Trading Notes for Monday, January 27th

Well that was fun… thank you China! The belief of many on Wall Street is the market/investor was looking for a reason to sell. While that sounds good in theory, the reality is if you want to sell you don’t really need a reason. What happens from my view is investors get nervous the higher the market climbs and the more analyst banter about valuations being too high. In other words, emotions get stirred up by all the chatter. The more emotional, the more we listen. The more we listen, the more likely we will react to an event such as China. It we were concerned about China, FXP was the trade to own (see ONLY ETF Model). The point being, some antidotes sound good in the media, but aren’t how traders really trade.
That said, how do we approach the market this week? Simply we look for support and until we find it the short term momentum is on the downside. The longer term trendlines are still pointing higher. If we are going to get a longer term trend change the momentum must continue on the downside. Thus, this is where patience comes into play versus a knee-jerk response. The S&P 500 index fell to 1790 on the close Friday. 1775 is the next key level of support for the index. If we break below that level the selling continues towards the 1745 level. First, we watch to see how that plays out. Second, what if one of those levels holds and the index reverse? Then we have to determine if it is just relief buying or are the buyers truly engaged? Thus, the need for patience.
Trend changes do not take place in days… think of an large cargo ship turning around. They don’t make quick u-turns they tend to take a slow long turn. That is a trend change. The catalyst of China may be in play, but the follow through will be if China really does have as big of a problem as is speculated. Stops are to protect you against the reality of the event, patience and entry points are to allow you determine your next course of action. Emotions get in the way of logically building and demolishing portfolios. Be patient this week as it all plays out.
Sectors to Watch:
  1. Natural Gas (UNG) up 17.8% last week… welcome to the winter impact on the commodity. The upside remained in play after catching support at the 50 DMA. FCG responded, but with the broad market worries tested back below the $20 breakout level. Worth watching as an opportunity as the underlying stocks are not participating in the upside commodity prices. The trade opportunity is $23.70 as a reasonable target over the next 12 months. (Sector Rotation Model)
  2. Biotech (IBB) tested lower, but remains in the uptrend. Positive sector should give opportunity on the selling looking forward if the upside is to remain in play.
  3. Energy (XLE) closed below the $84.77 support. Watch for bounce or short play in the sector.
  4. Retail (XRT) is getting more pressure on the downside of the index. Broke support at $83.25 and now testing the 200 DMA? Earnings are keeping the sector down and the outlook isn’t improving. Downside trade, but watch for a short term bounce first.
  5. S&P 500 index broke 1810 support and puts the short trade in motion short term. Watch to see how key support levels hold as stated above before jumping to conclusions.
  6. NASDAQ fell 75 points to 4144 breaking support at the 4180 mark and leaving the short opportunity as a trade. uptrend still in play longer term and we will see how the overhang plays out next week.
  7. Dow broke the 50 DMA and triggered the short in DXD we posted Friday morning. Weakest of the sector so far. Does it bounce or do the other indexes play catch up.
  8. Small Caps (IWM) the Russell 2000 index broke 1165 support and 1147 put the downside in play. The negative move could offer short plays next week.
  9. China (FXI) where all the problems are… banking, lending, economy, etc. Enough to go around and if the worries continue to rock global markets it could get interesting moving forward. FXP is short trade and watching to protect gains on a bounce.
  10. Crude oil is still rising despite the test on Friday. Target remain the $23.50 level for now and adjusting the stop to account for the move on Friday.
  11. Gold miners (GDX) broke out last week as posted on the pattern trade list.  Nice follow through on on upside, but seeing some consolidation. Gold prices moved higher among the worries in China and helped on the upside. Volatility test on Friday and looking for upside on trade short term.

The models are updated and stops are everywhere. Friday was a mess and the acceleration with a gap lower to open put traders in a selling mood. We will set back… regroup and determine the best course of action heading into next week. Look for the Daily Trading Notes to be published on Sunday night versus Monday morning. I want to give you time deal with any trade setups based on the scans this weekend. Plenty of technical damage done on Friday and that left some short setups and some opportunities as well if the buyers return. No reason to panic and no reason not to add to positions if the opportunity arises. The key is to manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Pattern Trading Setup and Tracking:

  1. Hit plenty of stops on the list below between Thursday and Friday’s selling. The drop on Friday broke up many patterns and puts an adjustment period in play relative to this strategy. However, support lines now com in play as a derivative of the strategy for short trade setups. We will look to see how Monday unfolds and make our adjustment accordingly.
  2. Example: QQQ testing support at $86.50. A break below support would be a continuation of the selling and offer a short trade in QID entry $61.85. A test, bounce and follow through would offer an upside trade if it holds momentum.
  3. SPY testing $178.85 support. Break and the downside momentum continues with a short trade setup in SDS entry $31.60. Bounce off support with follow through momentum upside trade sets up.
  4. We will be patient and see how this plays out for now.
  5. Follow up on previous trades or posts:
  6. FIO – Entry 9.45. Double bottom. technology sector still leading. Stop $9.18.
  7. WEN – Entry 9.12. Break from trading range. Fundamentally performing well in tough sector. Stop $8.95.
  8. EGN – Entry $70.80. Energy sector bouncing back to life. double bottom breakout. Stop $69.90 HIT STOP.
  9. QLD – Entry $100. Continuation of new high on test. Watch and be patient. Stop $98.85
  10. CURE – Entry $75.30. Continuation of uptrend in healthcare sector. Stop $73. HIT STOP
  11. JBL – Entry 17.60 test. Broke above resistance $17.48 and testing. Stop $17.60.
  12. TQNT – Entry $8.50. follow through on break from trading range at $8.50. Semi’s still moving higher. Stop $8.50.
  13. GILD – Entry $75.50. Break through resistance, triangle. Biotech is still leading sector. Stop $79.
  14. GDX – Entry $22.50. Break from bottom consolidation. Gold is attempting to bounce as well. Stop $22.50.
  15. PALL – Entry $72.55. Bottom reversal at resistance. intermediate term downtrend line. Metals are gaining momentum short term. Stop $$72.50. HIT STOP
  16. V –  Entry $223. Consolidation top. Financials working higher as sector. Stop $226. HIT STOP
  17. NVDA – Entry $15.90. Trading range breakout. Semiconductors upgraded and moving higher. Stop $15.70. HIT STOP
  18. CBB – Entry $3.65. Trading range breakout. Telecom sector is stock picking sector for now. Stop $3.65. HIT STOP
  19. HPQ – Entry $28.85. Ascending triangle. Upgrade to PCs with stock in position to break higher. Stop $$28.75. HIT STOP
  20. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher Stop $119.
  21. RSOL – Entry $4.15. Break to new high, double bottom weekly chart. Solar still moving higher and merger pushed the stock higher on Thursday. Stop $4. HIT STOP
  22. QCOM – Entry $74. Trading range breakout. Telecom pulled back looking for a continuation of the upside move. Stop $74.50 HIT STOP
  23. ATNI – Entry $57.50. trading range breakout. Telecom sector remains a leaders. Stop $59.50
  24. FHN – rounded bottom breakout. Entry $11.85. Nice upside breakout. Stop $11.85 HIT STOP
  25. PJC – trading range breakout. Entry $39.90. Stop $39.25. HIT STOP
  26. XLK – Test of low and bounce. Entry $34.75. Watch for test and then entry. Stop $35.50. HIT STOP
  27. GLW – Trading range. Entry $17.28. Upside if momentum returns to technology. Stop $18.50.
  28. VMW – Flag. Entry $87.45. Looking for continuation of the upside. Stop $96. HIT STOP
  29. STX – Entry $50.25. Continuation within the range. Setting up to continue higher. Got the move. Stop $59. 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.

Facebook (FB) Update:

  • 12/30 – Hit stop on position added and managing our positions of 2000 shares long term.
  • 1/2 – Watch the test of support at $53.40. could offer another trading opportunity.
  • 1/5 – Short setup on the current activity could be the trade. Need to be patient to see how this will unfold.
  • 1/6 – big reversal on Monday to close up 4.8%. Watching to see how that holds near term.
  • 1/8 – Testing the previous high after test lower. Break and we will add a position on the move higher. Retest lower and we look at the downside in relationship to the broad markets. Entry $58.50 add 500 shares.
  • 1/17 – Tight trading range. Interested in adding position still if we breakout to new high. Downside risk still in play.
  • 1/21 – Added 500 shares at $58.50. Will add another 500 on confirmation of the move. Stop $55.50. Giving room in the established range to move. Break lower take the exit.
  • 1/23 – testing lower end of the trading range and if a bounce materializes we will add 500 shares to the trade position at $57.15. Otherwise honor the stop.
  • 1/24 – Stop hit and loss realized on the position. Now we watch to see how this unfolds short term. $53.40 is our next decision point. Do we add or do we buy puts against our positions? Selling our position is not out of the question either. More to come.