Trading Notes for Today, December 16th

Notes to Note: 

Nice open reverses after first hour of trading and broad indexes continued lower on Monday. Today is looking mixed towards the open. Gold is down nearly 1%, crude oil is down 3.1% and that is pointing to more bumps for the markets overall. We have to manage our stops and take what unfolds moving forward.

The yield on the 10-year bond remains under pressure as investors look for alternatives closing at 2.1%. The movement to bonds is an indication that investors are looking for safety or a hedge to their portfolios going forward. Equally the thirty-year bond TLT hit $126.04 and the yield on the bond resides at 2.74%… down from 3.1% on November 6th. Big move tells the uncertainty level in the markets currently.

The NASDAQ closed down 47 points or 1.2% to start the week. Yes, volatility remains at work in the broad index. We have discussed the potential test to the 4611 level near term and we hit that on Monday closing at 4605. Semiconductors and small caps failed to hold up for the index and biotech dumped 2.7% on the day. We discussed the two inside trading days on Wednesday and Thursday of last week, the break lower Friday established the downside as the direction of choice currently with the confirmation on Monday.

The S&P 500 index closed at 1989 and confirmed the downside break of the 2018 mark on Friday. Energy, basic materials, telecom and industrials are leading the downside, but financials, healthcare and technology are joining the forces on the downside. We closed below the 50 DMA confirming the sellers taking control currently. 1983 support in play, but the 1967 mark may be the next stop.

The Russell 2000 index was in the 1153 to 1190 trading range and closed at 1140 Monday. That takes out the 50 and 200 DMA. What is the next step? 1097? Not out of the question in the current environment. 1120 is the next level to watch.

The Volatility index reversed off the lows at 11.5 on December 8th and pushed to an intraday high of 24.8 on Monday. This shows and validates the uncertainty in the markets currently. It is worthy of note on Monday that the index did not accelerate higher on the selling. It did have one interesting looking chart on the five minute chart however. Watching to see how this unfolds tomorrow.

Dollar closed at new high last 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.

There are plenty of issues, worries and speculation for all, and they remained in play on Monday. There is still the need to let it unfold one day at a time and let it work through the process and validation. The break of support on the S&P 500 and NASDAQ index keeps the downside in play. Looking for confirmations and opportunities, but also aware of the time of year it is and potential for a bounce and run into year end. Thus, we will take an aggressive approach (where we get in and out of trades, not risk) to how we enter and exit any trades going forward.

Economic News for the Week:

Empire State index turned negative for December down 3.6. Industrial production rose 1.3% and better than expected. Homebuilders index dropped to 57 below expectations. Again the data remains mixed for the economy as we continue to filter through the data.

The producer price index dropping 0.2% as a result of cheaper oil prices, and the consumer sentiment jumped to 93.8 much better than expected. The consumer continues to hang tough and optimism springs eternal. The early benefits of cheaper oil on both accounts… but, analyst are equally as worried about the longer term impact to the economy. We will see how it all plays out going forward.

Retail sales numbers were posted and they were better than expected… up 0.7% and auto sales were up 1.7%. All around positive numbers and better than expected even with the weaker Black Friday numbers. Still optimism swirling about the holiday sales and we will see how that unfolds, but not until January. The good news did help push stocks higher in the morning.

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

* Tug-o-war over as oil prices continue lower. The speculation that OPEC would fold has not materialized and the lower oil travels the more nervous investors are getting. Plenty of pontification on how this will be destructive to the global economics, but there are no real facts on the outcome or destruction levels.

* The Fed is moving back center stage starting tomorrow with the FOMC meeting… last one for 2015. Not much is expected to change as everyone continues to drink the Kool-aide that all is well in the US economy.  The discussion on interest rate hikes is on the table, but no definitive timeline currently. Any guidance will be greeted with interest and not likely positive interest. 

* Commodities across the board a causing havoc for global markets. This is not just speculation, but potentially can be destructive to the economics of countries like Canada, Australia, Brazil, Russia, etc. where a big share of their GDP is derived from export of commodities. The lower prices do impact the revenue base of the countries and all that ripples through that theme. This remains the primary issue facing the markets going forward and the uncertainty of the events unfolding is pushing stocks lower in response.

What to watch this week…

Being that the indexes closed with a solid move lower on Friday we have to watch for a bounce or attempt to bottom short term. Look for doji candlesticks and the key retracement levels on Fibinocci charts. We could get additional swings lower, but I would be inclined to believe we start to see a base build even if it is only for a week or so and then bounce into the new year. Watch how the leaders respond this week… healthcare, semiconductors, biotech, drugs, and retail. Sold on Monday, but not bad enough to say they are done… patience.

Crude followed through with another 4.1% drop on Monday to follow up on the 12.9% drop from last week, leaving crude at the $55.35 mark. The sector (XLE) declined 0.9% for the day in response and continues to confirm the downtrend. Remember the simple rule of trend analysis… Short the rallies in an established downtrend and that has been exactly right currently. Looking at the chart this downtrend started in July for the stocks and it has not held on to a rally attempt since. ERY is the leveraged short trade. SCO is the short oil trade. Plenty of speculation to continue the downside near term.

Natural gas had been declining, but did find a bottom and holding. $19.50 is the level to clear for the based to break higher. The pressure from oil is overlapping towards natural gas, but patience here will likely be rewarded on the upside. Supply data continues to show draw downs keeping the hope alive that prices will rise in response. UGAZ is the leveraged upside trade and $9.55 upside trade entry. Watching to see who wins the tug-o-war.

China gave up the gains and moved back to the bottom of the up trending channel. This could give another upside trade opportunity and one to watch going forward. We will keep this under review this week for a trade. Watching how China trades overnight.

Semiconductors (SOXX) stops are $91.50 on trades and they were hit Monday. Watching to see how it responds to the recent selling.

Retail found some good news and XRT is holding above the $90 level for now. I still like the parts better than the whole for making money in the sector. Look at FRAN, BURL, PETM and PLCE from Monday’s trading.

Small caps (RUT-X) tested the 1153 support level and closed at 1140 Monday. Posted TZA trade below on Friday and still like the short side follow through, but be aware of the surroundings if this bounces with broad markets.

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 IBB support is $297.25. MONDAY: Fell right to the support level and that deserves a response from investors early in trading.

Technology (XLK) took out the $40.95 support. Downside in play currently on the move. TECS is leveraged short trade on sector.

Volatility Index (VXX) The spike higher is on watch. Got an early fade, but it rallied back to push VXX back to high. Still watching how this unfolds as the volatility intraday chart shows unique move. Watching futures this morning.

Emerging markets (EEM) short trade set up last week and followed through. Closed at  the next level of support on Friday and a broke lower on Monday opening the short trade. EUM.

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 TODAY: Adjusted our stops and letting this play our short term as the market takes its lumps.
  • Retail (XRT)  the sector was to take on some leadership into year end with earnings as the catalyst. 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 in the parts. TODAY: Tested back near the $90 mark and held this week. Volatility picking up and we have to manage the outcome short term.
  • 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. TODAY: Tested and broke broke lower. Raised our stops and we will see how it unfolds this week.
  • 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. (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: Testing lower and we need to manage our risk relative to market overall. Holding our stops to give some room for volatility.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o Strategy as a trade on the Fed intervention into the keeping rates low again. Some topping signs returned and watching how it plays out near term. MONDAY: Hit stop on the downside move and took exit from the position.
  • 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: Broke the 200 DMA on price, but still above the stop… Manage your risk and honor your stops.
Watch List Opportunities:
  1. S&P 500 Model – udated
  2. Sector Rotation – updated
  3. ONLY ETF – updated
  4. Pattern Trade Model – updated

Pattern Trade Setups:

  1. Downside exerting itself and stops are hit on positions as we move forward. Added to the short trades on Monday and watching how this unfolds. As stated in the video updates last night the uncertainty has led to selling and speculation. Stick with the broader indexes for now now the reversal and we will drill down if this proves to be sustainable.
  2. SOXS – entry $15. Bottom reversal. Watching for the confirmation of the selling in the sector short term as trade. $17 target and we will manage the position on move.

Pattern Trade Tracking:

  1. TZA – entry $13.80. Top of trading range. Cheating entry on this slightly as a couple of the indicators point to this level technically. $14 is the breakout and other option for entry. Stop 13.50. (ADD on break above $14 – Added 12/15 second positions at $14)
  2. QID – entry $40. Bottom reversal. Selling is picking up in the technology stocks and if they break support short term will accelerate downside. Stop $39.50 (Add on break above $41 – Added 12/15 second position at $41))
  3. SDS – entry $22.95. Double bottom confirmed with break higher. This is a trade on the current volatility in the market. Stop $22.50 (add on break above $23.50 – Added on 12/15 second position)
  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. HIT STOP
  5. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.95
  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. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $31.50 HIT STOP
  8. 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
  9. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  10. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  11. MCHP – entry $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. HIT STOP
  12. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  13. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  14. 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.
  15. SOXX – entry $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 – entry $82.50 (added 2.5% 10/24) same stop on all. HIT STOP
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.