the data hit the uncertainty jump and the index rose to back to the 20 mark before ending the week at 17.7. Monday it jumped to 21 and closed at the 20 mark.¬†Once again it is important to understand that investors don’t like uncertainty about the future. The default is to sell and watch as it unfolds. We are at that crossroad again to start the month of January.¬†VXX was up 7% as well on Monday with the uncertainty driving the index higher.

The Dollar (UUP) continued higher on Monday at $24.25 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 91.4 on Monday. The stronger dollar remains a positive from my view going longer term. Still looking for more upside strength in the buck. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future. The impact to oil is showing as well with a drop near the $50 per barrel level.

There is¬†plenty of¬†speculation in the markets currently as all the new year prognostications are put forth and the negative data to start the December reports set the tone. I am not big on speculation or guessing where the market ends one year from now. But, the ability to look at the trendlines and determine the direction currently and going forward is key to managing your portfolio. Long term trendlines remain on the upside. The micro term trend (0-13 weeks) is where the problem currently exist. A double top pattern is showing on the major indexes as a possible downside setup. That creates worry from a technical viewpoint. The data started out negative for December and that has the worry zone rising again. Global indicators are still week and Greece is back in the picture creating more uncertainty for the Euro zone. Bottom line is we are starting the new year with renewed uncertainty and that creates volatility. We have to be patient short term and take what the market gives. This is a trading market and time horizons are short term. Longer term positions must be managed on the longer term trendline as exit points. Understand and respect your surrounding relative to the market. Don’t over think your response. Plan and execute your plan according to the strategy you have deployed for the positions you hold. Let it unfold and respond accordingly. Attempting to predict the future generally ends bad.

Economic News for the Week:

December data disappointed investors and the upside move on Friday turned sour. Markit PMI started with a miss reporting 43.9 versus 54.8 in November. Then ISM manufacturing came in at 55.5% versus the 57% expected and 58.7% in November. That set the tone for the trading Friday and may well overlap into next weeks trading if the numbers are not better in the services sector. This is a key point to watch as the data unfolds this week…

On tap is the ISM services on Tuesday along with factory orders. FOMC minutes on Wednesday with the ADP employment report and trade deficit. Then the jobs report on Friday along with wholesale inventories. If the data is not better… the sellers may well take control of the trading week.

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

*¬†Worries are building again over the price of crude oil pushing lower towards the $50 mark. This worry is going to be removed anytime soon. The weekly inventory reports don’t show any signs of demand rising short term. For now you have to assume this remains a concern.

* FOMC meeting was catalyst for the upside… now we have the minutes on Wednesday to explain what was already explained painfully by Yellen following the meeting. Watch this data to see how it impacts the psyche of the investor.

What to watch¬†this week…

Trading begins in earnest again with everyone back to work and ready to start the new year with positive results. There are many moving parts as we discussed above and we will start with a patient hat on to see how investors feel relative to stocks. Take it one day at a time for now and understand this is a trading environment short term.

Volatility Index (VIX) moved back to the 20¬†mark. The move on Friday left some question marks about the uncertainty levels still in the market. We closed off the highs, but the trade in VXX is still worth watching as the short term directional trade. MONDAY: headed higher to 21, but closed back near 20… uncertainty is driving currently. VXX is the trade is this continues.

Crude oil remain on the worry list to start the week. Closed at $52.81 as inventory data disappoints again. The stronger dollar is having an impact relative to the bounce in the buck on Friday. As if the commodity needs any more pressure than it already has on the downside. Short side of oil is to be considered. SCO. MONDAY: Fell to $50 or 5% down on the day. SCO gapped higher and left no room for entry, but watching how it unfolds on the Tuesday.

Energy (XLE) the sector has fallen 21.6% since the high in June. Oil has declined 51% during the same period. This is commonly referred to as a discrepancy. Either oil prices need to rise or energy stock price will fall to close the gap. This could offer a trade to be short energy stocks and long oil going forward. Food for thought. MONDAY: XLE was down 4% helping close the gap… except crude was down 5%! Ugly now and looking forward. ERY in play currently on the push lower.

Treasury Bonds (TMF) jumping higher on the uncertainty pertaining to stocks. Broke through resistance on Monday and heading higher if this current move gains traction. Watching for test of the move as opportunity to add to holding.

Semiconductors (SOXX) are setting up with a double top as well and putting pressure on the technology sector overall. Without the upside leadership from the sector¬†this could be a catalyst sector for the broader indexes. Watching the downside play short term. If… SOXX can hold above $92 this week the upside trade may return, but for now the bias is on the downside. MONDAY: fell 2% and testing the December lows. Not looking good short term.

Retail is still a mixed bag of optimism and reality. The upside move after the holiday sales reports helped push XRT back above the $95 level and held with a test on Friday. I am ready to take my profit on this trade and watch how it unfolds with the data. I am not as optimistic in my views as the analyst. Stop at $95. MONDAY: HIT Stop and exiting was the right move.

Small Caps (IWM) hit stops on Friday with the selling on worries. I am still looking for trade on the upside in the sector to start the new year. However, if the break below the $118 mark occurs I am willing to trade the downside to support at the $115 mark. TZA is short ETF. MONDAY: continued lower and the TZA trade showed up as the entry point hit.

Biotech (IBB) tested back to $293 and closed at $306 with a bounce off the lows. The key is how they unfold going forward. They are holding up after last week, but still need to see how it unfolds this week in trading. Time will tell as we own the biotech sector and will look to add if the upside holds to start the week. MONDAY: still holding up well and watching how it unfolds near term.

Emerging markets (EEM) reversed the small rally on Friday with negative sentiment returning to the global markets. Downside trade is back and a test of the $37 level on EEM is likely based on the data and the sentiment in the sector short term. EUM short ETF. MONDAY: downside continued with selling on news and worries. The entry hit on short trade.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†Revisions to the investment options started January 1st
  2. Sector Rotation Strategy- NEW STRATEGY started on January 1st.
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Starting out with some interesting patterns and a psychology that is teetering on a negative bias. Watching how today unfolds to start the first full trading week of the year.
  2. PXLW – entry $4.75. Break of downtrend line. Semiconductor sector and looking for some leadership to return.
  3. IBB – entry $309. double bottom. looking for the upside to continue as held up well last week in face of selling in broad markets. Trade to $337 target.
  4. FXP Рentry $43.30. Reversal. China moved higher in a uptrending channel and is now testing the September highs. Looking for test lower of the move in conjunction with the worries in the emerging markets.

Pattern Trade Tracking:

  1. GDX Рentry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $18.90.
  2. KLIC – entry $14.45. Trading range breakout. Semiconductors are leading again and looking for upside follow through. Stop $14.10. HIT STOP
  3. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $13.50
  4. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $44
  5. 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
  6. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $95. HIT STOP.
  7. 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. HIT STOP
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. MONDAY: 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: still testing the support levels watching.¬†
  • 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: nice move higher, but tested on Friday? Watching.
  • 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:¬†Nice break on the upside finally! looking to hold the move and clear the $50.80 resistance.