Trading Notes for the Week of January 5th

Notes to Note: 

The new year begins with a bang as ISM manufacturing numbers are less than expected and the oil prices continue to tumble. Friday was a test on the downside and move we should be well aware of to start the week. We start the week with plenty of additional economic data and if it is equally disappointing could act as a catalyst on the downside for the broad markets. Don’t assume anything, but prepare for the downside risk as we start the week of trading. The charts are showing signs of fatigue as this advance continues to struggle with the uncertainty on many different fronts. Practice patience as we start the new year of trading.

The ten-year bond gave advanced in price again as the yields continue to find reasons to move lower. The yield now stands at 2.12% or down 13 basis points last week. The bond continues to act contrary to the analyst beliefs, but may be telling us things aren’t as good as they think. The warning has not been right relative to a correction in stocks yet, but it is still worth watching the warning signs when they exist. The indications are for rates to rise as the Fed prepares to hike rates later this year… no indication yet from bonds they believe that to be true.

The NASDAQ closed at 4726 to start the new year. A nice double top pattern is forming on the chart currently and we will watch how this unfolds on the week. The index was 80 points or 1.6% on the week. The Christmas rally didn’t last long. The weakness in small caps and semiconductors to end the week get the blame, but it was broad based in action. Watching to see if the index holds support at the 4652 mark. A break of that level opens a test of the December low near 4540.

The S&P 500 index closed at 2058 or down 30 points or 1.4%. The index has struggled of late with leadership shifting back and forth depending on the day. All ended the week in negative territory with healthcare and consumer discretionary holding up the best on the week. Technology and consumer staples gave up the most losing better than 2%. What do we make of the action to end the year? Uncertainty at its best plain and simple. The data isn’t helping to build confidence and investors are content to lock in profit or trade short term. Both signal this is a news driven market environment currently and to be treated that way until some catalyst takes place to change the psychology.

The Russell 2000 index was able to break through the 1190 resistance and move to a new high near the 1220 mark. Unfortunately it didn’t last long as the index closed the week at 1198 after testing the 1190 mark again on Friday and losing 1.3% on the week. This is still one index to watch to start the week for some leadership. The biotechs held up well last week and technology was weak. Looking for the upside in small caps to return if the tech sector can put a positive face on to start the new year.

The Volatility index tested support at the 14 level, but when the data hit the uncertainty jump and the index rose to back to the 20 mark before ending the week at 17.7. The swings have been big the last three weeks with some days of calm inbetween. Once again it is important to understand that investors don’t like uncertainty about the future. The default is to sell and watch as it unfolds. We are at that crossroad again to start the month of January. I stated to start the week I was looking for a decision at the 14 mark… break lower with stocks moving higher or move higher with stocks moving lower. The later was the outcome and VXX was the trade to capture the move. If we hold the 17 level VXX remains the trade. If we break below that level SVXY is likely to rally back with stocks getting a bump on the upside. One thing is certain however, volatility is here to stay for now.

The Dollar (UUP) jumped higher on Friday closing at $24.20 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 91.1 on Friday. The stronger dollar remains a positive from my view near term. Still looking for more upside strength in the buck. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future.

There is plenty of speculation in the markets currently as all the new year prognostications are put forth and the negative data to start the December reports set the tone. I am not big on speculation or guessing where the market ends one year from now. But, the ability to look at the trendlines and determine the direction currently and going forward is key to managing your portfolio. Long term trendlines remain on the upside. The micro term trend (0-13 weeks) is where the problem currently exist. A double top pattern is showing on the major indexes as a possible downside setup. That creates worry from a technical viewpoint. The data started out negative for December and that has the worry zone rising again. Global indicators are still week and Greece is back in the picture creating more uncertainty for the Euro zone. Bottom line is we are starting the new year with renewed uncertainty and that creates volatility. We have to be patient short term and take what the market gives. This is a trading market and time horizons are short term. Longer term positions must be managed on the longer term trendline as exit points. Understand and respect your surrounding relative to the market. Don’t over think your response. Plan and execute your plan according to the strategy you have deployed for the positions you hold. Let it unfold and respond accordingly. Attempting to predict the future generally end bad.

Economic News for the Week:

December data disappointed investors and the upside move on Friday turned sour. Markit PMI started with a miss reporting 43.9 versus 54.8 in November. Then ISM manufacturing came in at 55.5% versus the 57% expected and 58.7% in November. That set the tone for the trading Friday and may well overlap into next weeks trading if the numbers are not better in the services sector. This is a key point to watch as the data unfolds this week…

On tap is the ISM services on Tuesday along with factory orders. FOMC minutes on Wednesday with the ADP employment report and trade deficit. Then the jobs report on Friday along with wholesale inventories. If the data is not better… the sellers may well take control of the trading week.

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

* Worries are building again over the price of crude oil pushing lower towards the $50 mark. This worry is going to be removed anytime soon. The weekly inventory reports don’t show any signs of demand rising short term. For now you have to assume this remains a concern.

* FOMC meeting was catalyst for the upside… now we have the minutes on Wednesday to explain what was already explained painfully by Yellen following the meeting. Watch this data to see how it impacts the psyche of the investor.

What to watch this week…

Trading begins in earnest again with everyone back to work and ready to start the new year with positive results. There are many moving parts as we discussed above and we will start with a patient hat on to see how investors feel relative to stocks. Take it one day at a time for now and understand this is a trading environment short term.

Volatility Index (VIX) moved back to the 20 mark. The move on Friday left some question marks about the uncertainty levels still in the market. We closed off the highs, but the trade in VXX is still worth watching as the short term directional trade.

Crude oil remain on the worry list to start the week. Closed at $52.81 as inventory data disappoints again. The stronger dollar is having an impact relative to the bounce in the buck on Friday. As if the commodity needs any more pressure than it already has on the downside. Short side of oil is to be considered. SCO.

Energy (XLE) the sector has fallen 21.6% since the high in June. Oil has declined 51% during the same period. This is commonly referred to as a discrepancy. Either oil prices need to rise or energy stock price will fall to close the gap. This could offer a trade to be short energy stocks and long oil going forward. Food for thought.

Semiconductors (SOXX) are setting up with a double top as well and putting pressure on the technology sector overall. Without the upside leadership from the sector this could be a catalyst sector for the broader indexes. Watching the downside play short term. If… SOXX can hold above $92 this week the upside trade may return, but for now the bias is on the downside.

Retail is still a mixed bag of optimism and reality. The upside move after the holiday sales reports helped push XRT back above the $95 level and held with a test on Friday. I am ready to take my profit on this trade and watch how it unfolds with the data. I am not as optimistic in my views as the analyst. Stop at $95.

Small Caps (IWM) hit stops on Friday with the selling on worries. I am still looking for trade on the upside in the sector to start the new year. However, if the break below the $118 mark occurs I am willing to trade the downside to support at the $115 mark. TZA is short ETF.

Biotech (IBB) tested back to $293 and closed at $306 with a bounce off the lows. The key is how they unfold going forward. They are holding up after last week, but still need to see how it unfolds this week in trading. Time will tell as we own the biotech sector and will look to add if the upside holds to start the week.

Emerging markets (EEM) reversed the small rally on Friday with negative sentiment returning to the global markets. Downside trade is back and a test of the $37 level on EEM is likely based on the data and the sentiment in the sector short term. EUM short ETF.

Watch List Opportunities:

  1. S&P 500 Strategy – Revisions to the investment options started January 1st
  2. Sector Rotation Strategy- NEW STRATEGY started on January 1st.
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy – updated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Starting out with some interesting patterns and a psychology that is teetering on a negative bias. Watching how today unfolds to start the first full trading week of the year.
  2. PXLW – entry $4.75. Break of downtrend line. Semiconductor sector and looking for some leadership to return.
  3. GDX – entry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage.
  4. AMZN – entry $315. reverse head and shoulder. Short term trade on retail momentum. Tough day on Friday, but is positive start to the week it should turn higher.
  5. IBB – entry $309. double bottom. looking for the upside to continue as held up well last week in face of selling in broad markets. Trade to $337 target.

Pattern Trade Tracking:

  1. KLIC – entry $14.45. Trading range breakout. Semiconductors are leading again and looking for upside follow through. Stop $14.10.
  2. IWM – entry $119. Trading range breakout. The sector has flirted with breaking through this resistance three times maybe it makes the upside move now. initial target $123. Hit entry, but late in day. Waited for the weekend to pass and will take on Monday assuming upside resumes. Stop $119. HIT STOP.
  3. SOXL – entry $135 test. pivot point reversal in the previous leader is positive sign. I would like a test to the bottom of the bar on Thursday at $133  ish and take the lower entry, but if that doesn’t happen a small test to $135 will be good. Another gap open pass. Initial target $146. Stop $135 – break-even. HIT STOP
  4. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $13.50
  5. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $44
  6. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
  7. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $95.
  8. 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 $24.70.
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: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • 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. Still trading sideways as investors sort out the facts and fiction. MONDAY: Gave back the gains and still holding and waiting for the upside to resume.
  • Twitter (TWTR) –  Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.) Broke down and trading lower, we exercise the put if no bounce. $36 is potential support. Watching how to trade this near term. MONDAY: still testing the support levels watching. 
  • 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. MONDAY: nice move higher, but tested on Friday? Watching.
  • Whole Foods Market (WFM) 11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position. Small range as market keeps stock in check. MONDAY: Nice break on the upside finally! looking to hold the move and clear the $50.80 resistance.