Trading Notes for Today, August 7th

Notes for Trading: 

The markets open negative on Wednesday, but immediately see buyers step in and push the indexes into positive territory. Nothing big on the downside, but the reversal was nearly 1% early, but it failed to hold into the close. The chop remains as investors continue to dance to the headlines and trade on emotions. The VIX index rose to 17.3 early, fell to 15.7 on the rally and closed near the 16.3 mark. Not big swings, but enough to keep the attention of investors and keep the volume on the low side again today. Plenty of issues still on the table as we work through the emotions of the uncertainty.

Sector Notes: 

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

  • Russia remains a talking point on the day as Poland made comment relative to the advances from Russia on Ukraine. RUSS gained another 6.3% on Wednesday to add to the 9% gain on Tuesday. The decline has been a good trade and we would push our stops near the $14 mark on the move. The uncertainty remains a challenge for the equity markets as it anticipates action by Russia. Downside risk remains in play and for now we take it one day at a time.
  • Volatility spiked¬†to 17.5 last week¬†as the anxiety rose relative to interest potentially rising sooner than later. It has traded between 15 and 17 this week closing at 16.3 on Wednesday.¬†Trading the volatility is getting choppier as the day to day swings build.
  • Small Caps (IWM) the short interest rose¬†last week¬†and the¬†ETF tested the $110 support level on Friday. Monday the ETF¬†moved to $111.66¬†and it closed at $111.38¬†Tuesday and $11.73 Wednesday after a move above the $112 level intraday. Watching for a possible reversal to lead the broad indexes higher, but that has not materialized yet. The good news is it has not sold lower either. Downside in play currently and watching. (SEE ONLY ETF Model for Trade)
  • 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) 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 tested the break higher with a follow through today. 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)¬†two days of selling takes out the support at the $40.30 mark. Flag pattern¬†breaks lower, but not much conviction in the selling.¬†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. (SEE ONLY ETF Model for Trade)
  • 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.¬†Selling on Tuesday gets our interest on the downside with a break of the $43.50 level. EEV is the short ETF for emerging markets $17.35 is the level of entry to watch.
  • Base Metals (DBB) is developing a trading range with the bouncing around in the metals currently. Still holding in the newly established range and watching for a resolution on direction.¬†$17.56 is support and watching to see how it holds near term. A break below would be the exit point.
  • Real Estate (DRN)¬†rolling top pattern broke and tested lower and testing support near the $58.50 mark. This is setting up the sell signal should it break lower. The uptrend line is being challenged and there is plenty to deal with short term.¬†Rising rates are putting pressure on the sector near term. Short side is definitely a trade possibility with a break of support. SRS is the short ETF for the sector. (SEE ETF ONLY Model for Trade)
  • Utilities (XLU) still showing weakness and tested the 200 DMA. Five days of selling and we broke¬†the $41.50 support level. Short side is building¬†interest¬†as the downside take root. SDP (short ETF) broke higher as a result, but no volume to speak of to trade it. Dec Puts on XLU would be best way to trade the downside. Took the short trade today on XLU as the downside accelerated through the 200 DMA.
  • Short Oil (DTO) reversed the positive gain from Monday in oil as the downside returned. There is a head-and-shoulder pattern in play and¬†the¬†break above $31.20 put the upside in play for the short fund. USO broke¬†the 200 DMA and¬†is in position to continue the downside move. $97.45 support broke today with close at $96.86 and could push to the next support at $95.
  • Gold finds buyers as the rumors of the Fed not timing the hike in rates correctly or the economy not being able to deal with the hike in yields and stalling going forward. That is a fancy way of saying the market is trading gold on inflation concerns. The 1.5% gain today was nice, but didn’t solve anything relative to the longer term outlook for the price of the commodity. A move above $126.50 on GLD would worth our attention short term for a upside trade.
  • Gold miners (NUGT) the bump in gold prices today help the miners move to the top spot on the day. I like this trade better if gold prices are going to hold up. Again this is speculation and the trading range is well establishe over the last four weeks with the uncertainty about the outlook for gold prices. (Silver dumped lower on Tuesday and it could get interesting if the price of gold holds up.) (SEE ONLY ETF Model for Trade)
  • Natural Gas (UNG) gained 1.2% on the day, but more importantly reversed the downside trend in play since June. Down more than 24% off the high the reversal is worth watching as natural gas prices look poised to regain some upside short term. Natural Gas stocks (FCG) has declined more than 20% on the move and is worth watching as this unfolds as well. It is summer… supplies have increased… but, the outlook is for prices to rise going into the winter months. Time will tell and watching for the confirmations on the upside are still in order. (SEE ONLY ETF Model for Trade.)

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

RESEARCH MODELS:
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated Р8/6/14) РAdded to Watch List
ONLY ETF Model (updated Р8/6/14) РAdded to Watch List
S&P 500 Index Model (Updated Р8/6/14)
ONE EGG Model (updated Р8/6/14)
Monday Trade Opportunities:
Trade Opportunities:
  1. Set for bounce off the recent lows with oversold technical data building. The fear factor is still present, but subsiding. Take what is given and don’t force the trades.
  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. (Gapped open and watching for the test of the move to establish an entry point.)
  3. SOCL – entry $20.15. cup and handle pattern. Held up well in the selling last week.
  4. FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week.
  5. TNA – entry $68.45. bottom reversal. Leader on the downside and setting up a bounce trade.

Pattern Trade Tracking & Follow Up:

  1. VMW – entry $100.50. trading range breakout and test. Upside value along with EMC. Stop $97.80. Use some patience on upside move.
  2. 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.
  3. 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.
  4. 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.
  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. 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:

  • 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.