Trading Notes for Today, August 8th

Notes for Trading: 

The markets open on Thursday to the upside and looked prepared to rally, but it only lasted an hour before the sellers took their shot and the index faded to test 1905 on the low of the day and closed at 1909. Most traders are expecting the market to bounce from the oversold technical indicators, but investors are building a different attitude with the issues in Russia, global economic weakness and threat of higher rates from the Fed. The worries are sticky this time around and for now the sellers have control. How low do we go? That is still up for debate. The use of stops for predetermined exit points, discipline on any positions added and a confirmation of the move lower will introduce the short side of the market as a longer term possibility. The bottom line is to be patient and manage the risk of the market. Remember cash is still a sector.

News to Note Today:

  1. US Approves airstrikes in Iraq. This article points out the hows and whys, but the implications to the market was to push the futures lower into the start of the trading day. Iraq was one of the back-burner geopolitical worries facing the markets… It is not boil and impacting trading.
  2. China’s exports rise well above the forecasts. Up 14.5% and well ahead of the 8% projected pushing the indexes higher in China. Watch the impact to FXI today as it has been selling along with the global markets this week.
  3. Nikkei was down 3% overnight on the news above about airstrikes approved in Iraq. I know it doesn’t really effect Japan, but investors don’t like uncertainty in any country. This is worth watching into Monday’s trading. EWJ is down 4% the last two weeks as the yen has gained strength. Flight to quality similar to the US markets.
  4. Gold is higher pre-market with the Iraq news adding to the pressure from Russia. GLD should open at or slightly above the $126.50 breakout point.
  5. Crude oil is up to $98 per barrel on the Iraq news… makes sense with the exports from there now coming into question along with Ukraine. Exit points on DTO likely and watching the long side if crude holds above $98.

Sector Notes: 

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

  • Russia remains a talking point on the day as Putin enacts his own sanction again the US and Euro Zone. Little impact to the country ETF RBL. RUSS gained 15% the last two days and the sellers needed a rest today to count their gains. The decline a trade and we would keep 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.
  • Volatility index is back on the upside as the VIX gains 2% and moves VXX up more than 2% and UVXY 2x leverage up 4.3%. The upside is gaining some momentum and may allow us to hold the positions for more than a day.
  • Small Caps (IWM) the short interest rose last week and the ETF tested the $110 support level on Friday. It has been volatile intraday, but has not managed to break back above the $112.50 level or below teh $110 level. 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 as the trend. (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 2% gain the last two days 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)

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 – 8/6/14) –
ONLY ETF Model (updated – 8/6/14) –
S&P 500 Index Model (Updated – 8/6/14)
ONE EGG Model (updated – 8/6/14)
Monday Trade Opportunities:
Trade Opportunities:
  1. Negative setup on the Iraq news from the White House. Watch and manage your risk.
  2. SDS – entry $26.65. bottom reversal. Selling activity picking up 1900 level will be in play on the index today as downside now in play.
  3. GLD – entry $126.50. 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.)
  4. SOCL – entry $20.15. cup and handle pattern. Held up well in the selling last week.
  5. FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week.

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 – Entry $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. ADDED shares on 8/7 – $73.15