Trading Notes for Monday, June 10th

The jobs report showed 175,000 jobs and an increase in the unemployment rate to 7.6% and the market rallies. The data was in line with expectation, but it wasn’t exactly a trend changing event, at least from my view. From the markets (investors collectively) view the reversal on Thursday in addition to the positive jobs report was a trend changing event. As I have learned over the years I am allowed to believe whatever I want… but the reality is what the market does. For now the buyers have once again stepped in to buy on the dip.

Sentiment is where I see the challenge short term. Investors are playing stocks like chameleons. The worries over the Fed ‘stemming’ the current easing efforts, QE infinity coming to an end. This is the new phrase the media has adopted for the Federal Reserve cutting the current bond purchases of $85 billion per month. If they call it what it is, it would probably cause more problems for the financial markets. That aside, without some clarity on how the Fed will act, and what the potential ramifications of the actions will be, expect more ups and down as investors grapple with how to invest their money both short term and long term.

Sentiment is also starting to deal with the ‘tappering’ comments, however there is still some anxiety over what is happening with interest rates. The continued climb has put excessive pressure on Fixed Income and dividend type assets. If this volatility continues to rise as a result of interest rates rising too far, stocks will likely disassociate with the correlation that exists between bonds and stocks currently, moving in opposite directions. This is a genuine concern as yields move higher.

Should we just watch the ten-year bond and quit worrying about the ‘tappering’? That was an analyst comment made about the current worries in the market relative to the Fed. It is true that the ten year bond will give you insight into what is happening and the impact to equities short term. Example, the current yield is 2.16% on Friday. The rise from 2.01% on Thursday’s lows equated to a rally in stocks. Thus, if yields are climbing you would look for equities to climb with them. If they are falling, you would look for equities to fall with them. Of course they will not do this in perfect harmony, but they will correlate effectively. The challenge to that strategy will come if what we discussed above transpires, interest rates moving too high and disrupt the comfort level of investors relative to bond yields and fear pushes stock prices lower.

The bottom line as we start a new week of trading is patience. The yo-yo effect of trading in this current environment will wear you out mentally and cause you to make bad decisions. Let the speculation and emotions play out and then take advantage of what is working. Sometimes doing nothing is the right thing.

Below is our outline of what we are watching today and some pattern ideas. The Watch List and Play List have been updated as well. Review and exercise caution. If you have specific questions on any posts please forward them directly to me.

Sectors to Watch:

  1. Energy is responding to the price of crude continuing to rise. XLE tested support near the $80 level and is attempting to head higher short term. OIL is in position to break the downtrend line with a move above $22.50. The EGG Model trade is XOP on a confirmation of the move through $61.40.
  2. NASDAQ 100 index found support and bounced. Looking for a trade on QQQ with a move through $73.50 on the upside and a follow through. Sector Rotation Model has the trade posted on the Watch List.
  3. S&P 500 index bounced off the 1597 level and has moved back into position to regain the uptrend. The S&P 500 Model has trade for entry on SPY at $165.20. If the upside resumes added entry points for SVXY, XLF, XLE and XLK.
  4. Short bond trade is back in play if the upside to equities continues. Posted long term play on Sector Rotation Model and Trade on ONLY ETF Model.
  5. Manage your stops on each of the model trades. They have been updated for the week ahead.
  6. Japan (EWJ) continues to struggle, but may have posted a key reversal on Friday. $11.22 offers some resistance on the upside, but watch the sentiment short term towards the country ETF. The long term outlook for Japan is positive, but it will come with plenty of volatility as the economic growth plans are implemented.
  7. The downside risk is still in play. The bounce off support is just that, a bounce. We are still looking for issues from the economic data and then earnings will be right around the corner again. We have to be patient and deal with the short term volatility as we go forward.
  8. Facebook – No positions currently. The sentiment towards the stock remains negative. Found some support at the $22.80 level for now. Looking for a base or range to be established short term before any upside trades. There is a potential reversal trade setting up, but we will be patient here short term. The current play (I suggested) if you can stand the risk is the 23 September puts. The cost was $2 per option contract when recommended. The target on the trade would be the next key level of support which is $18.80.

Pattern Setups For Today:

  1. ANAD – Trading range with break above the $2.11 entry point.
  2. KOLD – Cleared $18.35, next level is $19.45 and could run from there.
  3. OIL – break of the downtrend line at $22.50. upside trade.
  4. Follow up on previous posts:
  5. QLD – A,B,C,D pattern. $67.40 entry on the follow through from Thursday. SSO is set up on the same trade pattern with entry $78.55. Manage both trades.
  6. BRCM – Test of support at the $32.25 level and the 50 DMA. $35.65 entry on the bounce. Got follow through need to manage the downside risk. Raise stop to $35.
  7. PCLN – Pennant upside break at $810. Nice bounce on Thursday.
  8. LEDS – triangle/wedge breakout to the upside at $1.70.
  9. PALL – Still in play on break above $73.85 resistance. $76.50 target.
  10. PACB – Break above the top the trading range. $2.65
  11. CRAY – Cup breakout at $18.05, initial target $18.85 and then 20.20.
  • NOTE: The pattern trades above are setups that I see for a potential swing trade or trade. 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.

All investing comes with risk. Our job as investors is to manage the risk. Markets remain choppy and directionally challenged for now. Keep your focus and discipline in place.