Trading Notes for November 18th

Notes to Note: 

Monday certainly didn’t provide a¬†catalyst in direction. Energy offered some negative momentum again, but the broad markets continue to trade sideways. No news to speak of, but plenty of speculation on what is going to happen the balance of the year. I don’t doubt any of the speculation based on year past, but there is always the potential of the proverbial jack-in-the-box derailing things short term.

VIX index was up near the 14 level, but the VXX trade was lower? Some volatility, but not enough to keep the markets off balance to start the week. There is a content sentiment to let this market trade within itself without major speculation or outside influence. Watching to see how it unfolds.

Oil tested the $73 level last week, but managed to close higher to end the week. Monday gave some small trading range and ended slightly lower on the day. The commodity is still below the $80 support many were hoping would hold. Rumors about OPEC cutting production sparked the slight move higher to end the week, but not evidence or follow up on that this week. The downside has pushed the energy sector lower, but is it is still hovering around the $86 mark on XLE. Since there is no clear indication relative to direction we have to be patient and let it unfold this week.

We are now in our third week of consolidating in place on the major indexes. We are seeing some sector rotation in leadership, but it is not impacting the broad markets. The key is to be patient and let it all unfold. The consensus on direction remains split among analyst as to which direction wins near term. The charts will tell soon enough we just have to avoid brain damage of making bad decisions near term.

What we are looking for¬†this week…

Doji central… the Japanese candlestick formation that many point to for directional signals are everywhere. As you are aware this candle tends to show up when the market direction becomes uncertain. I would have to say the data, charts and volume all confirm a lack of direction and/or conviction. Two interest for me first, BABA and if it will pullback and test the move higher. Second, S&P 500 index showing a string of doji candles as it tops. No changes on Monday to the outlook.

The dollar… the higher the buck travels the more headwind it could create for stocks, especially the multinational companies. We have already seen the impact in the third quarter earnings and the dollar has moved higher since. This has impacted the commodities as well, but it is starting to produce more concerns about the broader markets going forward.

Commodities… crude oil bounced off the intraday lows on Thursday and managed to close the week on a positive note. Watch to see if it follows through and offers any trading opportunities. Gold bounced as stated above and worth watch as well for GLD to clear the $114.50 level and possible trading opportunity. This is more likely going to be up to the dollar versus any other event. UNG found support at $20.75 as natural gas tested lower, but got a big jump on the upside on Monday gaining more than 5%. This remains a supply and demand story for natural gas. Watching for the cold winter to impact the prices going forward.

Change in the Chinese stock market allowing the Hong Kong and Shanghai exchanges to trade mainland stocks. This opens the way for non-Chinese retail investors to trade on the mainland exchanges. What impact that will have on prices is still yet to be determined. We own FXI and YINN in the EGG Model and we will watch closely to see what, if any, impact this could have on those positions. Big selling on Monday and overnight doesn’t look much better. We will exit out positions and see what happens from here.

Banks? KBE is under pressure again from the fall-out of the fines from the foreign-exchange manipulation. Throw in the higher capital requirements and the ETF fell following the news last week. Watching to see if it can hold $33.25 support on the week. KRE, the regional bank ETF, traded in sympathy, but offers better forward looking opportunities fundamentally and could offer an opportunity for adding to positions. Sold below support Monday at the $40.35 mark.

Treasury bonds still remain a concern as rates have settled with the thirty-year bond still at the 3.06% mark. The chart of TLT looks similar to the S&P 500 index the last couple of weeks. Topping and no clear indication on direction without offering excessive speculation. Either way this will offer some interesting trades as it unfolds going forward.

Remain patient and let the markets unfold where they intent to go.

Some thoughts on news/events and statistics impacting investor psyche:

* Volatility has disappeared as VIX dipped below 13 last week and close at 13.9 on Monday. Despite analyst and the media stating their is uncertainty looking forward the VIX is not showing any short term. Something to watch as this all unfolds moving forward.

* Topping patterns with the major indexes as they look for a catalyst on the upside. Now is a time to put on your patience hat and manage your exit points based on the time frame you are watching by holding. There no clear signs for selling or buying and this is becoming a time to set your stops and go play golf or travel… anything, but forcing trades and yelling at charts.

* The Fed is still in the background pulling the strings of the bond market and interest rates. Not much is expected until the December FOMC meeting, but they are speaking and pontification about the economic picture as well as their intent towards rates and stimulus.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward.

Sectors to Watch Now: 

MOO, Market Vectors Agribusiness ETF has been running nicely off the lows, but that is the industrial stocks like John Deere, Toro, Tractor Supply and Agrium moving higher. Tried to break from mini-consolidation and resistance just overhead. Still work to do, but still looks positive short term.

Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.)

Miners (XME) – entry $35.80. Consolidation pattern in need of volume move higher. (GDX, SIL options as well)

Russell 2000 Small Caps (IWM) – short entry $115.40. topping off the ‘V’ pattern completion. Watch carefully how this unfolds.

Emerging Markest (EDZ) – short entry $35.55. weakness in the sector is showing up and the consolidation pattern breakout would be the entry point for the trade.

Internet (FDN) – entry $61.50. continuation of uptrend. The test back to $60 held and making move towards the September high. I like this sector going forward for growth. Scanning the ETF for movers has produced some interesting pattern breakouts and setups.

Utilities moved lower and breaking support last week. The concerns about valuations fundamentally have been the key issue for the sector. Despite the drop the rally back on Monday above the $45.30 mark and we are watching to see how this settles out. The short trade got cut off on the bounce Monday. Support is $43.75 currently and move below that could be downside move to $41.50 level.

Model Position Notes: 

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

  • Volatility Index (VIX)¬†The index moved slightly higher¬†on the week, but is still well below the 15 level. Tested above the 14 mark again on Monday¬†and¬†we will watch for any opportunities as they present themselves. Oil is creating some uncertainty in the markets relative to speculation on the impact of cheap oil on the jobs and economic picture. $28.20 was entry posted for VXX last week to¬†add. Need to be patient with this trade and¬†we will add to the position¬†going¬†forward.
  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through. We will look to add this position if trend gains more traction. Added to the S&P 500 Model. Retail move higher on earnings and is now driving the follow through on the upside. (posted to the Sector Rotation Watch List)
  • Preferred Stock Index (PFF) broke above the $39.50 level and holding. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Model.
  • Short Treasury Bonds (TBT) – TLT¬†bounced on buying Fridayy. We will take our exit if the stops are hit this week, but be patient and watch how this plays out. ¬†Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Raise stop to break even trade at $51.80 on renewed worries. NEED TO BREAK ABOVE RESISTANCE at $53.55!
  • Russell 2000 index (IWM)¬†Led the move off the lows and cleared¬†the 115¬†ish resistance and stalled with consolidation near the highs. We have been looking for investors to take on risk in portfolios¬†and the sector may be showing signs of just that short term..¬†Adjust your stop accordingly.
  • Utilities (XLU) broke above the upper resistance at the $43.75 mark and confirmed the move higher. A reverse head and shoulder pattern was the breakout move and on test¬†and confirmation of the move to add a position to the S&P 500 model. Holding and letting it run for now. S&P 500 Model.¬†Watch the volatility as it has picked up, but the upside remains the trend.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. Continued to move higher¬†tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. Manage your stops.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Interest rates will play havoc with the sector, but for now content. Some topping signs continued this¬†week… watching how it plays out with $74.75 as support currently.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was¬†lagging as the earnings and outlook were not attractive to investors. That changed following the FOMC meeting and now testing the highs? Stops at the $23.70 ¬†ish level to¬†manage the risk.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and got the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation on the chart. Still like the upside move and the target on¬†the sector and we own XLV in the S&P 500 model. First sector to recapture the September highs, but has stalled in a tight range near the high. One question mark is the election… will the republicans attempt to overturn Obamacare or parts of it? The attempt could rattle and impact these stocks in turn.
  • Retail (XRT) we are looking to the sector to take on some leadership into year and earnings were the catalyst thus far. Break above the $90 level was the entry point for the sector ETF, but take time to scan the holding and you will see some great pattern breakouts last week. Sales data out on Friday for October better than expected. Test lower on Monday of interest… manage your stops.
  • Homebuilders¬†(ITB) followed through on the break through resistance as well on some positive data in the sector. The sector continued higher and looks¬†positive following the break higher with some¬†resistance at the $25.10 mark.¬†We hit the entry point and stops should be brought to break-even at $24.40. Testing the move higher? Watch and manage your risk.
Watch List Opportunities:
  1. S&P 500 Model – Adjusted Stops.
  2. Sector Rotation – Updated stops.
  3. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Not much changed on Monday… Patience as this unfolds. Trading windows getting narrow again and we have to be patient not to force trades or chase them.
  2. Nice move in some patterns… DECK, RH, STX, TRLA and not so good in others… DANG, DBA, KRE, FXI. Thus, we have to be patient and selective as this unfolds.
  3. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce.
  4. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54.
  5. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector.
  6. TZA – entry $13.80. bottom reversal. Negative move for the small caps watch for follow through and test.
  7. MCHP – entry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap. Closed on the entry watch early.
  8. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here.

Pattern Trade Tracking:

  1. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $66.80.
  2. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  3. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive. Stop $22.75.
  4. TBT – entry $52.85. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position. Stop $51.80.
  5. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $116.
  6. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $141.20.
  7. TBT Рentry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.80 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  8. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday Рentry $125. (10/27) Stop $132.75.
  9. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50. Added¬†to the position on move through resistance at $66.42. Entry $66.45. (10/27) Stop $74 on all shares. HIT STOP.
  10. SSO – entry $107.60. bottom reversal.¬†Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside –¬†entry $$117.10.(10/27) Stop $122.90 on all.
  11. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $88.20. Break above resistance (82.30) good point to add to position. Added to position Рentry $82.50 (added 2.5% 10/24) same stop on all.
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: 
Twitter is showing signs of breaking lower and need to manage the position relative protection. Facebook is acting better, but still worries around the stocks short term. Building some downside protection into our positions.
Bank of America is doing well on the move higher and we continue to manage the position accordingly. If the upside stalls we will lock in some profit on the options added and let the balance play out going forward.
  • 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. Watching today for it to bottom out and add to position as it since. Patience today as other news will impact later in the day with FOMC. Flat lined after open… still like the upside and will be patient. Add Dec $75 puts @ $3.50 – 10 contracts. (watching the Jan $75 puts to add if we break support.) – Nice bounce in the sector SOCL.¬†
  • Twitter (TWTR) – $50 entry (10/20 – 1000 shares).¬†Removed stop with the gap lower pre-market of better than 12%. Added 500 shares at $42.80 (10/28). This is a long term holding and we trade around our position as the downside is back. (11/5 – Added Dec $40 puts at $2.50 – 10 contracts — HIT Stop $1.75 on contracts) – (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)
  • NEWS: Twitter announced they were adding a video service to launch in early 2015 and investors liked the idea. Stock jumped 8% on the day as a result. 11/13 – stock tumbles as investors decide they don’t like the news? Watching¬†the tug-o-war and consolidation near the low. Nice bounce in sector SOCL.
  • 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.
  • NEWS: Forex fines of $250 million from OCC – hit the price on the day. They also stated they would not lower their standards for high risk mortgages. (makes sense) Wall Street didn’t like the news as they want more earnings…. bank wants to avoid defaults.