Trading Notes for the Week of October 6th

Notes to Note: 

Friday produced enough of a bounce to raise questions on the selling from earlier in the week. The key support level breaks are still in play and we need to validate the upside or validate the downside. The uncertainty of the markets short term has the bias towards the sellers despite the Friday move. We have held our short positions open and we have adjusted the stops based on what we see to start the week. Plenty of worry and volatility to keep us cautious at this point.

It now earnings season and all eyes will be on the start of the reports. Unfortunately we start with the banking sector which has its own challenges separate and apart from the current market environment. They will give some indication of what is taking place in the markets. Technology sector is on tap as well and that is where the fun will begin for earnings as the sector has been under pressure from sellers recently. We will take it slow to start the week and then we will see how it unfolds from there.

I am watching to see how this sets up prior to the open on Monday and we will post updates below prior to the open on Monday.

Some thoughts on news/events impacting investor psyche:

* ¬†Economic data remains on the flat to negative side from last week. The global economic data isn’t much better. This week will need some validation of optimism for growth or at least hope of growth going forward to reverse the negative reactions generated the last two weeks.

*  Trading environment is compressing holding periods on trading positions. Thus, the choppy markets are in play and we have to respect that relative to trading. The swing lower broke key support levels last week, but Friday was enough to let this unfold to start the week. If the volatility returns it is wait and see. If the downside resumes it could accelerate quicker this time around. Patience and trade with stops in place to protect against the unforeseen.

*  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.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level and Wednesday saw more¬†selling and closes at 1946. Thursday ended flat, but was active on the day and Friday bounced to 1967 and raises questions on if the downside move is over? My downside target¬†remains the¬†1910 level near term, but there is always a slight chance of¬†a bumpy ride on the way there such as Friday. The short trade is SDS which we added in the Pattern Model below. Today: watching to see if the upside can hold the Friday momentum… if so, we will have to manage our stops on the short trades.

Bonds (TLT & IEF) The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. The response to the Fed not moving on interest rates was a push lower in yields. Fear rallied TLT $118.42 and near the previous highs and testing near that area as we closed the week.. Watch to see how this volatility works out short term. TODAY: Money is trading in and out of bonds, but the yield movement is is the key to the outcome in pricing. Watch to see how the minutes from the last FOMC meeting impact, it at all the price of bonds.

Semiconductors (SOXX) Hit stops as well and downside accelerated. Watching for short set up in the sector as well.  TODAY: Hold $84.75 support or the downside becomes attractive as trade. Entry $12.30 SSG or Short SMH at $49.85. Manage the outcome short term as the sellers are gaining control. Patience required.

Small Caps (IWM) they were down over last four weeks and technically oversold. The produced bounce intraday on Thursday and followed through on Friday. The 1110 level is the next to clear if the bounce going to amount to any more than just a bounce. On balance volume has dropped, relative strength remains ugly and 50 DMA continues below the 200. Short has been the position to own, but watch closely and manage your stops.

Midcap 400 index broke the 200 DMA and support at the 1365 level, but recovered that level barely on Friday. Bounce is what we watch and if it fails to hold we add a short trade on the move.

Model Position Notes: 

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

  • S&P 500 Index (SDS) Made the break lower and looking to add to the position is selling resumes. Took¬†entry of $24.85 on¬†negative sentiment last week. (SH in S&P 500 Model) TODAY: Watch and manage the risk of the trades and watch how the trendline fares in the current move with the bounce from Friday in play. Stop $24.57
  • Consumer Services (XLY)¬†after a set up to break higher the sector broke support on the downside and the short term trade.¬†The $67.60 mark¬†was¬†the downside break and added¬†the short trade. (Pattern Trade Model) ¬†Got the downside follow through and¬†HIT Stops on position Friday and watching to see if the upside creates another short trade opportunity in the rally.
  • Energy (XLE) the sector¬†continues to struggle and closed negative on a positive trading day Friday. The drop in crude to $89.72 again didn’t help and the current downside target for oil is $85.77. If that happens the short trade in XLE will benefit further.¬†. Added the short side trade (Pattern Trade) and managing the risk.¬†The short trades with DUG added as well. (ONLY ETF Model) Short side played out well and holding. TODAY:¬†Looking for any follow through on the downside selling in crude. Adjust stop to $88.80.
Watch List Opportunities:
  1. This is a market to watch as the bounce on Friday is a just that and nothing more or we get a updraft and see what catalyst lay ahead.

Pattern Trade Setups:

  1. Intraday reversal? closed on a doji candle and could offer a change or bounce off the lows. Jobs report will have some influence on the open.
  2. Validated the upside bounce from the doji on Friday, but still cautious relative to the sentiment.
  3. I will add to this page prior to the open on Monday. Want to see what the sentiment is prior to the trading day to start the week.
  4. SPY – entry $196.75. bottom reversal. Trade back to 2000 on the index. Stop $195 on entry.
  5. JPM – entry $60.50. bottom reversal. Trade back to recent highs. Stop$59.75 on entry.
  6. CRM – entry $58.50. bottom reversal. Trade back to the recent hights. Stop $57.50 on entry.
  7. GOOG – entry $577. bottom reversal. Trade back to the top of current range. Stop $570 on entry.

Pattern Trade Tracking:

  1. FAZ Рentry $16.90. Trade reversal break of support at $23 on XLF. Stop $16.90. HIT STOP
  2. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $49.80
  3. UNG – entry $22.15. trading range breakout. Good base on the commodity and a breakout would be a trade on the upside move. Willing to add to the position on a positive test look longer term than trade. Stop $20.65
  4. QID – entry $44.65. Break above resistance off five week base. Stop $45.40 HIT STOP
  5. QID –¬†entry $45.50. Add to position if the downside accelerates through support of 50 DMA. stop $45.40. HIT STOP
  6. SDS РEntry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK after stop had it too tight) Stop $24.57 (held Friday)
  7. SDS –¬†entry $24.85. Add to position if the downside continues. Stop $24.57¬†(held Friday)
  8. XLY РShort entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $66.25.
  9. XLE Рshort entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $88.80. Reversal candle sitting on the 200 DMA Рwatch to see if it confirms in the AM and manage the stop.
  10. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $16.50 ( Held Friday)
  11. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
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: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $73.80. Joined the distribution process. However, still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to¬†$47.25 for now on position and we will make adjustments as we go forward.