Trading Notes for Today, December 11th

Notes to Note: 

Inventory data for crude rattle investors again and the intraday reversal on Monday became a selling day on Tuesday. This news is establishing a beachhead in the minds of investors. Simply put, investors are starting to believe the impact from the lower prices of crude oil will have a negative impact on the economic picture and the markets over time. It is difficult to believe this type of news and the far reaching impact, but as it gains clarity and ultimately reality, the selling tends to accelerate. Banks in 2007 were the same issue for the markets as it took four months to sink in and then the selling began. I am not saying the energy issue is the same truth long term, but it is gaining traction and believability with each report and story told relative to the impact, thus stocks sold in response Wednesday.

Crude falls to $61 on EIA supply data on Wednesday. Inventory rose 1.5 million barrels and much more than the 3 million decrease expected. As if that were not enough, OPEC stated it estimated less demand for its oil in 2015 to approximately 28.9 million barrels or 500k per day drop. Put that in the mix with the current production numbers of 30.05 million barrels per day from OPEC and you can see the reason for the drop relative to the projections. The demand currently is likely closer to the projections for 2015 than the amount produced. This is all feeding the speculation of what will be the fallout and impact of lower demand, lower prices and lower stock valuations? The worries all took their toll on the markets Wednesday and the question is how much more is there to come and at what price?

The yield on the 10-year bond fell again Tuesday hitting 2.16% and IEF was up 0.4% in response. The movement to bonds is an indication that investors are looking for safety or a hedge to their portfolios looking forward. The thirty-year bond gained 0.7% and TLT hit $124.10, the yield is at 2.83% and rotation to safety is still in play.

The NASDAQ closed up 82 points on Wednesday after falling 46 points to start the week. We discussed the potential test to the 4611 level near term we are making a run at it. Still watching to see how the near term unfolds.

The S&P 500 index fell 33 points and continued testing the move lower from last week. The low was 2026 on the day working towards the 2018 level we stated was a potential testing point.

The Russell 2000 index tested the 1153 mark Tuesday and then reversed intraday to 1185 and back near the 1190 break out point. Wednesday it gave most of it back closing at 1161. The trading range remains in play, but the volatility has elevated considerably of late.

The Volatility index made it’s way below 12 and tested the 11.55 support level¬†last week. The bounce back to 14.6 on Monday pushed the¬†VXX price off the lows as well.¬†We got a similar spike last week that faded by week-end. That has not happened this week with a close at 18.5 on Wednesday.¬†Uncertainty continue to rock the confidence of investors.

Dollar closed at new high Friday, but has¬†tested lower¬†this week, but holding¬†the $23.35 support. Stronger dollar is a positive, but more than enough analyst, politicians and economist want it to drop again. Not so fast… you cannot devalue your way to a strong economy! It has never worked in history and it isn’t likely to begin now.

Economic News This Week:

One key leak from Europe on Wednesday was a memo being leaked that Draghi doesn’t have approval now for bond buying stimulus to start in January. That impacted the sentiment as well and it too Europe lower as IEV fell 1.1%. If the rumor is true this will have negative effect on prices in European stocks going forward. As with any news this would have to be validated to be true and what other stimulus may take place in Europe.

Not much in terms of news that is market moving, but Thursday is retail sales data and could have an impact on the retail sector going forward. Expectations are for only 0.4% growth in November. This is one to watch.

Jobs report on Friday showed 321k new jobs added in November, but it has little impact on the markets overall as the quality is an issue relative to economic benefit. Economist however, raved about the results, politicians raved about the news and the markets yawned. This is a data point to watch next week for some after the fact response. There was plenty of data that was not as attractive as the top line number. Consider the participation rate remained at 62.8% and worst since 1979! Underemployed was at 11.4%. After six years of stimulus we have created exactly 2 months with more than 300k jobs added, Reagan period recovery produced 23 months by comparison with one adding over 1 million jobs. Not to mention less population. System is broken.

What to watch¬†this week…

Crude oil moved to $65.84 and below the $67 mark again. XLE made a move back to $82 level failed and tested lower to end the week. This would lead me to the belief that a base may build in the sector before any definitive direction is decided. Clarity relative to oil prices is needed in order for the stocks to rebound accordingly. The IEA inventory data for crude showed a decline of 3.7 million barrels Wednesday, better than expected, but crude managed to close lower on the week. Until some clarity arises in oil and natural gas we will let this play out and then determine the best opportunity going forward. Anything else would be speculation and too high risk.

WEDNESDAY:¬†Crude followed through with another 4% drop on Wednesday to go with the other bookend from Monday’s 4% drop leaving crude near the¬†$61 mark. The sector (XLE) follow suit with a¬†drop of 3% as well. The stall on Tuesday proved to be no shift in direction or momentum for the commodity. Remember the simple rule of trend analysis… Short the rallies in an established downtrend. Tuesday didn’t really qualify as a rally, but it felt like one after the size of the drop over the last month. Looking at the chart this started in July for the stocks and it has not held a rally attempt since. ERY is the leveraged short trade. SCO is the short oil trade. Didn’t get the additional¬†bounce before we establish more¬†downside¬†to the sector and the commodity. Short still in play.

Natural gas is falling further with UNG dropping below support at $19 on UNG last week. The short trades were plentiful, but it did manage a bounce on Friday to close back above the $19 level. This begs the question on direction? Up or down? EIA report is released again Thursday and could have a better impact than last week with another draw down in supply. Warmer weather projections for the next week plus has prompted the decline in the commodity and validates that speculation rules over data for now. Watch tomorrows report for how it will impact the commodity going forward. Potential trade setup based on how it unfolds.

WEDNESDAY: Attempted to bounce again from the selling from Monday and added 1.7% on the upside. However, the downside is still in play, but attempting to bottom the last few days. KOLD is the short trade ETF for natural gas, break of $18.25 on UNG would be the confirmation for the short entry. UGAZ is the leveraged upside trade and $9.55 upside trade entry. Watching to see who wins the tug-o-war.

China continues to produce bad economic data. But, the country ETF continues to push higher with plenty of volatility, but higher nonetheless. The drop of 2.7% on FXI Monday shows the volatility in the country ETF and struggle to gain any upside traction. That said, China was up more than 6% the balance of the week and just shy of the September high. The upside is in play if you can stomach the volatility of the move.

WEDNESDAY: Bad news on the lending front for real estate sends the country down 3.5% Tuesday and dropped 1% on Wednesday. The move higher was extended and broke lower similar to the last two drops in the current uptrend. Opportunity? It held the 30 DMA and could bounce off a move back to the upside in trading today.

Semiconductors remain a leaders for the broad markets, but they look extended and we are raising our stops to manage the risk of the position. Ride it as long as it retains momentum, but protect the downside risk.

WEDNESDAY: Tested along with the broad indexes. The selling resumed on Wednesday with the broad markets reacting on the downside. Watching the $92.50 mark to see if any support? Respect the downside move and keep your stops in place.

Retail is suffering at the hands of an 11% drop on Black Friday sales. I think this is going to shift to be a stock picking sector going forward. The bloom is off the rose, so to speak, with the drop in sales. Now it is time to find the winners and the losers. TRIP, OWW, SAH, OUTR, KMX are some that show upside promise. The key is to watch what the sectors and the data is telling you to find the best opportunities.

WEDNESDAY:¬†Moved to test the $90 support level and held again on Wednesday?¬†Watching the topping formation and scanning the stocks for leaders.¬†The $90 level is the stop. Auto supply component has been keeping the upside in play… they gave back some of the breakout move from Tuesday… watch and see it they can hold the course in this selling near term.

Small caps tested the 1153 support level and the focus has shifted to the break through the 1190 level on the upper end of the range. Break could offer an upside play or you could find the leadership and trade that as well. IBB is one of the key leading parts of the index. Remains in a defined trading range.

WEDNESDAY: Go figure the Russell 2000 was off 1.2% on Tuesday and rallied back to lead the back near the 1190 level at the top end of the range. Wednesday it sold down 2.1% to land at 1162 and making a move back to the 1153 support level. Flip a coin and see which direction wins at this point. We will be patient and see how it unfolds near term.

Biotech still leading the upside, but IBB and XBI are showing some topping. Need to see a follow through on the upside if the leadership is to continue. One to watch this week.

WEDNESDAY: Consolidation in the sector remains with a wedge or consolidation forming near the highs. Watch to see how it plays out.

Technology needs to step up and take back some leadership other than the semiconductors. Internet (FDN), Social Media (SOCL), Software (IGV) and Networking (IGN) all need to step up the game. All are worth digging into the ETFs to find the leadership within each.

WEDNESDAY:¬†Got some downside leadership on Wednesday with a drop of 1.5% and another test of support at the $40.95 mark. Break is exit point for trades and longer term assets will use the 50 DMA. IGV is the first to break a key support level… watching to see how the others progress today in trading.

Some thoughts on news/events and statistics impacting investor psyche:

* Tug-o-war over oil prices and the impact to the global markets and economy. Too much speculation on the outcome when no one really knows. Oil prices, stimulus fake outs (Europe) and Greece are all in the headlines.

* The positive economic data last week did not produce much in terms of a positive upside for stocks. If there was a delayed reaction this week ot was negative. The reality is the market is looking forward and the data was looking backwards. Investors are uncertain of the outcome that crude oil will bring and speculation leads to volatility intraday and longer term. Watch for more positives to develop as we push towards year end.

*¬†OPEC and Russia stance on cutting oil production remain an issue. It has shifted to the back burner for now, but it will be watched through the supply data and the price of crude going forward. Due to the weekly release by the EIA on supply, the temperature isn’t likely to get too warm any time soon. Consensus believes that OPEC will cut output over the next 1-6 weeks to help the issues with supply. Too much talk and speculation and not enough action or fact.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes. Not much is expected until the December 16th FOMC meeting, but they are speaking and pontification about the economic picture as well as their intent towards rates and stimulus. The discussion on interest rate hikes is on the table, but no definitive timeline currently. Next week is the FOMC meeting.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward. Big spike higher to end the week. Take a moment and look at the month chart of the Dollar Index (DXY) not the eleven plus year consolidation wedge breakout and the topping near resistance currently. The dollar could be on a multi-year rally as the global markets deal with stimulus efforts and devaluation of currency. China, Russia and Europe have all forfeited considerable ground to the buck and we are going to see more before it is over.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and followed through. Added to the S&P 500 Strategy¬†Retail move higher on earnings and is now testing on sales data. (posted to the Sector Rotation Strategy) TODAY:¬†Sells to $69.85 and $69.25 is the level to watch going forward as this unfolds. I would use that as exit point for trades and 50 DMA for longer term positions.¬†The anxiety relative oil and global economics has created a rise in volatility and thus the swing lower.
  • Retail (XRT) we are looking to the sector to take on some leadership into year and earnings were the catalyst thus far. Break above the $90 level was the entry point for the sector ETF, but take time to scan the holding and you will see some great pattern breakouts last week. Sales data disappointing to Black Friday? putting pressure and testing the support.¬†TODAY:¬†Tested back near the $90 mark and stayed? Honor stops at the $90 level on this move. Volatility picking up and we have to manage the outcome short term.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. The move has been steady, tested and challenged, but still trending higher.¬†Manage your stops.¬†TODAY: Hit¬†$125.80 support and exit point. No bounce¬†on Wednesday, but the short term exits are here. Still watching the 2018 mark as key support.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was¬†lagging as the earnings and outlook were not attractive to investors. (S&P 500 Strategy) Stops at the $23.70 ¬†ish level to¬†manage the risk. Nice break higher on Friday and worth adding if we hold the move. TODAY:¬†Tested¬†and broke¬†the 10 DMA and $24.30 is level of support we need hold short term . Manage the risk.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and got the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation on the chart. The upside follow through as been the consistent leader for the broader index. (We own XLV in the S&P 500 Strategy) First sector to recapture the September highs¬†and set the pace for the upside to continue. TODAY: Broke¬†the 10 DMA and¬†looking for the 30 DMA to hold for support. Manage your risk short term.
  • Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.) Hit the entry point and upside remains¬†in play with a new high and… watching how it unfolds this week. TODAY:¬†Tested lower and now we see if that is all their is on the downside or it just a sign of what is on the horizon. $92.50 support… manage the stop.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Some topping signs returned last week and watching how it plays out near term. TODAY:¬†Watch for move back above the $77.25 mark. TODAY: Back near the highs as this environment attracts investors looking for safety and dividends.¬†Holding in the trading range near the highs… manage the risk short term.
  • Preferred Stock Index (PFF) broke above the $39.50 level and rose nicely. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Strategy. TODAY:¬†Testing the 200 DMA on price and still above the stop… Manage your risk and honor your stops.
Watch List Opportunities:
  1. S&P 500 Model – Watch list updated.
  2. Sector Rotation – Watch list updated
  3. ONLY ETF – Watch list updated.
  4. Pattern Trade Model – updated
  5. 401k Update Posted for December.

Pattern Trade Setups:

  1. Selling sticks in trading on Wednesday and puts every one on guard as the unbelievable is starting to be believable. Uncertainty in play with the VIX jumping to 18.5 on the day. Missed our entry with the gap higher.
  2. FXI – entry $40.20. Test A, B, C, D pattern. up trending channel in play. plenty of volatility in the country ETF. Trade only if you can handle the ups and downs.
  3. TNA – entry $74. inside day within range. Bounce back to the 1190 level or beyond for the index. Set up technically is positive, but negative trading day overshadows on Wednesday.
  4. SVXY – entry $68.25. Positive reversal as some uncertainty about oil comes out of the sentiment. Trade to $74 and take the profit.

Pattern Trade Tracking:

  1. KBE –¬†entry $33.85. Banks ready to break higher. The sector has lagged and could resume leadership. Stop $33.
  2. NWSA – entry $15.80. double bottom. Base is ready to break higher with target of $16.80 initially and not much resistance on the move. Stop $15.30
  3. INTC – entry $37.70. Pennant. Continuation of the upside move in place. Semi’s continue to be a leader for the broad indexes. Stop $$36.40. (big test lower on the gap lower open) Still like the upside. HIT STOP
  4. BSFT – entry $28.10. flag breakout. The follow through on the move higher is the entry point. Could run back to the $32 high from February. Software sector is in position to break from consolidation pattern as well. (IGV) Stop $28.10.
  5. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.50
  6. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $37.50.
  7. DIA – entry $178.80. Breakout top consolidation. Follow through on positive move Tuesday to new highs and leadership in broad indexes. Stop $176.50. HIT STOP
  8. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $54.
  9. MU – entry $34.70 (bought higher than posted). Trading range breakout. ready to establish a new high. Breakout is positive for the sector and the stock. Stop $34.70
  10. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $28.90
  11. JNPR – entry $22. Triangle. downtrend will be broken as well on a breakout and follow through. Leading the network sector higher currently. Stop $21.30
  12. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
  13. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  14. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  15. MCHP Рentry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap. Added position and Stop is $43.65.
  16. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  17. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  18. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive. Stop $23.70.
  19. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $142.00. HIT STOP
  20. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday Рentry $125. (10/27) Stop $137.90. HIT STOP
  21. SSO – entry $107.60. bottom reversal.¬†Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside –¬†entry $$117.10.(10/27) Stop $125.25 on all. HIT STOP
  22. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $91. Break above resistance (82.30) good point to add to position. Added to position Рentry $82.50 (added 2.5% 10/24) same stop on all.
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: 
Some positive moves in all the positions with Bank of America lagging currently. We continue to be patient and hit some stops on the hedges we added. That concludes the upside has returned at least for the near term. Remember we are looking long term and we have to ride out the volatility periods as the develop.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning¬†were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Still trading sideways as investors sort out the facts and fiction. Added Dec $75 puts @ $3.50 – 10 contracts.¬†Hit stops on the puts at $2. move on the upside reversal has been a welcome site as it bounced off the trendline.
  • Twitter (TWTR) – ¬†Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)¬†Broke down and trading lower, we exercise the put if no bounce. $36 is potential support. Watching how to trade this near term.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks are finally gaining some ground and I like our position currently.¬†We add our long positions in stocks back as held support¬†and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15.
  • Whole Foods Market (WFM)¬†11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position. Finally got the continuation breakout on the upside short term.