Trading Notes for Today, August 4th

Notes for Trading: 

Today we start with caution. This type of selling is usually met with some buying to test the sellers. It is Monday and following a negative week with some time to reflect over the weekend new money may find its way to the markets. 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: 

  • Russia/Ukraine… the issue remains and it is far from over¬†as worries rise about sanctions from the US and Europe. The Russia ETF (RBL) declined on the week¬†and in position technically to¬†fall further. Watching to see how it unfolds. RUSS¬†is the short ETF for the country and we have been willing to step into the trade when appropriate relative to the risk. $13.26 is breakout level to watch.
  • Volatility spiked¬†to 17.5¬†this week as the anxiety rose relative to interest potentially rising sooner than later. The fear that trends with volatility moving higher and markets moving lower is what we are concerned about as we progress toward the future. If all the headlines about bubbles and corrections gain traction in action… the selling will accelerate.
  • Small cap stocks (IWM)¬†moved back to the 50 DMA last week. This week it tested support at the 200 DMA and Thursday broke support and closed at $110.68… next support is $108. The weakness in small caps has been present all year with the up and down short term trends. Looking at a weekly chart the trading range is very well defined for the last seven months.¬†Risk off has definitely become the short term theme. TZA is the short ETF for small caps.
  • Housing is another sector which the data has confirmed a slowing with the decline in new home sales and pending sales.¬†The short interest and the negative sentiment has grown and taken sector below support. Looking at the weekly chart of ITB the next level of support is $21.55. This is a barometer for the health of the economy as well looking forward.
  • Patience is a word we all like to use, but struggle with implementing. The last four¬†weeks shows the importance of knowing how to manage the risk and volatility of the broad markets. Knowing when to put on risk in your portfolio versus knowing where to take risk off is vital to the preservation of principle. Short term view is to raise cash. Longer term view is to manage your stops and lessen your equity exposure if the selling continues.
  • Treasury bonds (TLT) continue to have defensive momentum to them from money rotating to safety. Yields tested lower on Wednesday and Thursday, but bounced on Friday.¬†The challenge is each time rates attempt to move higher bond buyers push them down again? I would assume pressure from the Fed and some from foreign money moving to safety, but the pressure on yields to rise is mounting and worth our attention. Watch TBT as opportunity again.
  • Coffee (JO)¬†moved¬†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.¬†Big gain early Friday, but turned to loss by end of the trading day. Watch and look for upside growth.
  • Short Crude Oil (SCO) was up again as crude is now testing $97¬†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. Geopolitical pressure remains in play and a strong dollar are keeping pressure on the price.
  • 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 tested lower. It did bounce off the $94.25 support to close above on Friday. added to QID on the move (see pattern trading table). I am watching how the large cap index responds to the recent selling and test of support. Still trading above the 50 DMA and thus need to manage the short trade aggressively.
  • Volatility Index (VXX) jumped 8.3% on Thursday with test lower and closed higher on Friday. The¬†lethargy is officially gone at this point, but we have to see how the sentiment shift finishes this week. ¬†This can reverse as easily as it rises day to day. Focus and manage the risk of the markets accordingly.

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


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

Sector Rotation Model (updated Р8/1/14)

ONLY ETF Model (updated Р8/1/14)

S&P 500 Index Model (Updated Р8/1/14)

ONE EGG Model (updated Р8/1/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. Are we setting up for a bounce off last weeks selling? That would be the predictable course of action and with the major indexes at key support levels the probability is yes. Thus, two setup trades for today…
  2. QQQ – entry $95 on reversal bottom started on Friday. QLD is leverage trade ETF. ($116 entry)
  3. SVXY – entry $74.75 on reversal bottom. Initial target is $78 and then $82.
  4. Both are trades on a bounce nothing more.

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 $34.80.
  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 $16.50.
  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. ¬†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.¬†Stop $47.50. both positions
  4. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  5. 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. HIT STOP
  6. 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.

Long Term Opportunities:

  • NO current positions in Facebook (FB) – see note page for history.