Trading Notes for Next Week, October 20th

Notes to Note: 

Market produces big bounce to close the week, but most of it was attributed to short covering. I would like to say that isn’t true, but being that it was Friday and the indexes hit the 10% mark on the downside on Wednesday intraday, it could be very true. Made some nice short term trades on the move up and down, but now comes the bigger question… do the sellers come back next week? That will be one of the key things to watch as this all unfolds. Plenty of analyst out on Friday stating the rally is on and predicting the indexes to move back to the previous highs and beyond by year end. Bold predictions considering the worries and conditions of the charts short term. Time will tell and I will definitely be watching for signs to validate any truth to such statements.

Earnings were not great on the week and that keeps a lid on the upside from my perspective. We want to see something to turn the tide relative to the buy-side. GE and some regional banks helped the upside on Friday, but the downside from Google and Netflix took a toll on the NASDAQ and leaves open the argument for a trend to develop. Monday will start the week off with Apple announcing and it could very well set the tone for the week relative to earnings.

S&P 500 index moved back to the resistance point of the 1895 ish mark which was the April high, but could move through the resistance point on Friday. There is a lot of work to do if the upside is to resume short term. The bounce is in play and the resistance mark is set, now we just need enough buyers to take us through these levels and proceed higher. The results will set the pace for any short term trades.

Small caps were the leadership for the upside on Wednesday and Thursday, but closed in¬†negative territory on Friday. I didn’t like that as an indicator for the bounce. 1090 resistance remained in play and another important thing to watch as we head into next weeks trading.

Semiconductors bounced from the oversold conditions as well, but could not get through the 580 resistance. Another sector to watch this week as we look for some more upside before another round of selling potentially.

Biotech made solid moves higher on Thursday and Friday to end the week. XBI, the large cap biotech ETF has held up better than the small caps in IBB. XBI in position to break through the downtrend line if the upside gains momentum, but like the small caps had a tough day on Friday. Like the other sectors look for the follow through if the upside is to gain any momentum worth buying.

Fed speculates on QE returning ‘now’ versus the previous¬†hints at next year if the deflation issue shows up in the economic data. That helped stocks¬†rally along with the global indexes off their lows. The rate hike is being pushed to September of 2015 versus March. Bonds rallied on rumor or consideration by the Fed and it could be a catalyst if the Fed does take such actions in the FOMC meeting. … jury is out, but the Fed meeting is coming soon and the should clarify some of this issue. Too much volatility in the bonds on this to trade short term.

There are no guarantees on where the indexes go from here. The downside remains the trend micro term and that must be reversed if the upside has a chance to regain any momentum. I am content to hold cash with some trading as we take what the market gives one day at a time up or down.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains in¬†the fear zone with the VIX index above the 20 level. The¬†sellers took their best shot¬†and over the last month have produced what amounts to a ten percent push lower prior to the bounce on Thursday. The indexes need to get through the next level¬†of resistance if we are to push higher. The downside is still in control of the trend and for now this is¬†just a bounce within that trend. The downside questions still remain… How long? How much? Why? etc. Those are questions are more for the¬†speculators¬†as we focus on¬†managing our money relative our strategies and beliefs taking what the market gives along the way. Don’t let your emotions get the best of you and remain true to your investment strategy, now is not the time to change or adapt a new strategy simply in response to what the market is doing day to day.

* FOMC minutes¬†where the catalyst to the current string of events playing out. The rally relative to a dovish Fed was shown to be worthless if the global economies are faltering. In other words, investors believe the global slowdown is of more danger than the Fed’s willingness to delay the hike in interest rates or more quantitative easing. This story is just starting to unfold as we head towards the FOMC meeting the end of the month.¬†There is going to be more blather from the Fed heads as we approach the meeting and that will create more speculation on the outcome.

*  Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. You either hold through the chop with a longer term focus or you sit on the sidelines and await clarity to develop. The latter allows me to maintain my sanity and is my preference relative to short term holdings. Cash remains king for now.

* ¬†Please note above… Cash is King! That is not a mindless comment it is a simple truth. When you hold cash as we do now… your emotions are not running wild. You are not losing money and that keeps you in a place of calmness. You are able to look at the movement and outcome of this event with the eye of opportunity not crying and weeping about losing money. Stay focused and remain true to what you believe.

Sectors to Watch:

S&P 500 index rose almost 2% early on Friday, but slowly gave up some of the gains. It remains below the 200 DMA and the 1895 mark of resistance. The test near the 1810 level of support was nothing short of fearful for traders. Bounce trade on the break through 1895. Reestablish the short trades on a move below 1865.

Bonds (TLT & IEF) uncertainty in the bonds as the Fed talk shifts to more QE? Break below $120 on TLT is a short entry as a trade with $117 as target. The sector will remain volatile until the FOMC meeting and results.

Two sectors to watch longer term from my notes:

Impact of Crude oil on other sectors is important to watch. While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like Delta and Southwest. You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward.

Treasury yields continued decline with the 10-year bond now yielding 2.19% and the 30-year bond at 2.95% to end the week. That broke support¬†and the speculation is for rates to rise in response to the Fed hiking rates next year… not happening as fear wins. If we remember the FOMC minutes from the last meeting, the Fed is worried about the stronger dollar… the impact of higher US rates to the global economies and low unemployment rates in the US. In other words the Fed wants rates to remain low longer to help the world economies. I believe this is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. The downside trade is TBF which is the non-leveraged short for the 20+ year Treasury bond if rates start to rise again. If Humpty-Dumpty (treasury bonds) fall as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. This is most definitely a sector to watch going forward. Don’t let the short term fear factors driving rates lower be a distraction from the longer term outcome for the sector, but in the same vein we have to let the speculation and fear play out. Trade the upside of the bond and then short the bond as the yields start to rise.

We will track to see how this unfolds going forward and what trades or investments materialize.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • Sold short positions in parts and hit stops on Friday to exit completely.
  • The long trades in S&P 500 and the SOX index are in play on the bounce. Manage the downside reversal with stops if we break below the 1865 mark on the S&P and the SOX at 565.
  • Trade in energy stocks is still in play on the bounce. watch oil prices and manage your stops relative to the move.
Watch List Opportunities:
  1. S&P 500 Model – updated model table
  2. Pattern Trading Model below updated.

Pattern Trade Setups:

  1. The¬†downside isn’t over… there was a nice bounce on Friday, but it was still a bounce in the downtrend.¬†My bias remains with the sellers as we have¬†failed to produce a trend change to this point.¬†Will we get any more buying or do we trade lower again? Watching today to see how the indexes respond.
  2. Scans¬†following the close on Friday show…. the following as opportunities:
  3. IWM – entry $108. bottom reversal test. nice bounce and test on Friday of the move. Looking for the upside to resume if the bounce is to gain any momentum.
  4. SPY – entry $189.70. bottom reversal. follow through on the upside move from Friday. $196.50 target on the trade.
  5. SOXX – entry $79.70. bottom reversal. follow through on the upside bounce last week. Fill the gap on the move higher as target.

Pattern Trade Tracking:

  1. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. Target $87. Stop $75. SOLD 1/2 on pop $84 on Friday. raising stop to $79 on balance.
  2. SDS – Entry $25.90. Next level resistance follow through on upside trend (micro term). Don’t chase on a gap higher and watch to see how it unfolds on the day. Stop $27. Sold 1/2 at $28. (target) & STOP on Balance at $27. HIT STOP on balance Friday.
  3. QID – Entry $46.30. Next level of resistance to follow through on the upside trend (micro term). Don’t chase on gap and watch to see how it unfolds on the day. Stop $50. Sold 1/2 at $51.50 (target) & STOP on balance at $50. HIT STOP on balance Friday.
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: 
We are establishing this sector to manage longer term positions that we discuss in our webinars or on the website. The goal is to learn how to manage and trade long term holdings to maximize the potential of each holding. We will use long positions, short positions and options to manage each holding. Below are the current holdings or stocks we are tracking.
  • Facebook (FB) – Nice bounce off the lows on Friday. Uptrend is still in play and watching to add a position as we move through earnings. NO long term holdings currently… Hit our stops. Watching as we move to earnings on 10/28.
  • Twitter (TWTR) – Nice bounce off the lows as the stock has held up well during the selling and now bounced off the 200 DMA. A move back above $50 would be of interest to add a position again. Earnings are 10/27.
  • Bank of America (BAC) Sold on earnings in the sector despite meeting expectations. We hit our stops on the stock, but maintain our option contracts. Looking for a move back above the $16.30 level and we will add a position back if we hold.¬†We¬†own the Jan 2016 $17 Calls at $1.85) Banks are selling in the current push lower.