Trading Notes for Thursday – May 23rd

The market reacted to the Fed on Wednesday… is this the start of the downside so many have been looking for? The economic data has not been enough to deter investors, but the Fed is causing concern over stimulus. What Bernanke said was enough to confuse and the FOMC minutes confirmed the discussions relative to the slowing the stimulus. All said, futures are lower again this morning and we have to manage our positions on the downside.

In the headlines… Japan down 7% overnight? Now that will get the attention of any investor. The US stimulus issues and Chinese manufacturing slowing (Manufacturing PMI fell to 49.6% showing contraction this morning) prompted selling on the Nikkie. EWJ is set to open at $11.58, down from the $12.13 close today.

HPQ – Beat estimates and the turnaround is working thus far. It was up more than 13% after hours and the stock is set to open at $23.66 this morning. The posted declines in sales, but were able to hold margins on products. Printers were the bright spot in the report. I was watching to buy the break from consolidation, but the gap higher will put this on hold for now.

Sectors to Watch:

  1. First question… short plays. I am getting email on this already. Premature other than a speculation trade on the current news and activity. I posted a short trade on the Dow on ONLY ETFs Model as follow up to the comments yesterday relative to the Dow. (Wednesday’s comments: DIA – Short play to $148 and fill the gap left on the move higher. If market moves lower this is the trade.)
  2. Side note on the short plays. Scanning the short or inverse ETFs, huge volume increase on Wednesday 2-4X, large intraday swings on news, plenty of interest in this move and the sellers could get control quickly on the move. Watch for flash move lower and bounce back. The buyers aren’t out of this yet.
  3. FCG set to test the $16.80 breakout level? Watch to see if it holds and offers opportunity.
  4. TLT – is $116.50 support? Didn’t hold as rates rose on the Fed news. The bond is more inclined to bounce initially if the fear factor steps in on flight to quality. Watch this as it will set up an opportunity to add to TBT as the bond yields will rise longer term on the Fed activity.
  5. OIL – Dropped below $95 support and trading lower overnight to $93. Short play makes since depending on the open.
  6. Short Silver trade on ONLY ETF is testing lower and saw a big swing in price on Wednesday in reaction to the Fed. The trade could have been entered yesterday on the bounce back. I am looking for a confirmation today with an early test of the move from Wednesday.
  7. Facebook – The break of support at $26.50 last Thursday was a negative. Wednesday the break below $25.25 as support is only adding to the downside risk. The test of the 200 DMA leaves plenty of questions relative to the future outlook for the stock. A break below $25 raises the question on hold and add to position as it bottoms, or sell and buy back as it bottoms. We are favoring selling and buying back as the next support is 10% lower at $23.28. If you want to track the Facebook research page send a request to Don@SectorExchange.com to obtain the link to the page.
  8. We started the week with this question… is market setting up for a pullback? The uncertainty of the Fed action is putting some doubts in the market short term. Watch to see if it develops going forward. All the events are in place, but the sellers have to be willing to exert themselves. If it transpires watch to see how quickly the buyers step in as an indication of the upside strength. Wednesday gave some more insight into the answer as the nervousness relative to the Fed showed in the accelerated selling following a brief move higher. Today will offer more insight relative to the follow up with more selling or the buyers stepping back in to take the markets higher again.
  9. Bubble Watch? The earnings growth compared to stock price gains is an sobering detail of numbers. Basic materials are up over 10% this year, but the earnings per share growth is -15.3%. The discrepancy is what has many analyst awake at night… me included. Consumer Staple EPS growth is minus 4%, yet the sector is up more than 20% for the year. Telecom EPS growth is minus 14.1% versus the sector being up 13% this year, and Energy minus 5.4% EPS growth and up 15% this year. The numbers don’t lie as they say, but they are being ignored by investors currently. That is why they created stops! That way you and I don’t have to guess if the bubble will pop, we only need to define where we are comfortable heading to the exits when it does. The move on Wednesday in prices of the these sectors shows the downside risk.
  10. Bubble Watch? The bond issue is back in the headlines as the jump in rates following Mr. Bernanke’s testimony to Congress on Wednesday sparked more concerns. Yields on the ten year bond is now over 2% again. Watch the downside in bond and consider the short play in TBT or TBF.

Pattern Setups For Today:

  1. Plenty of breakout reversals in the scans. Watch the downside effect today. IF big swings lower watch for the opposite to happen. If gradual move lower more likely to stick. Market psychology is coming into play now.
  2. CCL – Break of $32.90 short setup for the stock.
  3. NTI – Break lower from trading range short setup. Sector showed big weakness on Wednesday.
  4. SDS – Trend reversal off low. $39.10 entry on upside. Keep tight trailing stops. $38 to start.
  5.  SNE – Continues to push higher as Japan’s market rallies and company turns around profit. PlayStation, Television, etc. sales are improving the bottom line. Watch for test near $20.50-21 as opportunity. Setting up, but watch the Japan decline this morning.
  6. Follow up from Wednesday’s List:
  7. IGN – Gap breakout on Cisco news. Watch for test of $28.75 level and continuation higher. (inside trading days continue) Look for continuation on the upside. Got the test, now we see how it plays out with the negative sentiment in the market overall.
  8. UNG – channel or trading range break on the upside. $22.05 follow through? Got it with a gap higher on Tuesday. Holding… look for the upside follow through.
  9. AAPL – building a trading range and support at $420… Moved through resistance at $438. Negative sentiment will weigh on the stock lower? Acting as if it is done for now on swings up or down.
  10. FOSL – Flag that should be bullish, but retail struggling. Fill the gap? Filling the gap on the negative sentiment.  Worth keeping on watch list for the bounce.

Still plenty of positives in traders minds. The adjustments on Thursday were not significant enough to get the attention on the sellers at this point, as seen in Friday’s buying. Watch, protect against what isn’t working and add to what is, don’t fight the trend.