Trading Notes for Today, August 18th

Notes for Trading: 

Friday showed the issues with Russia and Ukraine are not over. It also showed how nervous investors are over the situation expanding beyond a war of words. The indexes were trading higher prior to the news of shots being fired and immediately dropped and treasury bonds rallied. It did manage to fight back to even on the S&P 500 index by the close, but the message was sent that investors don’t want to see the uncertainty if would create in global economics. Thus, we move towards another trading week with renewed caution relative to the geopolitical issues around the world.

The major indexes did advance on the week with the NASDAQ leading the way with a 2.1% gain on the week. Biotech was the leader with a gain of 4.7% and three solid days following the break from the consolidation pattern. The Dow was recovering nicely until Friday when the large cap stocks responded to the news. Small caps continue to lag only gaining 0.9% on the week as the risk avoidance gains traction again. Bottom line is the bounce remains in play and we will continue to treat as a bounce based on the volume and take one day at a time as we advance forward.

The global markets remain challenged by the event in Russia with Europe (IEV) taking the brunt of the worries. The index did gain 1% on the week, but showed high volume selling on Friday. The worries around the issues with Russia are putting downside pressure on the sector. Russia (RBL) had seen a nice rise in stock prices off the August 6th low, but suffered Friday. This continues to trade on the news and makes any position volatile to hold. The emerging markets (EEM) bounced back nicely and cleared resistance at the $4.30 level again and now needs to move above the $45.10 highs to keep the upside in play. The emerging market bonds (EMB) have recovered very well off the selling over interest rates rising and the dollar gaining strength. Still in a longer term trading range, but still worth holding for the dividend.

Bonds continue to frustrate traders more than bond holders. The drop in yields this week on rumors the Fed would continue to add stimulus in the form of quantitative easing sent the ten-year to 2.34% and the thirty-year to 3.13% both are twelve month lows. Bond holders have once again reaped the benefits of rates declining. This has also added stability to the REITs (IYR), utilities (XLU), preferred stocks (PFF), convertible bonds (CWB) and high yield bonds (HYG). Money rotation to these sectors has been of interest, but it more likely trading money versus sticky longer term holdings. Still plenty of risk in bonds should yields reverse short term.

Commodities are struggling all around. Oil (USO) declining has been the biggest impact of note as crude tested the $95 level and bounced back above $97 on the close Friday. Is that the low for now? Worth watching and trading if the reversal sets up and follows through. Natural gas was in the same boat selling lower on and testing the July lows on Friday. Short side of the trade has worked well since June. Agriculture (DBA) has tested lower as well and bounced also on Friday. Not willing to jump on board for anything more than a trade opportunity on the bounce if it materializes. Gold (GLD) dumped on the news Friday and bounced back, but the damage was done. Stuck in a trading range with no real catalyst in place now to rise short term.

Bottom line… one day at a time. Bounce play still the mode of operation for now. No clear indication of this move being anything more than that at this point. We start the week with a cautious outlook and a willingness to wait for validation on the upside with an eye on the downside.

Sector Notes: 

Below are some key notes on events and what we are watching looking forward:

  • Small Caps (IWM) has now moved back to the 200 DMA and stalled. Need to push through the upside and reverse the downside trend. $112.50 was the entry point and managing the risk with a first target of $115. Stop at $112.25 for now. Still not showing much upside momentum.
  • Russia remains a talking point as the Putin continues the game war with Ukraine. Quiet time ended Friday and now we the volatility has returned with RBL dropping on the news. Willing to wait with $23.75 stop hit Friday. Looking at RUSS now to start the week.
  • Volatility index back on the upside spiking to 15 on the news in Russia and closed back at 13.1 as it dissipated. Watching to how it unfolds on Monday. VXX or SVXY?
  • Internet (FDN) remains one of the stronger sub-sectors in tech. Attempting to break from the consolidation pattern on the upside, but derailed on Friday. Some of the bottoming stocks are bouncing and helping the sector maintain a positive bias for now. Look for upside trade on the move short term. Too difficult to see beyond that for now. $60.25 entry point on short term breakout. We hit the entry for trade. Stop $59.50.
  • China (FXI or YINN) The upside remains positive and continuation of move last week gave another opportunity for adding the position back based on the resilience in the country short term. Added at $40.50 and willing to add again with confirmed close above $41.15 or $41.25 entry point to add to position.
  • Emerging Markets (EDC or EEM) – Bounced off the lows and looking for a follow through on the upside at $44.30 entry. This has been volatile on all the news and geopolitical events. If they remain in the headlines this will remain a volatile trade. $43 stop as result.
  • Real Estate (DRN) tested support near the $58.40 mark. Entry $61 on trade. Managed to bounce off the lows and has now regained the upside momentum with the move back above the $62.85 resistance and held on Friday. The interest rate concerns are being pushed to the side for now and looking to move higher. Holding for now, but keep your stops in reasonable location $60.50.

Practice patience and let this new chapter of the markets story unfold.

The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 8/17/14) –
ONLY ETF Model (updated – 8/17/14) –
S&P 500 Index Model (Updated – 8/17/14) –
ONE EGG Model (updated – 8/17/14) –
Monday Trade Opportunities:
Trade Opportunities:
  1. SPY – entry $196. bottom reversal and clearing the next level of resistance.
  2. CORN – entry $26.70. trading range bo. Bottom reversal breakout potential as trade.

Pattern Trade Tracking & Follow Up:

  1. YHOO – entry $36.50. trading range break. Internet sector moving higher. Stop $34.40
  2. NKE – entry $77.70. trading range break. Watch for move higher prior to earning on 9/22. Stop $76.
  3. CELG – entry $89. wedge breakout. healthcare leadership short term. Stop $85.
  4. BTU – entry $16.05. double bottom reversal. Energy gained on news… got the follow through for entry in the trade. Stop $$15.70.
  5. RFMD – entry $11.50. pennant upside continuation. Need semiconductors to regain positive momentum if broad markets are to regain upside. Stop $11.
  6. EEM – entry $44.50. break above resistance again. upside trade still looking longer term. Stop $44 for now, but give some room if the volatility picks up.
  7. SSO – entry $113.50. Bottom reversal on test lower. Trade on the bounce only for now. $117 target on the trade. Stop $113.50.
  8. SOCL – entry $20.15. Cup and Handle breakout. Upside back in play. Stop $19.80
  9. GLD – entry $126.50. falling wedge. economic and global activity favors a rise in price short term. Stop $125.30. HIT STOP
  10. FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week. Stop $59.
  11. VMW – entry $100.50. trading range breakout and test. Upside value along with EMC. Stop $97.80. Use some patience on upside move.
  12. CLF – entry 16.20. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher. Stop $16.50. HIT STOP
  13. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
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:

  • Facebook (FB) – Testing the break higher and has held up well in the recent selling. $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 $71.50