Trading Notes for Today, December 17th

Notes to Note: 

Nice opening rally off the early lows for the broad markets as oil prices rose above the $56 mark. Oil turned lower and the markets joined in and forfeited all the early gains. The market is centrally focused on oil prices and what it may mean for the economic outlook. IF and that is a big if, the price settles the market looks poised to bounce. Year end, holidays, window dressing, etc. are all reasons for a bounce, but patience is a reason not to speculate on one.

It is important to note the selling has not hit the panic button yet. It seems unsettling as the downside has been orderly, but we have to watch how it unfolds… maintain stops on positions and let the story unfold versus attempting to tell the ending before you know.

FOMC meeting today and that will bring more speculation to the table. Not expecting much from the Fed, but that is always a dangerous assumption when there is mild panic globally about the forecasts.

The yield on the 10-year bond remains under pressure as investors look for alternatives closing at 2.07%. The movement to bonds is an indication that investors are looking for safety or a hedge to their portfolios going forward. TMF or TLT are leading the way higher as a result of the decline. FOMC meeting tomorrow and it will likely have some impact near term.

The NASDAQ closed down 38 points or 0.8% adding to Monday’s break of support at the 4611 mark and closed at 4567. Yes, volatility remains at work in the broad index. The large cap NASDAQ 100 index fell 1.2% as the selling in large cap tech, internet and pharmaceutical companies hurt the index on Tuesday.

The S&P 500 index closed at 1976 adding to the downside break of the 2018 mark on Friday. Energy, basic materials, telecom and industrials are leading the downside, but financials, healthcare, consumer services and technology are joining the forces on the downside. 1967 is the next support level and based on the willingness to dump stocks currently it should be long. Watching for a base of bounce before we take on any additional risk in the broad markets.

The Russell 2000 index attempted to lead on the upside, but in the end failed to hang on to a solid move higher. The index is still at the 1140 mark and looking for some help on the upside short term, but that has not materialized.

The Volatility index jumped to a high of 25.2 Tuesday and showed the worst may not be over yet.  The more the media hypes the issues with Russia, the threat of default and economic impact the worries will only continue to grow and the market is poised for more downside. VXX still in play. Manage your stops accordingly.

Dollar is taking some heat from the market and broke the $23.35 level on Tuesday and challenging the uptrend. Watching the current weakness with interest as the FOMC meeting concludes tomorrow.

There are plenty of issues, worries and speculation for all, and they remained in play on Tuesday. 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:

Adding to the worries on Tuesday with the housing starts coming in weaker than expect and lower than October. The Markit flash PMI was not in line with last month either and moved lower. Data isn’t helping thus far as the focus still remains the price crude oil… but, we do need the economy to improve… not remain flat.

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. I think Russia has a better chance of winning the Nobel Peace Prize than OPEC giving in personally. 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 that can be validated.

* The Fed is moving back center stage starting Wednesday 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…

The downside confirmation for the broad markets remains in play. So far I am going with a correction or test lower in play, either way the market is moving lower currently. Let it confirm the move and add your downside positions one at a time.

Crude followed through with another 4.1% drop on Monday to follow up on the 12.9% drop from last week. Tuesday, we can rest easy as the price rose to $55.98 up 7 cents. Let the rally begin!  The sector (XLE) was higher by 0.9% for the day in response and continues to show a downside bias. 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. Tuesday again put an end to the push higher. UNG is testing the $18.39 support level and looking for more help to avoid breaking lower. 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. Patience will be rewarded eventually.

Semiconductors (SOXX) stops are $91.50 on trades… hit Tuesday. Short side looks attractive, but need to confirm the move lower with some follow through near term. SOXS $15.20 entry?

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 CVS, SPLS, RAD, and LE on Tuesday’s trading.

Small caps (RUT-X) tested the break lower to the 1140 mark Monday and closed at 1139. Wanted to bounce on Monday, but failed to hold the move and now watching to see how it unfolds going forward. If all else fails this will accelerate to the downside. Be patient.

Biotech (IBB) failed to hold support at $297.25 and that confirmed some short opportunities for Monday trading. Watching BIS as opportunity to trade the downside. $49.15 entry on the stumble works.

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

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. attempted to bounce early, but failed and posted further downside.

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 HIT STOP — took the exit.
  • 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 hit on Tuesday and took the exit.
  • 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. HIT STOPS on Tuesday and took the exits.
  • 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. HIT STOPS Tuesday and took exit.
Watch List Opportunities:
  1. S&P 500 Model – updated
  2. Sector Rotation – updated
  3. ONLY ETF – updated
  4. Pattern Trade Model – updated

Pattern Trade Setups:

  1. Stop are hit and the selling returned after another positive open. The futures are pointing higher again today… starting to feel like the boy who cried wolf… can we hold a bounce through the trading day? Oil is pointing lower and the FOMC meeting concludes today, should be fun for everyone.
  2. Scans are turning up some interesting trade setups, but the risk is elevated. Willing to let some of this calm and play out before we put more money at risk.

Pattern Trade Tracking:

  1. 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. Stop $14.75.
  2. 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)
  3. 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))
  4. 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)
  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. 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
  8. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  9. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  10. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  11. 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.
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: 
Tuesday took it’s toll on the positions and we will watch to see how today unfolds relative to the support, and hedging further any movement on the downside. The opportunity will be on the bounce once the noise settles and some clarity returns.
  • 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.
  • 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. Small range as market keeps stock in check.