Trading Notes for Today, December 19th

Let’s hear it for the Fed! The FOMC meeting concluded Wednesday with comments from Mr. Bernanke with a positive view of the economy looking forward. They cut ten billion in stimulus and gave some guidance into next year. The meeting accomplished two things from my view, first, they took a step towards cutting the stimulus and two, they gave clarity in the direction the Fed will go taking away stimulus. Both helped investor confidence and the broad indexes rallied. Today we see if investors follow through on the positive response or if buyers remorse sets in. Manage the positions and additions to your portfolio with caution, there are plenty of surprises with the economy yet to come. My focus remains to be patient and take it one day at a time. We will focus on the short term trend and take what the market gives. If you have specific questions on any posts please forward them directly to Jim@JimsNotes.com.

Sectors to Watch:

  1. S&P 500 index held support at 1775 and the bounce on Wednesday put the index back at the previous highs closing at 1810. Can we hold and move higher going forward is the question? The response to the comments and actions by the Fed were quick and positive. We did not add any positions on the news and will now look at how it reacts or moves to the gains. Watching the top end of the range and a probable test of the move back near the 1800 level. Any additions would be a trade more than a belief in a continuation of the upside at this point.
  2. NASDAQ remains in the uptrend, closed at 4070 and back near the previous highs. This has been the stronger of the major indexes and will be key in how we proceed following the Fed’s stimulus decisions Wednesday. Technology and large cap stocks have been the leaders and both moved higher, but the index lagged the others on the upside response. Watching today for test of the move and a trade opportunity short term.
  3. Small Caps (IWM) was sitting on the 50 DMA and testing the $109 support level holding over the last week. The bounce pushed the Russell 2000 index back towards 1133 high on the close. The uptrend remains in play following the test. There was an opportunity to add to the IWM position on Wednesday, but we had not posted the trade. A test and confirmation of a move above the 1133 level is what I am watching today.
  4. Financials (XLF) moved held the $21 support and shot up to the previous high at $21.61 on the Fed statement and actions. The regional banks (KRE) and brokers (IAI) were leading the sector and that remained the case on Wednesday with the insurance stocks (KIE) jumping as well.  A test of the move and continuation through the previous highs would be of interest to add to our position.
  5. Energy (XLE) was tracking lower similar to financials and the reversal at support of $84.80 moved through the buy point at $86.15. The sector has been mixed of late and a test of the move and confirmation would be a good buy signal for energy. The refiners remain the strongest sub-sector currently.
  6. Technology was testing lower prior to the Fed decision and bounced back with a solid move. However, it was not the same end result as the move lower early in the day was off more than 1% when the news was released. This put the close in the category of laggard. Watch to see how it follows through today.  The semiconductor sector (SOXX) is leading the upside and followed through on the move above the top end of the trading range. Test and follow through above the $34.80 level is of interest.
  7. As we progress through the trading week the noise around the FOMC meeting has drowned out the rest of the data. The economic news on Monday helped the broad markets bounce off support and hold the uptrend into the Fed announcement on Wednesday. When investors and traders get fixated on an event the best course of action is to be patient. The news is out and it was perceived as positive and now we look to see how it plays out from here. I am looking for a test of the move on some buyers remorse and then a follow through on the upside through the first of the year. Be patient and let this unfold, today will be a little clearer at least concerning the Fed short term.

The models are focused on a short term view dominating the process currently. This week continues to focus on the FOMC meeting and the results. The news Wednesday put the buyers back in control and today we confirm if they want to be in control going forward. My focus remains to let this unfold and then take what the market offers. I am adding a couple of plays that the entries are based on a test of the move Wednesday and confirmation of the upside reversal off the test lower the last two weeks. The bounce off support was helpful to calm the nerves earlier this week and the jumps back to the previous highs on Wednesday was a case of too much and we now look to test the move and give us some entry points. The pattern list is where we are posting most trades short term as a result of the current market environment. Technical trades and avoidance of speculation on news. Manage the risk of trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Pattern Setups For Today:

  1. XLK – Test of low and bounce. Entry $34.75. Watch for test and then entry. No test, no trade.
  2. XLE – Trading Range bounce. Entry $86.15. Watch for test and then entry. No test, no trade.
  3. KEG – support reversal. Entry $7.68. Energy stocks bounced on Monday? Watch
  4. Follow up on previous trades or posts:
  5. GLW – Trading range. Entry $17.28. Upside if momentum returns to technology. Stop $16.90
  6. VMW – Flag. Entry $87.45. Looking for continuation of the upside. Stop $85.15
  7. STX – Entry $50.25. Continuation within the range. Setting up to continue higher. Got the move. Stop $51
  8. DOG – Entry $27.45. Bottom reversal. The Dow is leading the selling short term and the trade set up is in play. Stop $27.20. Manage the risk of the trade. Gap open and let it play through out the day with the first hour low ($27.18) as the exit point. Never hit and using the same stop today. HIT STOP
  9. SDS – Bottom reversal. The downside trade setup for the S&P 500 index is worth watching here. Entry $32.20. Stop $31.90. Manage the risk of the trade. Same as DOG, first hour low Monday ($31.67) was the exit point and same today. HIT STOP
  10. BRCM – Breakout from Trading Range. Entry$28.20 on test of the move. Watch for the test and follow through. Be patient. Got the entry on the breakout test Thursday. Stop $27.50.
  11. FB – Trend reversal test. Entry $48.70. Follow through on the reversal and move above $47.40. Stop $53.70. Nice move higher on trade of being added to the S&P 500 index.
  12. HBAN – Breakout from trading range. Entry $9.13. Not much test, but steady trading. If no test, max entry is 9.20. Be patient with the upside as this the stock has a pattern of breaking higher, run and then consolidate. Stop $9.15.
  13. PSX – 65.70 entry. Flag breakout. Consolidation after break higher. Refiners are leading in energy sector. Lower oil prices help margins, etc. Patience and expect volatility. Stop $71.60. Nice break higher as gasoline prices start to rise. Allow for some volatility with price moving.

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.

Facebook (FB) Update:

  • 11/25 – Still sitting on support and we remain in the same strategy as above. We will decide in the next two weeks how to treat our options based on the movement. Patience for now.
  • 11/27 – With the break of support on Monday we will look to exercise our options on the stock we currently hold in December and that will give us zero shares and a nice profit in the position. The initial break lower on Tuesday was interesting, but some buying followed to push back above the support at$45.50. Micro downtrend still in play without some buying to reverse.
  • 12/2 – Got a reversal and looking to exit the put contracts and hold the stock. Sold @ $6 on stop.
  • 12/5 – Watching to see how the stock follows through on the rumor mill of being added to the S&P 500 index. Expect a test or pullback after the news settles. I am looking at the put contracts out to the March/April timeline  again if we don’t hold support.
  • 12/9 – Mixed trading day on Friday that ended lower. The reversal is being driven by the sector and the S&P 500 addition. Looking for a potential move back to the previous high.  Added position (See Above Pattern Trades) and we will manage it accordingly. This is a trade position only.
  • 12/13 – nice follow through on upside… watch as this is news drive move. Raise your stops accordingly. See Above in the pattern trades for details. STOP @ $52.13.
  • 12/18 – Raise stop %53.70 on trade taken off the low.