Trading Notes for Today, December 19th

Notes to Note: 

Markets¬†gap open and money flows in on the Fed comments. Two days of help from the Fed and we are pushing the previous highs. Plenty of talk about the hedge fund buyers and the desire to get their numbers up going into year end. If there is any truth to that the upside is in play and the outlook is bright. But, this is the same market that was worried about the impact of the energy price destruction. That didn’t stop today as crude drop 4% into the close and below the $54 mark. Small after-hours bounce, but still no bright spot. The traders are in control for now and this could very well run higher into the year end rally. All the major indexes close with gains of better than 2% on the trading day and the upside is in play on the pivot point move off the Tuesday low.

The ten-year bond bumped to 2.2% and up 16 basis points the last two days as investors decide they like stocks and are buying. The movement to bonds has been an indication that investors are looking for safety or a hedge to their portfolios Does this mean the move is over and all is well with owning stocks? Time will tell, but if the selling in the 20+ year bond ETFS, TMF or TLT are any indication, the downside may be visited short term. Yield on the thirty-year bond moved to 2.81%, but still long way to go back to 3%.

The NASDAQ closed up ¬†96 points on Wednesday and follows that Thursday with a 102 point gain and back to the 4746 mark. Remember the closing high was 4791 November 28th¬†. Gap open made any entries difficult, but for those who bought if was still up another 0.7% from that point.¬†Didn’t take the trade on the gap open and still watching now for the break through the previous highs.¬†(ONLY ETF Watch List)

The S&P 500 index closed at 2061 gaining 47 point on the day. This follow through from the pivot was great as everyone now likes stocks. The Fed magic at work again. Is it sustainable? Based on this activity you would have to say yes. Based on the reality profit taking looks good on short term positions. Pivot point reversal confirmation today puts the index in play on the upside. Gap open made entry difficult for our view and we are watching to see how it unfolds.  (ONLY ETF Watch List)

As we discussed in the webinar on Tuesday night if the rotation to the downside were to reverse it would need an event, catalyst or news to stem the downside acceleration, and the FOMC was part of the reason, oil holding near $55 was part of the reason and Russia becoming proactive towards the ruble was part of the reason… The next question is sustainable or temporary? For now I am going with temporary backed by some hope that the upside move¬†will improve the longer term view for investors, but hope is not a trading strategy, thus I am going with temporary and that leads me to short term windows versus longer term horizons. Shift in trading strategy currently to account for the volatility and uncertainty that is becoming sustainable short term (0-13 week outlook).

The Russell 2000 index was up¬†4.8%¬†the last two days¬†leading the indexes higher and setting the bar for other to follow. We have discussed the move in this index the last few¬†days showing signs of wanting to bounce and it did just that Wednesday and followed through on Thursday. Because there was nothing more than a hunch on my part we couldn’t trade it, but it did follow through and is now at 1191 above the 1190 resistance. There is a trade on the confirm break above the 1190 level today.

The Volatility index jumped to a high of 25.2 Tuesday and reversed to 16.8 on Thursday. The swings are getting bigger and Wednesday was a news driven move that could take the immediate uncertainty out of the market. Thursday was a nice follow through to take the emotions out of the trading. The move in SVXY has been positive with the reversal, but it is struggling to gain any respect from investors as a legitimate trading opportunity, but the S&P 500 index is moving higher.

Dollar (UUP) is taking some heat from the market and broke the $23.35 level on Tuesday, but bounced back to $23.60 on Wednesday and held the move higher on Thursday. The FOMC news helped as the threat of interest rates rising helped the buck.

There is¬†plenty of¬†speculation in the markets currently on both the up and downside. This puts the market in a trading mindset and if you are not like minded in your approach currently you are taking some jabs on the chin daily. I know… it has taken me a couple of weeks to shift gears mentally in my approach to this current environment. My belief was the uncertainty and choppy market¬†was not a sustainable cycle… but it is proving to be just that for now. The ups and downs are only lasting a few days and until that changes I have to adjust to shorter term holding periods and take what the market gives versus the mindset of it holding a trendline for a longer time period. We are making those adjustments in the strategies as well. This is the very process I talk about when I say let the market tell you what it is doing versus forcing your will on it. A few jabs to the chin will get you attention! The goal is to not get knocked out!

Economic News for the Week:

FOMC meeting was all the buzz on Wednesday and investors liked what they heard about next summer and the Fed playing nice with interest rates as the US and the world markets adjust to what is happening in the oil sector currently. Rally time for the market and everyone is happy at least for today.

Philly Fed was lower and in line with expectations. CPI shows inflation is still not a problem as oil continues to move lower. Leading indicators were below previous months, but still showing positive growth expectations. Weekly jobless claims at 289k and below expectations. Still plodding along economically and enough to keep the buyers happy.

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:

* FOMC meeting was catalyst for the upside on Wednesday…watching to see if the new unfolds into an event trading cycle for the market or short term upside/micro trend. Patience and focus are key short term.

* 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 had caught a “bid” accelerating into Tuesday’s close. The move in oil early and Fed talk later¬†created a pivot point for the indexes¬†that¬†now has¬†to validate a short term¬†move on the upside moving forward. Pivot point potential is what we confirm today?

THURSDAY: confirmed the upside move and held. Is this the supposed rally into year end everyone has been discussing… that is now a rally back to where we were prior to the selling. Upside off the pivot point is still in play and watching how it unfolds today as it is the last trading day of the week.

Crude was higher on Wednesday hitting a¬†peak¬†of $59 early which it failed to hold by the end of trading. The positive news overlapped into the energy (XLE) stocks moving up 4% on the day. This was follow through on the move higher on Tuesday. Thus, we have established Monday as the pivot point with a follow through confirmed. Thus, let the trading begin, all is well… right? This may be good for a trade, but anymore than that is purely speculation at this point. (ONLY ETF Watch List)

THURSDAY: Crude was down 4% or $54.11. Did attempt to move higher following the close. Going the wrong direction for the energy stocks to recover. XLE struggled all day with the up and down of the stocks and the commodity. We proceed with extreme caution in the commodity and the stocks. UCO could be bounce trade on Friday.

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. UNG is testing the $18.39 support level and looking for more help to avoid breaking lower as it pushed to $18.80 on Wednesday. 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. Largest natural gas producing stocks, XOM, CHK, EOG are ones to watch for opportunities on the individual stock level.

THURSDAY: News on inventory erased a nice early gain in both the commodity and the stocks. More draw downs in supply, but, you knew there would be BUTT in the news… warmer winter weather is still the rationale for selling into the inventory data. I will continue to watch as eventually something will com of this discrepancy. FCG fell from $11.93 to $11.41 or 4.2% off the high.

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.

THURSDAY: Reversal off the $89.40 ish support level. Shows pivot point, but needs to confirm the move and got it on a gap higher. The only negative was lower volume on the move, but solid nonetheless. SOXL needs to move above the $135.40 for trade opportunity.

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 Wednesday’s trading they followed through. Sector was up 2.4% and looking to clear the $93.50 move.

THURSDAY: Cleared the $93.50 resistance and entry point with gap higher. Making a come back on the comments from the FED? Interesting climb as money rotates again.

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.

THURSDAY: Got the bounce and ran higher off the pivot point low. 4.3% move last two days puts us back at the 1190 resistance point. Take it out and this gets interesting on the upside. IWM entry is $119.

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.

THURSDAY: Reversal and pivot higher closing back above the $297.25 on Wednesday and so much for the selling. The move back near the $316 high is within $3 now. Renewed leadership or just a bounce? IBB entry $$316.

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.

THURSDAY: like the other sectors found the low and pivoted back to the upside. Followed through and is testing the $41.75 resistance. Entry for XLK is $41.90. TECL is $141.25.

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.

THURSDAY: Reversal in the volatility on the Fed news. Sustainable? Trade-able yes, risk? Yes. SVXY is the upside trade short the VIX, but brings plenty of risk with it. Gap open… small test… held at the $64.50 level on SVXY – watching to see how it fairs tomorrow.

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.

THURSDAY: Eight down days in a row… it had to bounce eventually. This is like watching the roulette table have eight red number in a row… eventually it has to black.¬†Cleared the $38.42 mark and looking for follow through and entry at $38.90.

Model Position Notes: 

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

  • 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:¬†Broke through the resistance and closed at $94.92 and at high. Watch and manage the risk of the trade.
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. Markets get the pivot point follow through and makes positive move higher on Thursday. There are plenty of bottom reversal moves on the charts and I am looking at the best opportunities going towards year end.
  2. VIPS – entry $20.65. pivot point reversal. Retail sector leader that sold off and is now putting in a current low and reversal. Taking the entry above the resistance point. $23 initial target.
  3. SOXL – entry $135 test. pivot point reversal in the previous leader is positive sign. I would like a test to the bottom of the bar on Thursday at $133 ¬†ish and take the lower entry, but if that doesn’t happen a small test to $135 will be good. Another gap open pass. Initial target $146.
  4. QQQ – entry $104.75. Pivot point reversal. A test back to the $103 mark would be ideal. However, a continued move through the next resistance is equally good.
  5. IBB – entry $315.30. pivot point reversal and resumption of the uptrend. Previous leader in position to run higher after test lower.
  6. IWM – entry $119. Trading range breakout. The sector has flirted with breaking through this resistance three times maybe it makes the upside move now. initial target $123.

Pattern Trade Tracking:

  1. NPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.95
  2. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $37.50.
  3. 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
  4. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  5. 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.
Wednesday bounced, helped keep the positions in good shape… now comes the issue of short term versus long term trading. Need to work through the noise short term to define what if any changes we make looking long term. Patience for now.
  • 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.