Trading Notes for Today, August 6th

Notes for Trading: 

The market¬†followed up Monday’s positive move with more selling and a break below the next level of support on the S&P 500 index. As we discussed in our weekend update, the sellers have control, it is just a matter of how far they are willing to take it. The buyers have stepped aside for now and buying on the dip may be 1897 mark on the index. The VIX index spiked back near the 17 level. This is all a result of news mixed with key reality data points and worry over the Fed. Nerves are exposed and we are willing to wait and let the clarity show up first.

Choppy markets create the challenge of clarity in the charts, clarity in the markets outlook and the investors unwillingness to take on undue risk. The selling on Tuesday was credited to the worries over the Fed hiking interest rates to start the day, but then there was the Russia/Ukraine issue that sent the market lower in the afternoon and yields back to their previous lows. Fear trumps interest rate worries. However, as we have seen in the past, fear dissipates and optimism replaces it in time. The interest rate worries will persist and have a high probability of sticking and taking the broad indexes lower. In the meantime this is creating a choppy market place and keeps us from taking on risk and managing our emotions. The scans and models are not designed for day trading and we will avoid any such posts. We will remain patient for now and see how this unfolds going forward.

Sector Notes: 

Below are some key notes on Tuesday’s events¬†and what we are watching looking forward:

  • Russia/Ukraine… the issue remains is what we stated last night and little did we know this would gain more clout based on the latest news. Sanctions are one worry, but the treat of war is another.¬†The Russia ETF (RBL) bounced Monday, but turned lower on Tuesday in response to the news. 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. hit the entry point on Tuesday for the trade. Remember trading in news event sectors carries a higher risk as you don’t know what will happen tomorrow. Making 9% on the day in RUSS would say take some profit off and let the balance run.
  • Volatility spiked¬†to 17.5 last week¬†as the anxiety rose relative to interest potentially rising sooner than later. The index fell to 15.1 Monday as the fear subsided on a¬†quiet day. Tuesday it jumped back to 17 as the sellers returned.¬†Hit stop on SVXY and entry on VXX. Trading the volatility is getting choppier as the day to day swings build.
  • Small Caps (IWM)¬†short interest rose¬†last week as¬†the ETF tested the $110 support level on Friday. Tested the last two days, but the upside ¬†moved to $111.38 on the close. This could be the indicator to show the worst is over short term? Markets are finding support? Waiting for the other shoe to drop? The downside is in play currently and we would need to see a reversal to change the outlook for now.
  • 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. Holding the support level the last four days and watching to see if this offers any opportunity.
  • 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 was the entry point with solid break higher. Unfortunately the volatility and uncertainty is driving the price up and down. Still like the longer term upside as the opportunity, but you will need to deal with the volatility of the commodity short term.
  • China (FXI or YINN) moves higher on Monday and is back near the previous high. Economic data from the services sector was below expectations and pushed the index slightly lower on the day. The upside remains positive and we may look at adding the position back based on the resilience in the country short term.¬† Watch for the next opportunity in the country ETF if the upside remains in play. The bias for China is on the upside. Clear some of the headlines around the world and the country ETF continues the upside trend.
  • Emerging Markets (EDC or EEM)¬†– we got¬†the break higher last week¬†in the sector and we again gave up the gains with¬†Argentina weighing on the sector as they default on bonds. Broke the¬†$44.25 support and hit stops Thursday. Bouncing back¬†and looking for a reasonable entry point based on the activity. Same as with China, global noise is weighing on the sector. Be patient the opportunity will come.
  • Base metals (DBB)¬†still gaining in the uptrend and bounced nicely following last weeks test. Hold and manage stops. Watching to see how this unfolds. I still like the upside here.

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 Р8/5/14)

ONLY ETF Model (updated Р8/5/14)

S&P 500 Index Model (Updated Р8/5/14)

ONE EGG Model (updated Р8/5/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. More selling compresses holding periods and position size. Still choppy and that keeps my bias towards the sidelines. Taking unnecessary risk isn’t smart trading.
  2. GLD – entry $124.55. falling wedge. economic and global activity favors a rise in price short term. Low risk trade with stop at $123 support.
  3. SOCL – entry $20.15. cup and handle pattern. Held up well in the selling last week.
  4. VMW – entry $100.50. trading range breakout and test. Upside value along with EMC.
  5. FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week.

Pattern Trade Tracking & Follow Up:

  1. QQQ – entry $95 on reversal bottom started on Friday. QLD is leverage trade ETF. ($116 entry) Stop $115.90 as took the QLD trade. HIT STOP – choppy mess.
  2. SVXY – entry $74.75 on reversal bottom. Initial target is $78 and then $82. Stop $75.90. Gap lower open (remember I remove my stops and let this play out during the day.) Sold at the $75.90 stop posted after open. Small profit as chop set the tone.
  3. 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.
  4. 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.
  5. 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. 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 $48.15¬†both positions. Nice gain on selling in broad markets.
  6. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  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.

Long Term Opportunities:

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