Trading Notes for January 7th

Notes to Note: 

The headlines focused on the fifth day to close negative in a row. I was focused on the 2000 mark of the S&P 500 index which by lunch had given way to the sellers. By the close it was able to hold. Today we look to see if any buyers step in at this level and how we trade from here. Yes, selling always makes for grandiose headlines, but the reality is support and how much fear creeps into the markets. We can chalk up an ugly start for investors to the new year, but as they say it is still early and there is plenty of fun to come. 1972 remains the level to watch going forward and the all the news around the global markets, oil prices and the US economic data. The double top pattern of a reversal remains in play and the sellers are 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 Tuesday below the 2% mark for the first time since October at 1.96% or down 8 basis points. The bond gained 0.6% breaking to a new closing 52 week high. As we discussed last week this is acting as a contrary indicator to stocks going higher, but now stocks are moving lower as you would normally expect. Proceed with caution as the yields are accelerating to a climax run.

The NASDAQ closed at 4592 Tuesday down 59 point or 1.3% on Tuesday. That puts the index down 133 point for the week. A nice double top pattern reversal is playing out near support currently at 4555. The long term uptrend is still in play, but the risk of moving lower is rising.

The S&P 500 index closed at 2002 or down 18 points or 0.9%. It is now down 55 points for the week. The index has struggled to find any leadership as all ten sectors have lost ground the last five trading days. Energy is the downside leader losing 6.5%. Materials off 4.5% and industrials down 5.1%. Financials gave up 4.8% showing more weakness than expected. Consumer staples and healthcare (defensive sectors) held up the best, but still gave up ground. 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 on Monday. I stated to watch a break below 1180 to short back to the 1150 mark… that all happened on Tuesday with the index losing nearly 2% intraday. The close at 1155 was off 1.7% on the day. Looking to hold the support or test the December low.

The Volatility index tested support at the 14 level, but when the data hit and the uncertainty jump with the index rrising to back near the 23 mark before ending the week at 21.2. 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 6% Tnesday with the uncertainty driving the index higher. The question is will fear step in and escalate the selling?

The Dollar (UUP) continued higher on Tuesday at $24.30 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 91.7. 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 $48 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 on the major indexes has set up a possible downside move. 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:

ISM services for December were 56.2% versus 59.3% in November and below the expectations. This confirms what the manufacturing numbers showed on Friday… a slower December. Some slowing was expected, but it was weaker and that has put concern on the table about the US economy along with the global markets.

Factory orders were of 0.7%, durable goods were lower 0.9% and non-durable goods were down 0.5%. All less than expected and only adding to the concerns.

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 $48 mark. This worry isn’t 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 has begun in earnest again with everyone back to work and ready for the new year… or are they? Don’t take the initial selling as a clear sign of the market caving in on themselves. There will be some shots on the upside to test the resolve of the sellers, but for now they are taking control. 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. TUESDAY: headed higher to 21.1… uncertainty is driving currently. VXX is the trade is this continues.

Crude oil remain on the worry list closing 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. TUESDAY: Fell to $47.93 on the day. SCO gapped again on the day… Watch for a bounce in crude prices today as they traded higher overnight.

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. TUESDAY: Crude up overnight? will it help the outlook for today? Off 1.5% to add to the Monday declined. Test of the December low in play for now and then bounce?

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. TUESDAY: More money flow into the bonds… take what they give, but understand the risk of the rise. Fear versus concern is the issue for the bond. If fear rises there is more upside.

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. TUESDAY: added 2.2% to the downside and broke the December lows. Not looking good short term. SOXS has been the trade.

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. TUESDAY: continued lower and the TZA trade showed up Monday with the entry point hit and it followed through on Tuesday. Watching for support and bounce.

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. TUESDAY: still holding up well and watching how it unfolds near term. At the 50 DMA and $293 is key support.

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. TUESDAY: downside continued with selling on news and worries. The entry hit on short trade Friday.

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 – updated
  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 it unfolds at support today.
  2. If we bounce today there are some oversold situations the question is if we gap into the open more than 1%. Futures are up 0.7% currently and we will have to use caution in the opening move. Watch how sellers respond? Not willing to play the chase it up and down game day to day. Patience as it unfolds on direction.
  3. PXLW – entry $4.75. Break of downtrend line. Semiconductor sector and looking for some leadership to return.

Pattern Trade Tracking:

  1. FXP – entry $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. Stop $41.60.
  2. GDX – entry $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.
  3. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $13.50 HIT STOP
  4. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $44 HIT STOP
  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.
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.