Trading Notes for Today, April 1st

The activity Monday showed some willingness on the buyers part to step in and take advantage what is viewed as an oversold condition in growth stocks. Is the rotation over? Not likely, but the initial stage of money movement looks like it will take a break for now. That leaves the door open for another move to the upside in advance of earnings. The economic data could offer a catalyst if the news is better than expected. We will start this morning with the ISM manufacturing data.

First quarter is in the books and the challenge will be in the data.

What are we looking for Today?

Economic data reports for March. ISM manufacturing could set the tone today as it is expected to improve. 53.9% is the expected number and anything less could result in some selling. Vehicle sales, construction spending and Market PMI are out as well.

Digesting the fact that the earnings warnings are near record levels. Pre-announcements are heavily leaning towards the negative side. Despite the high levels the last three quarters the results have not kept the buyers from putting money to work in the market. Watch to see the response going forward.

The events from last week of money moving into the global markets. The EAFE index finally showed divergence from the US markets and it is important to see how that unfolds moving forward. Do we find opportunities in the global markets short term or is it a longer term trend for investors to take advantage of? Answer is unfolding day by day.

Will the bounce from Monday follow through or was it just some end of the quarter lipstick on the pig? Nice bounce, but we really need to see some kind of follow through to get the upside going. Be patient today as we start the new quarter and turn on the data faucet. Let the analysis begin.

Outlook for the Week of March 31st (Weekend Update)

Sectors to Watch:

  1. S&P 500 index watching to hold 1840-1850 support and 1885 resistance. Made upside progress on Monday with a move to 1872. The descending triangle pattern of consolidation is still in place, but the upside bias is now in play, and it is likely to continue until the data reports determine the next catalyst, up or down. For now we watch and take what the market gives overall.
  2. NASDAQ broke lower, but managed to find support and bounce at 4126 and the 100 DMA on the close. The impact of selling growth stocks did it’s damage on the index short term. How do we trade this index this week is still being determined. Positive bounce and follow through on Monday was a plus for the index up 1% to lead major indexes. Move above the 50 DMA would be a plus for the index.
  3. EFA is held support ($64.50 ) and moved through the entry point of $66.50, and followed through on Monday. Thus, we look to see how this trade plays out today as it is near the near term high. Developed markets looking good for now.
  4. Emerging markets (EEM) Broke the downtrend line back to the upside and shows interest from investors short term. We hit the entry point and it gapped higher on Friday followed by solid gain on Monday. Watching to see how this follows through on the week and we will have to remain patient with the position near term.
  5. Bond yields moved off the newly minted low of  3.49% Friday and Monday. Are we finally getting the upside drift for yields in light of stocks pushing higher. The short side of the bonds is attractive from a longer term outlook,  but we will be patient for now and let this all unfold.
  6. Biotech (IBB) bounced on Monday from the oversold technical indicators. Will this return to the previous highs following the selling? Worth watching, but the risk remains on the high side.
  7. Energy (XLE) is on the move as it broke through $88.50 on Friday and held the move on Monday. Rotation of money has been one reason for the gains along with sustained moves higher in oil prices. Large cap stocks are benefiting. XOM, CVX, etc.

Models:

Sector Rotation Model (updated – 3/31/14)

ONLY ETF Model (updated – 3/31/14)

S&P 500 Index Model (Updated – 3/31/14)

ONE EGG Model (updated – 3/31/14)

Pattern Trading Setup:

Today’s opportunities:

  1. XLE – entry $88.50 test of breakout. Watch for a test of the move through the break from the consolidation pattern. Max entry from test is $89.25.
  2. XLF – entry $22.25. Test of trendline off February low. Looking to hold longer term and manage the volatility of the position.
  3. SLX – entry $46.50. Downtrend break off January high. Reversal off low, back above the moving averages, and positive stock movement. AKS as example.
  4. MS – entry $31.50, Bounce of support (50 DMA) and continuation of uptrend.

Pattern Trade Tracking & Follow Up:

  1. EDC – entry $25.50 ($26.10). Trading range breakout. Finally got the move higher in the emerging market index and looking for the follow through this week. Stop $25.45.
  2. JNJ – entry $96 ($95.75). trading range breakout. Look for test of the move and entry near $96. If higher don’t chase. Added after opening test. Stop $95
  3. WDC – entry $90. trading range breakout. Follow through on upside move. Stop $88.50.
  4. AKS – entry $6.65. Trading range. Looking for follow through on breakout. Materials sector. Stop $6.42.
  5. STX – entry $52.23. base, descending triangle. technology sector. Stop $54. Raised stop to see how this breakout plays out. Tested Thrusday watch today and take exit if fails.
  6. JPM – entry $57.60 ($57.75). higher low, with 200 DMA as trendline. Followed through and added position. Stop $59
  7. SMH – entry $43.95. Test of support. Semi’s sold off with broad market. Upside still attractive if the broad indexes bounce. Stop $44.25.
  8. NEE – Entry $91 on the test of the breakout at $90. Stop $92.75. Testing the high.
  9. RF entry $10.50. Breaking from consolidation. Financials. Confirmed on the upside. Stop $10.50. Nice upside move from the bank finally.
  10. TQNT entry 9.37. Flag on break higher. Looking for continuation of the upside move. Semiconductor. Stop $12.75. Adjust your stop.

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.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 2/18 – Raise stop to $58.95 currently and manage the move to the new high according to your risk. With the price moving through the top of the Bollinger bands some downside activity may be on the horizon or a continuation of the top consolidation.
  • 2/19 – $16-19 billion acquisition of WhatApp pushed the stock down 2.5% after the announcement in after-hours trading. Watching to see how investors react in trading today.
  • 2/24 – Continuation of the upside momentum. Plenty of news and comments on the stock, but the buyers remain confident short term. Looking at adding a trade on the stock with options. Watch to see how it trades today.
  • 3/1 – rolling top? Watching to see how this plays out short term and will look for a hedge on the remaining position this week. Raise stop to $63.75.
  • 3/5 – Target upgrade and stock runs higher on the move. Move stop to $65.90 and what how this plays out from this point patiently.
  • 3/12 – Setting up to add a $70 put contract for June at $6.85. 20 contracts. Looking at how we trade the balance of the week and if any weakness develops in the stock.
  • 3/13 – Added 20 puts @ $70 for June at $7.05 today. This will act as a hedge against the position and add some profit if the shares break support.
  • 3/24 – Holding support at the $66.50 level. If we break lower the downside could accelerate towards the $60 mark. Keep stop in place on the shares and manage your put contracts. HIT STOP and held out put contracts. Watch to see how this plays out going forward. Look to lock in gains on half of the position if the selling accelerates.
  • 3/26 – Sold on buyout news and hitting next level of support? Bounce in play. Watch the puts and look to sell half to lock in nice gain and hold half with stop at $62.90 on stock.
  • 3/27 – Sold half (10 contracts) in the morning decline and bounce at $12.6o locking is a gain of $5.55 per contract. Nice gain on the position. We hit stop on the remain 1000 shares at $63.75 and still own 10 puts. Looking to exit the puts today if the stock moves higher and then we will address how we want to play the stock moving forward. Looking at selling puts with a strategy of having the stock put to us if it drops near the entry level we would like town the stock. This would assume the risk on the downside has played out near term.
  • 3/31 – Still maintaining our puts for now as the consolidation at the lows builds. Maybe a bear flag pattern developing? Watch and set your stop on a move in the stock above $62.90 as noted earlier.