The Watch List and Play List have been updated for today. Review and execute according to your risk and investment objectives. If you have specific questions on any posts please forward them directly to Jim@JimsNotes.com.
Sectors to Watch:
- Thursday was a combination of worry, talking and reacting. We have discussed the issue with a self-fulfilling prophecy with the talking heads and analyst all banging on the market about valuations. The comparisons to 1987 and 1994, etc. etc. Then there are the hedge fund managers that come on television and talk about their holdings to add to the drama. Soros 13F filing showing a big bet on the downside for the S&P 500 index added to the fun on Thursday. When the day ended the S&P 500 index was down 1.4%, NASDAQ off 1.7% and the Dow 1.4% lower. Just a good old day of selling. No the sky isn’t falling, just stock prices thanks to the media and analyst who wanted this move. How far does it drop? Therein lies the challenge… I say manage your stops accordingly, keep your focus, and let this unfold one day at a time. Futures are up slightly as I write this, but that may change by the open.
- More selling is the likely outcome of Thursday’s action. The break of the first level of support was convincing and the sentiment has shifted towards stocks relative to be overvalued. This has shifted the forward look of improving data to worry about the Fed cutting stimulus. Manage the assets with the time-frame in mind and the associated risk.
- The key issue on Thursday was earnings. See last night post on Jim’s Notes for more…
- Treasury yields moved higher to 3.8% on the 30 year bond, and 2.75% on the ten year bond. The worry over the Fed cutting stimulus in September is causing challenges for bonds. Oil moved to $107.18 and holding as it seems to be willing to build a trading range of $103-108. Gold gained $31 to $1364 and above resistance at the 1340 level. It broke above resistance of $130 on GLD and moving towards the target of $137. The dollar moved back to $21.90 support (UUP) as all the Fed worries creep into the dollar. Question… Why is the dollar dropping if the Fed is cutting stimulus and economy is better? Watch the support level and see how the dollar plays out. Base metals (DBB) broke higher as well adding to the upside in commodities.
- The global markets reacted to the US trading dropping more than 1.4% in early trading, but managed regain nearly half those losses into the close. Europe (IEV) ended down 0.5%. China (GXC) lost 0.9% after being up 6.1% the last five trading days. The emerging markets reversed 1.1% and back below the $40 (EEM) mark. Australia (EWA) was off 0.6%, but was up 5% the last five days on stimulus as the central bank cut rates. Global markets remain positive (data) and worth owning if they don’t react to the US markets completely.
- Financials are a sector to watch this week (stated on Monday) and it turns out to be they were. They have traded up and down to move sideways holding support at the $20.35 mark. Thursday they fell to $20.06 and the 50 DMA. The break below support short term put SKF in play in the ONLY ETF Model. The risk of the sector is growing and the inverse ETF will act as a hedge if the downside accelerates.
- The S&P 500 Model is updated. Stops were hit on XLP, XLY, XLE, SPY, XLV and XLF. The stops on the balance of our positions are set and we are watching the move lower short term. We broke the 1675 level of support we were watching short term. VXX was up 5% on Thursday to buffer some of the downside activity. Mange your stops and see how this plays out going forward.
- The Sector Rotation Model is updated. Stops hit on XLU and IAI as the downside accelerated in the broad markets. This is still a choppy market and one to respect short term. DXD which is the UltraShort Dow 30 ETF was up nicely on the negative index move. We have a very high cash allocation currently and we will look at some short plays as we head into today’s trading.
- The ONLY ETF Model is under invested, but it better than attempting to time the micro trends or false moves based on emotions and news as Thursday’s activity validated. We are updating the Watch List and being patient going forward. We added SKF (short financials) on the test and move higher Wednesday and that played out nicely on Thursday. Manage the exit points and be patient.
- The ONE EGG Model added the EAFE index or EFA last week. Gave it all back in the open Thursday. We had raised the stop to $61.80 and we opened at $61.25. Took the exit at $61.15 as the downside accelerated in the first hour of trading. Makes me mad, but that is the way it works sometimes.
- Too much talk about the downside of the market. Analyst and the talking heads in the media are beating the drum. Thursday’s move was the beginning of what some believe should happen, but we will see how today unfolds as the week comes to a close. Set you stops accordingly and focus on what is happening versus what others are saying.
Pattern Setups For Today:
- The gap lower made it tough to add short positions. I would look for a bounce off this selling as an entry point for the downside as this push lower isn’t likely to end very easily with the Fed involvement, or should I say withdrawal of involvement. There is plenty of work to do and expect volatility to pick up through this process on both sides. Unless today unfolds to be a snap back rally, I want to watch and see how we trade this event. The trend off the November low has become extended, volatility has picked up and this pullback may be similar to the one in June, but then it may be more permanant if investors deem the economic growth cannot stand with the Fed stimulus. Either way this takes time and there will be volatility to go with the move and outcome. For the near term I expect more downside is in the cards.
- Follow up on previous posts:
- SLB – Flag/Channel. Uptrend in play off the June bottom and looking for a continuation play on the upside. Entry $82.75
- TBF – Ascending Triangle Breakout – Interest rates rose again on Tuesday. Look for a breakout confirmation on the inverse ETF. $32.70 entry. On the entry point with small test Wednesday? Took half a position with the Wednesday’s activity. Nice move on Thursday, move stop to break even.
- MU – Double Bottom Breakout – Semi’s broke higher on Tuesday helping lift the stock through the entry point of $14.15. The target is $16.15 and look for entry on test of the move near $14.50. Don’t chase the trade, but look for the test entry and opportunity. Still watching with modest test on Wednesday. Got test back to support! $14.35 entry on the bounce, if it moves higher.
- AMZN – Set up short on break of support. Entry at $290 with stop at $298. Got close, but still watching. Gapped down on the lower open Thursday. Passed and watching to see if it plays out today?
- AAPL – V bottom breakout with test. $465 entry. Broke on Monday and looking at the Oct $470 call. Added the position on the open Tuesday. Carl Ichan’s announcement resulted in a big move for the trade. Raising the stop to $27 on the move Wednesday. Manage the position as the stock still wants to go higher.
- DXD – Short Dow. In the worst shape of the major indexes. Rolling top and break of support creates the short trade. $32.95 entry for trade with target of 33.95. Opened near the entry, but then traded lower. Took the play on Wednesday with the Dow moving lower on the day. Nice gain on Thursday and raise stop to $33.50.
- COH – Short play on gap lower pennant. Short entry at $53. Good sales data, but the negative bias from earnings remains. The downside play is worth watching. Added short Monday on the move lower following positive data. Stop at $54. At support and break will add to the downside play.
- VMW – Flag gap higher. looking for a continuation of the move from the consolidation. Entry $84.10. Modest upside and stop now at breakeven. Hit stop on day, but I still like the stock fundamentally.
- CLF – Bowl pattern breakout? $19.20 was the resistance level cleared. Watch for test of the move and opportunity to add a position in the stock. Target is $23.50. Entry 19.50. Gained 8.9% on Thursday and 10.6% on Friday! Watch and manage the profit on the trade. Hit target… use that for the stop. Hit stop, but watch the upside to continue.
Facebook (FB) Update:
- Facebook – The sentiment towards the stock has shifted as it found support at the $22.80 level and moved to the top of the trading range before breaking higher and adding positions. The move above $24.50 was entry for position.
- Added position at $24.75 (1000 shares). Stop is $22.75 for now. A move back above the 200 day moving average and we will add to the position. (Added 1000 shares at $25.65 on break) Sentiment towards the stock short term is gaining. Consolidating at the current levels and holding. Still like the upside near term as it is gaining positive comments from analyst.
- Earning beat expectations on Wednesday and the stock jumped 29%. Here is where greed versus objective comes into play. This is a long term play and if the gains hold up today in trading the upside gain on the position is tempting. We will now have to design a way of protecting or realizing part of the gain short term. Be patient with the position on the upside as you are on the downside. Interesting link on earnings for facebook
- The stock broke lower from the pennant. Watch and manage your risk. As stated yesterday we are going to establish a hedge to protect the downside risk. Add a December $37 Put on FB @ $3.35. In addition sell a December $37 Put on FB @ $3.35. If the stock falls we can put our stock to someone at $37 prior to expiration in December.
NOTE: The pattern trades above are setups that I see for a potential swing trade or 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. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.