Trading Notes for Monday, February 3rd

The worries continue, but the buyers remain willing to step in when things look there worst. Friday morning the pre-market selling was ugly, yet buyers eventually stepped in and put money to work pushing the indexes back to break-even prior to selling in the last hour. The negatives seem to outweigh the positives for now, but we have to be patient and see how this plays out moving forward. It is easy to jump on the side of the sellers and talk about all that is wrong with the economy and consumer. As one analyst put it, “the US markets are still the best house in a bad neighborhood.” Not an overwhelming endorsement for stocks, but it does put it in perspective currently.
Our focus remains on the major indexes and their ability to hold support currently, but equally as important is the ability to resume the upside going forward. Be patient, be disciplined and focus on your objective. Sometimes the best trade is no trade. Today we are looking for direction… The up and down trading from last week left us at support without much clarity looking forward. Clarity is the key to developing a trend, up or down.
Sectors to Watch:
  1. S&P 500 index tested below the support at 1775 and bounced closing the week at 1784. The back and forth this week was interesting, but was net down 6 points. The index lost 3.6% for the month of January. Is the market building a trading range or is this just another period of volatility before heading lower? The next support would be 1745 and resistance is at 1810. Index volatility has picked up as well with the VIX index hitting an intraday high of 19, a test back towards the 15 level would show the anxiety is dropping and a bounce may follow. The index moved up to 18.6 to end the week and leaves volatility squarely in play. Watch the index for clues on direction this week.
  2. Utilities (XLU), REITs (IYR) and Technology (XLK) showed the best momentum to end the week. Watch to see how they progress today. Healthcare (XLV) struggled on Friday, but biotech (IBB), pharma (XPH) and medical devices (IHI) are still in good position to lead the upside.
  3. The NASDAQ closed the week at 4103 after starting the week at 4128. This has been the most volatile index of the broad markets. The technology index has been extremely volatile on the week leading the downside along with semiconductors. Both however, made a bounce to lead on Friday. 4000 is the next level of support and 4135 resistance. Earnings from the large cap stocks have been an issue and continue weigh down the index short term. Biotech has been a leader for the index and worth tracking the leaders within as they continue to perform well and show nice pattern setups for trading short term. TKMR broke from consolidation on Friday. AEIS equally moved higher to complete the move from a consolidation or handle pattern. Scanning IBB will turn up these opportunities.
  4. Dow is in the worst shape of the major indexes technically. 15,710 is support and we closed below that level on Friday. The index actually hit 15,617 intraday before recovering. Thursday posted a modest gain of 0.7%, but failed to achieve any upside follow through on Friday. Large cap stocks have been the weak link in this test lower and it isn’t showing signs of improving near term for the index. The up trendline off the November 2012 low is is next along wit the 200 DMA. DXD is the short ETF if we break support. *Moves of interest: MSFT breaking higher from trading range. CAT reversing and moving higher on earnings. MRK in position to break higher as continuation of the uptrend. XOM and CVX triggered short signals on the downside last week. Where is support?
  5. Russell 2000 Small Cap index held 1120 support and closed the week at 1130. The close remains on or just below the trendline off the November 2012 low. A break of this support would be a negative longer term for the index. The 30 DMA would be a good target to clear on the upside as breathing room for the index. TZA is short ETF for the index. Scanning the index shows some big moves on the upside Friday? Watching to see how that plays out short term.
  6. Europe (IEV) fell to $45.25 on the week with several attempts to bounce higher. Not what we expected with the positive economic data in Germany and the eurozone over the last week. We would need to move back above $46.52 to hold the uptrend currently. $45 is the next level of support to watch. EPV is the 2x short ETF for Europe.
  7. Natural Gas (UNG) rallied more than 17% the last two weeks and then sold back to support at $23.25. The volatility has picked up as the weather and the speculation are deciding who is right. The cold weather blast is giving reason to believe usage will arise along with plenty of speculation of what that will mean for price looking forward. The natural gas stocks (FCG) hit the entry point, but they have lagged the commodity significantly. Still looking for the upside to respond.
  8. China (FXI) worries sent the country ETF to support at the $34 level and consolidating near term. Plenty of talk about things improving in China near term. The challenge is the sentiment remains negative along with the economic forecasts. Be patient and let this test of support play out. A break of this level and adding to FXP is the trade with the target at $31.80 on FXI short term.
  9. Gold miners (GDX) bounced as gold moved up early in the week, but is testing and consolidating now.  It has now turned sideways as the price of the metal can’t rise through resistance. We will see how this plays out next week to start, but if the upside doesn’t resume soon we will exit the position and look else where for opportunities. Until then keep stops in place and see how the consolidation plays out.
  10. Bond yields continue to drop and push bond prices higher. If the economic picture is positive and the Fed is cutting stimulus… shouldn’t rates be ticking higher? This may be telling us that something is wrong with the Feds view or investors are too worried about the future. Either way this is another indicator for the worriers to watch. TLT hitting against the 200 DMA.
  11. Earnings were a mixed bag of winners, losers and non-events. Apple and Amazon disappoint investors and sell off more than 10% on the week. Facebook and Google beat expectations and move up to reward investors. The weaker reporting overall was expected and thus, the selling. There will be plenty more announcements next week, 80 of the S&P 500 index stocks report, and we will watch to see how they impact the markets moving forward.

The models have raised cash as a result of hitting stops, but we continue to look for the short term trading opportunities as this all unfolds. Looking to see if the markets can break free of the up and down, day-to-day trading cycle. We are willing to sit and let this unfold for now as some clarity is gained in reference to outlook short term. We are watching the support levels as defined above and we will act accordingly. Technical damage has been done and potentially more on the way as the trend is challenged from a longer term perspective. No reason to panic and no reason not to add positions if the opportunity arises. The key is to manage the risk of your emotions in relationship to the reality or results of the market, versus what speculation is being put forward from analyst.

Pattern Trading Setup:

Friday attempted to combine the trading range of the previous four days into one. The result was to close lower, but held support. Still looking for clarity and opportunity. Tough to buy into this volatility short term as you get stopped out of positions too quickly. Be patient and disciplined.

  1. OREX entry $6.90. breakout from consolidation and resistance. biotech still leading.
  2. TECL entry $85. Support test and reversal. clear the 50 DMA and resistance.
  3. SOXL entry $67.15 Support test and reversal. Previous leader.
  4. AMLP entry $17.85. Reverse H&S breakout. MLPs starting to gain interest.
  5. QQQ entry $86.60. Move through resistance and follow through on bounce off support.
  6. SDS entry $32.05. Break of key support. Waiting for the conviction to show on the downside.
  7. TZA entry $18.70. Break of key support. Waiting for the conviction and support break.

Pattern Trade Tracking & Follow Up:

  1. GILD entry $81. Test, hit stop. upside still in play. Looking for some upside conviction to take entry. Stop 77.40.
  2. YRCW entry $20. Cup & handle breakout. Transports were leading see if they recover. Stop $22. Stop HIT.
  3. FIO – Entry 9.85. Double bottom. technology sector still leading. Stop $11.25 big gain stop up. STOP HIT
  4. JBL – Entry 17.60 test. Broke above resistance $17.48 and testing. Stop $17.60.
  5. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher Stop $119.

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.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 1/27 – Tested lower on Monday, but managed to hold support at $53.45. Watching how it trades today relative to the broad market and support. Stop on the remaining shares is now at $50, but may raise that further if negative market sentiment picks up.
  • 1/29 – Beat earnings with upbeat data and outlook. The stock runs after-hours near the $60 level. Watch to see how it trades today. Need to hold above the $58.50 level and then look for entry to add to our position. Patience is key with the broad markets struggling.
  • 1/30 – Big pop for the stock gaining 14.1% and most of that happened pre-market on the earnings release Wednesday night. Good for our existing position and now we look at how to manage the stock going forward. Today will be important relative to follow through on the move. We added $15k of value on the move!
  • 2/2 – Stock held the upside move and now we see how the negative analyst treat the stock? We will make decisions on stop adjustments and profit this week depending on how this gap higher trades.