Trading Notes for Today, August 1st

Notes from Friday’s Trading:¬†

The sellers were in control today and they never looked back from the opening bell. This has been building over the last week as we have discussed the good economic news on Wednesday was too much reality for investors. The fear factor relative to the Fed hiking interest rates sooner than originally thought played havoc with investor psyche today. Throw in a big miss on the Chicago PMI and jobless claims rose. There was the hike in employment cost index for Q2 which was the highest in six years. The combination was too much for investors and in the end it was an ugly day as the major indexes turned in a negative month thanks to the losses today.

We have been discussing the negative sentiment building and major indexes shifted lower today as the sellers took control. That shifts the scans considerably relative to the leadership or lack of, and we will have to see how it opens tomorrow relative the direction and sentiment shift. Plenty of technical damage done in the market across the board and the move below the 50 DMA on the S&P 500 index is a negative and puts the index into a distribution phase.

Today we start with caution. This type of selling is usually met with some buying testing the opportunity. It is Friday and not a great day to want to add positions into a weekend. We will take more of watch and see approach to the open. The key is to be patient and let it unfold. Take it one day at a time.

Sector Notes: 

  • Treasury bonds (TLT) continue to have defensive momentum to them from money rotating to safety. Wednesday was the first big bounce in the yield we have seen in several weeks. Followed through on Thursday with more selling as interest rates rise again. TBT¬†hit entry at $59.60 and you have to measure the risk moving forward. Expect this to be a volatile move over time.
  • Small Caps (TZA) short interest rose and the short fund (3X leverage) was up nearly 7% as the index fell 2.3% on the day and confirmed the downside move. This has been a leading indicator for market direction the last month. I expect more downside if the job report is better than expected. Don’t over stay your welcome on the trade.
  • Coffee (JO) is moving off the lows and I like the upside opportunity in the commodity on the speculation around the rising cost based on supply and demand. $34.20 entry point and still rising. Posted to the Pattern Trade List. Manage the gain.
  • Short Crude Oil (SCO) was up again as crude is now testing $98.80 level with the move below $100 and the 200 DMA. The downside in crude continues to build some intermediate term interest. The demand has not materialized to the level some were expecting, but it has increased. Some downside will flush out the excess speculation and then give the commodity some direction. Trading below $98 in pre-market.
  • Natural Gas (UNG) still testing support near the $20.75 level and if a bounce starts that could set up a trade opportunity.¬†Looking for a move above $21.40 if we are going to trade a potential trend reversal on the move. The short side stops should be real tight at this point.
  • NASDAQ 100 index (QQQ) broke¬†the $96 level of support and added to QID today on the move. We started a position in the pattern trading posts. I am watching how the large cap index responds with the LinkedIn earnings beating expectations after-hours. This has been the overall leadership for the markets on the last leg higher, but is showing signs of topping technically.¬†More downside will bring the trendline into play as well. Manage the short trade.
  • Volatility Index (VXX) jumped 8.3% on the day. The¬†lethargy is officially gone? This can reverse as easily as it rises day to day, but today’s selling made an impact. If the jobs report if better tomorrow watch for the index to rise again as the worry over interest rates will move higher. If we get early downside in trading expect a bounce as the oversold technical indicators are in play. Bank some profit on this trade.

Practice patience and let this new chapter of the markets story unfold. SEE EGG Table Page for more sectors to watch short term trades.

Market Story & Outlook:
Current Story of the market still involves uncertainty looking forward¬†and the second quarter results from both economic¬†data reports and earnings have been a positive influence on the markets. The last two days the sellers have exerted pressure on stocks as the fear factor rises relative to the Fed hiking interest rates. This is becoming more of a reality to investors on the improvement. I would go more to the point that inflation is the bigger concern for the Fed. The uncertainty now surround what actions the Fed will take are the driving factor short term. We have shifted modes from looking for good economic data to drive the economic picture to worry over interest rates rising and stalling the acceleration in the economic growth. To indulge this one step further, consider the fact that the positive data like GDP, is not as positive as the headline number would indicate. That adds to the worry factor with the Fed. This shift now puts the new worries about the Fed on the front burners and shifts the economic, earnings, geopolitical, etc. worries to the back burners on simmer. Bottom line… we are still in a news driven market which is speculative at best.
The long term trends remain fully intact, but the short term worries are also fully in play. Choppy markets make investors crazy and traders happy. Decide what you are doing with each position prior to taking the position. Don’t turn trades into investments because you were wrong in your analysis. Cut your losses and maintain your discipline on each position.
The other story line we have been tracking is bond yields. The last two days the move in both the 10 and 30 year bond has push the price of bonds lower. The thirty-year bond moved to a low of 3.22% currently and closed at 3.31% on Thursday. The Fed is engaged in cutting stimulus and on the horizon is the rate hikes. That has nerves frayed and volatility rising. It also has bond prices declining as yields rise. This is not going to go in a straight line. Volatility in the move will come with every piece of speculation. That puts positions in TLT, IEF or TBT the path of volatility. Trading the downside of this move longer term takes a strong stomach for the up and down swings, but in the end rates will rise in the come 6-12 months, assuming the current course plays out.

The final piece of the puzzle¬†is earnings¬†and economic growth.¬†In an effort to keep it simple… earnings growth will be dependent on the economy continuing to make progress in growth. Not just in the top line numbers, but in the real impact of consumer and business spending, sales rising to impact earnings versus cuts in spending or stock buy-backs, and global expansion in the consumer. If that trend takes place the market will digest a rise ¬†in interest rates.

Last and not least from my view is the worry factor has to play out. Until there is clarity the chop will continue and speculation will rise along with volatility. Take it one day at a time and establish your strategy short term or long term before you deploy your cash.


The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated Р7/31/14)

ONLY ETF Model (updated Р7/31/14)

S&P 500 Index Model (Updated Р7/31/14)

ONE EGG Model (updated Р7/31/14)

Trade Opportunities:

  1. Expecting some more selling to start the day and then a bounce. Not enough evidence to trade anything of note today. I am an observer and willing to let this unfold on the day. I will post any changes directly to the Watch List on the Model tables today. Manage your short term risk in light of the news driving the direction intraday.

Pattern Trade Tracking & Follow Up:

  1. JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook. Stop $34
  2. 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.
  3. QID – entry $46.88. Bottom reversal. The break lower in the semiconductors is a negative for the index and earnings from Amazon will impact the index today. Watch for downside trade as NASDAQ looks toppy. Stop $46.50. 7/31 – added to position –¬†entry $47.50 – bottom reversal. Volatility in the index has been slowly rising the last week and concerns in the large caps are rising as well. Hedge for other positions.
  4. EMB –¬†entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30. Stop Hit
  5. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  6. SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive. Stop $70.85.
  7. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 17.50.

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)

  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.30.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.
  • 6/10 – Adding shares today on the move higher in pre-market. Added 500 @ $64.20 on Tuesday. News of Facebook adding the President of PayPal to staff prompted investors off the sideline on the idea. Watch and manage the risk after the euphoria evaporates.
  • 7/11 – Added the position back of 1000 shares at $65.15. Upside opportunity is still in play.
  • 7/22 – Raise stop to $67.80. Earnings are tomorrow…. it will be interesting, but based on research all is positive unless their is dirt under the rug somewhere. I still like the longer term outlook for the company.
  • 7/24 – Positive earnings news and trading higher after hours. We will adjust the stop higher today based on how this unfolds in trading. On Options trades use the stock price as exit point. Move stop to $73.90.
  • 7/29 – Stop hit on selling Tuesday. Watch how Twitter announcement impacts the stock today. Upside is still in play and it we fill the gap left on earnings it will provide an opportunity to buy the shares back.