Trading Notes for Today, April 9th

Notes from Tuesday:

Positive start to the day became mixed through most of the morning. The VIX index hit a high of 16.20 and then proceeded lower from there as buyers were willing to put some money to work. The big question early in the trading day was if the market was ready to bounce or not. At the end of the day… the same question remained.

The S&P 500 index hit the 50 DMA along with other key support indicators and bounced. It did so on light volume and so-so technical data. The point being, it bounced. The question, does it continue? The answer is found looking forward not at charts comparing the current market to 1929. Today will be key in how this proceed in the short term. Follow through to the bounce, no matter how modest, is key to the upside holding the move. One day doesn’t make or break a trend, but the longer this goes the advantage goes to the sellers.

There leadership in energy, basic materials, base metals, utilities and consumer products. Not exactly the group you would want leading a continuation bounce. They are definitely defensive in nature, but leaders nonetheless. Watching for follow through with technology and other growth sectors stepping in to assist on the potential move higher.

Earnings have begun with Alcoa posting a better than expected earnings report. The first test will come from financials which start on Friday with JPM. Remain patient and use a defined strategy to building your positions and managing your risk.

Outlook for the Week of April 7th (Weekend Update)

Sectors to Watch:

  1. S&P 500 index tested 1840 support on Monday after breaking 1873 on Friday. Moved back above the 1850 level on Tuesday. We have been watching 1840-1850 as a key support level along with the 50 DMA. So far so good, but there is there plenty of downside risk moving forward. Breaks of the support levels opens the downside as a trading opportunity with some longer term holding periods and a target of 1750 support target. The lack of direction remains in play for now.
  2. NASDAQ tests positive open, but leads the indexes on the upside with a gain of 0.9% for Tuesday. As we stated Monday, the index didn’t finish at the lows it started the bounce that continued Tuesday. Maybe this is support and we bounce higher from here? We did break the trendline from November 2012 and we would nee to clear the 4175 level to keep the trendline in play. Watch to see how it unfolds today?
  3. The Dow Jones Index held above the 50 DMA and is not participating much in the current volatility. The sideways trading range is still in play and we will have to be patient as this all unfolds. If the buyers don’t show the downside trade will have legs to carry the index lower.
  4. EAFE index (EFA) holding up well amid the selling, but that is not likely to remain as the US markets will overlap into the global markets if the selling continues. That said, watching to see if money rotates to what is deemed to be safer ground short term. Adjust stops to $66.50 on EFA. Holding for now.
  5. Emerging markets (EEM) has been a positive the last two weeks and the break higher has remained in play. Tuesday gapped higher and held on the day adding 1.5%. To this point ignoring the US markets. EEM stop at $41.
  6. Bond yields headed lower again at 3.54% on the 30 year bond. 3.49% was the low last week and we testing that mark again as this unfolds. 2.69% on the ten year bond and 2.65% support. Flight to safety is benefiting the bonds this week as Friday’s fear accelerates. I would be cautious as bonds look overbought and the NASDAQ oversold (see Tuesday). TLT could be a trade opportunity relative to the fear trade. If reversal in stocks takes place, the move in bonds will reverse with it… watch the risk.
  7. VIX index accelerated on selling as you would expect hitting 16.2 early Tuesday, but fell back to the 15 level showing some peace among investors. We will add a trade in VXX if the sentiment gains negative traction. VXN is the NASDAQ volatility index and hit high of 20.6 on Tuesday and move back near the 19 mark as buyers stepped in. Both indicators will show how fear plays out short term. Make no assumptions as the nerves of investors is a challenge.
  8. Retail (XRT) declined to the 200 DMA as the doubt in the consumer builds following all the winter stories. Watching how this unfolds, but small bounce on Tuesday gives some breathing room short term. The selling can resume at any point, but we have to take what the market gives one day at a time. $85.25 target on bounce, then we see how it goes.

Models:

Sector Rotation Model (updated – 4/7/14)

ONLY ETF Model (updated – 4/7/14)

S&P 500 Index Model (Updated – 4/7/14)

ONE EGG Model (updated – 4/7/14)

Pattern Trading Setup:

Today’s opportunities:

  1. EGHT – entry $10.65. Bounce off support within trading range. telecom sector. Look for test of the move higher early or wait for the confirmation at $11.
  2. FCX – entry $34. Double Bottom breakout. Base metals/commodities sector.

Pattern Trade Tracking & Follow Up:

  1. PCLN – entry $1180. Bottom reversal at support. Oversold bounce trade. May 1180 call option (entry $55, stop $55) is alternate way to trade the move with leverage. Stop 1165.
  2. NFLX – entry $345. Bottom reversal at 200 DMA. Oversold bounce trade. May 345 call option (entry $25.80, stop $25.80) is another way to trade this move with leverage. Stop 336.45
  3. DBA – entry $28.55. Flag pattern. Continuation of the uptrend on break higher. tested back to support on Wednesday. Watch to see how it pans out today. Break lower gets very interesting. Stop $28.33.
  4. VXX – entry $42.15. bottom reversal. Sentiment shifts to negative and fear factor in play. Stop $41.60.
  5. SDS – entry $28.70. bottom reversal. Negative sentiment in the S&P 500 index. Stop $28.35.
  6. QID – entry $60.20. bottom reversal. Negative sentiment in NASDAQ continues. Stop $59.90
  7. CORN – entry $34.50 test of the breakout from cup and handle pattern. Don’t chase, no test/no trade today. Tested deeper than expected on Wednesday, watch for the upside entry point on the bounce back. Stop 33.85.
  8. CQP – entry $30.25. Trading range breakout. Energy REIT moving higher. Stop $30.25.
  9. 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.
  10. SLX – entry $46.50. Downtrend break off January high. Reversal off low, back above the moving averages, and positive stock movement. Stop $46.50
  11. 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.
  12. 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 $97.60
  13. AKS – entry $6.65. Trading range. Looking for follow through on breakout. Materials sector. Stop $6.65.
  14. NEE – Entry $91 on the test of the breakout at $90. Stop $92.75. Testing the high.
  15. RF entry $10.50. Breaking from consolidation. Financials. Confirmed on the upside. Stop $10.50.

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)

  • 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.
  • 4/2 – Watch stop on remaining options contracts with stock moving higher with the broad market. Bottom reversal setup on the move currently. $63.30 add 500 shares long. Held the 100 DMA and continuation of the reversal we will add to the shares. HIT STOP on remain contracts and now watching the current setup for the stock.
  • 4/3 – Added 500 shares at $63.30 on early move higher. Watch how the stock acts moving forward off the low. The stop on the trade is $60.50.
  • 4/4 – Hit stop on position and sold back to the previous lows. Watching to see if the downside is back in play and if our put contracts should be bought back for a trade on the selling.
  • 4/6 – downside accelerating and looking for support now at $54.87.
  • 4/8 – Bounce off support? Trade set up if the broad indexes bounce. Watching today.