Trading Notes for Today, December 2nd

Notes to Note: 

Crude oil remains the key story on Monday, but it did manage to bounce back from the sell off on Friday to close at $69.36. What changed? Speculation changed on which side of the trade the speculators wanted to be on. OPEC has not changed their strategy relative to production levels and we are still playing the game of what if… ¬†Oil is likely to retest the lows near the $63 level again before this is over if OPEC doesn’t cut production along with other non-OPEC nations.

China continues to produce bad economic data. They are getting part of the blame for the lower oil demand, but it is a direct result of the slowing output and economic growth. The global slowing in the US, Europe and Russia has impacted China and will continue to do so. 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 2% overnight. Volatility at it’s best.

Energy stocks still saw selling on Monday before a midday bounce. XLE was trading at $78.70 near the end of lunch and then moved into positive territory near the $80.10 mark. The intraday move was enough to stop the bleeding for now, but the worries surrounding these stocks continues despite the rise in crude of better than 4%. The tug-o-war is one to watch as this plays out short term. Any bounce could be entry point for downside play if oil prices don’t stabilize and remains in the headlines. Fundamentals take on a key role in the sector going forward. Those with the best balance sheets will survive.

Retail suffered at the hands of an 11% drop (early indications) in Black Friday sales. The trend is away from the sales and the next trend has not been discovered. XRT was off 2.1% on the news Monday and the biggest losers were ARO, BIG, GME, JCP BBY and LE. Not a pretty picture across the board. On line retailer AMZN was down nearly 3.7% on the news despite it being Cyber Monday for online sales. This is another downside pressure building on the markets near term and one to be watched.

NASDAQ drops 1.3% and brings the 4700 level of support back into play. Breaking out at 4611 and move towards the 4800 mark has been a positive for the index, but Monday put a test in place as technology, industrial and consumer stocks all set the tone on the downside. Not enough momentum to look at the short side yet, but this is one to watch as we progress through the week.

Russell 2000 Small Cap index dropped 1.6% on Monday and is testing the 1153 mark of support again. Seven days ago we were at this level of support and managed to bounce… will the same happen or does the sector set the pace for the downside in the broader indexes? TZA pushed back towards the entry point at $14. I am adding this to the ONLY ETF Strategy.

Russia suffers from falling oil prices as much as anyone and with the sanctions already in place over the Ukraine issues RBL continues to move lower. This may be a opportunity when the dust settles, but for now the vultures are circling. Venezuala, Brazil, Iran and Russia all want or need oil to be above $100+ to make their finances work. This is all something to watch relative to the geopolitical aspects of this fallout.

Economic News for the Week:

ISM manufacturing out Monday was better than estimates at 58.7%, but below Octobers 59%. Mixed response to the news, but markets were already in a selling mode by the time of the release. Market PMI was 54.8% and in line with the last report at 54.7%. Not showing growth, but still holding steady.

What to watch¬†this week…

Energy is the sector at the forefront this week with the price of crude slipping to the $63 per barrel. The first response is consumer benefits… how much and where is the best opportunity?¬†Second response is how low will the sector drop in price? As stated above short trade is in play on speculation, but that could change at any point. Watching the bounce on Monday in Crude? Stick or reverse?

Small caps hit resistance once again at the 1190 mark and reversed 1.4%… not exactly what I was looking for on Friday, but things got ugly the last 25 minutes of trading. Looking at the stocks in the index that dumped lower… of course energy stocks were the biggest and the most sold, small caps. Why, worries over the ability to stay in business as crude prices drop. This is a key concern for the market going into next week. MONDAY: fell 1.6% see notes above.

Commodities are another question mark considering what is taking place with crude oil. Grains (JJG) is trying to break higher. MONDAY: made move above $38.73 and closed. Watch for trade opportunity.¬†DBA is trading sideways. MONDAY: moved to the top end of the range and looks positive short term. UNG fell 4% in sympathy with crude… demand is rising with the cold weather short term? MONDAY:¬†fell 3.7% as oil bounced? I still have to believe this is a potential trade on the upside short term. Watching to see if opportunity in UNG materializes. Alternative energy hit by the move in oil with TAN and FAN down on Friday and worse on Monday with additional selling in the sector. Base metals (DBB) fell last week¬†as well. MONDAY: bounced off the early morning lows as it found some buyers. Watching to see how this unfolds short term. Precious metals fell lower with gold (GLD)¬†dropping on Friday to $112.¬†MONDAY: that shifted with a run back to the $116.56 or a 4% gain. This is a positive for the metal and reverses the negative sentiment from Friday.

Crude oil is the commodity that has the greatest challenge moving forward, but we are watching for the opportunity that lies in the reversal and capitulation selling. We will have to trade this around some positions we own in natural gas and other alternative  stocks to protect our downside risk as this all unfolds. Watching to see if crude can hold the move back to the $69 mark on Monday. Volatility at its best currently.

Global markets made a positive move last week, but now comes the challenges of the emerging markets reacting to the commodity crisis. How do they respond to all that is happening globally? Mixed picture and one to watch and trade, but not sure about holding these positions longer term. Europe (IEV) holding near the highs and looking for a upside follow through short term. Emerging markets (EEM) testing and gapping lower and the downside question mark returns.

Volatility index (VIX) fell the 12.4 as investors belief in the outlook remains confident. The disruption of oil is more of a positive to the broad markets than a negative… right? It depends on what you believe about the US energy sector and the downside risk of crude at $65. There is the challenge for the investor and VIX will reflect the shift in clarity relative to this issue if it starts to move higher as it did late on Friday. This is the week to see how investors really perceive what is taking place and what impact it could have going forward. Speculation may rule direction short term. MONDAY: VIX jumps to 14.1 as the issues in the headlines were many. VXX moved back to resistance at the $28.50 mark and could move higher based on the uncertainty that is building in the broad markets. Look to add this position as hedge short term if the lack of clarity continues.

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

* Renewed worries for the markets in the form of economic data. Consumer Confidence fell much more than expected creating the question of is this an event or fundamental disruption as it relates the economic outlook and trouble on the horizon for the consumer? Thus, we have to let it unfold and determine how to manage the outcome going forward. Watch the impact to homebuilders (ITB), consumer services (XLY) and retail (XRT).

* Another mixed news event or fundamental disruption came in two parts, first, the meeting of the gruesome foursome about oil production levels. Venezuela, Saudi Arabia, Russia and Mexico met pre-OPEC¬†and¬†end result was they could not come to terms on cutting production and thus, the hopes of cutting production at the OPEC meeting. Second, the OPEC meeting in which no one was willing to cut production. That sent crude oil to $66.15.¬†Bigger issues for US oil production simply put.¬†Event and this is an opportunity… fundamental disruption and the energy sector could drop another 30%.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes released last week. Not much is expected until the December 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.

* 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.

POINTS of INTEREST: Airfares rose 2.4% in October during the same time oil prices fell 11%? What about the consumer getting a break from the lower prices on crude oil? Unleaded gasoline at the wholesale level fell 22% but only declined 11% at the pump? Again where are the true savings to the consumer. It is as we speculated several months ago… it would end up in the corporations balance sheet and not the consumers. This is all something to watch looking forward relative to the consumer benefits.

Corporate profits annualized growth rate declined from 8.4% at the end of Q2 to 2.1% at the end of Q3. That is significant and impact the stock buybacks and dividend rates going forward. This is another point of interest to track moving forward.

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 driving the follow through on the upside. (posted to the Sector Rotation Watch List) Added XRT as well below for the move in sector. Manage the downside risk of the trade. MONDAY: down 1.1% and watching to see if it tests 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 for October better than expected. MONDAY: Fell 2.1% on the sales reports and we are adjusting¬†stops and managing the risk. Short side trades are setting up as well.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. Continued to move higher¬†tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. Manage your stops. MONDAY:¬†Watching how the test lower puts everyone on notice. Stops up and risk in sight.
  • 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.
  • 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. Still like the upside move and the target on¬†the sector and we own XLV in the S&P 500 Strategy¬†First sector to recapture the September highs, but has stalled in a tight range near the high. TODAY: Letting it run and managing the risk.
  • Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.) Hit the entry point on Tuesday, tested on Wednesday and back to the highs on Thursday…¬†and followed through on Friday! Upside now in play with a new high and… watching how it unfolds this week. MONDAY:¬†Tested lower and took profit on positions. Watch to see how it unfolds near term. $89.35 may be next level of support?
  • Homebuilders¬†(ITB) followed through on the break through resistance as well on some positive data in the sector. The sector continued higher and looks¬†positive following the break higher with some¬†resistance at the $25.10 mark.¬†We hit the entry point and stops should be brought to¬†$25.50. TODAY:¬†Topping again and another round of data on the way for the sector.
  • Europe (IEV) entry $44.25. Yes the close was above this price as the gap higher on Tuesday broke from the established range. Look for a test of the move and follow through on the upside. If no test $44.50 entry and¬†confirmation of the move higher. Expect volatility in the position as the news from Europe is always an adventure.¬†Made the move to $45 resistance and watching for more upside. Made it above resistance and now look for entry point to add to positions.
  • 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. Interest rates will play havoc with the sector, but for now content. Some topping signs continued¬†last¬†week… watching how it plays out with $74.75 as support currently. TODAY:¬†Volatility in uncertainty… watching how this unfolds could run with some flight to safety rotation in play.
  • Preferred Stock Index (PFF) broke above the $39.50 level and holding. 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:¬†Tested lower on concerns about the earnings outlook and dividends under pressure on earnings.
Watch List Opportunities:
  1. S&P 500 Model – Adjusted Stops and Watch List.
  2. Sector Rotation – Updated Watch List.
  3. ONLY ETF – Updated Watch List.
  4. Pattern Trade Model – Updated below.
  5. 401k Update Posted

Pattern Trade Setups:

  1. This could be an interesting week of trading as one sector struggles and others attempt to break higher on stronger economic picture? Monday set the tone for stocks in response to sales data and oil prices with major indexes moving lower. Futures are pointing higher, but we are approaching the day with caution and patience to see what plays out short term.
  2. Watching plenty as noted above — need some patience for now.
  3. TZA – entry $14. Short small caps on break of support at the 1153 level on index. Set up to move lower as growth stocks are again out of favor. Trade only on a move to 1120 on index.
  4. SDS – entry $22.45. short term sell signal on top (ONLY ETF Strategy). $23.50 target.

Pattern Trade Tracking:

  1. AMZN – entry $337.20. V-bottom reversal breakout. Broke down trendline off January high. Looking for follow through move higher and $362 target. Stop $325.
  2. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $53.
  3. MRVL – entry $14.05. triangle breakout on gap higher. testing as semiconductors break high and own a leadership role. Stop $13.98. HIT STOP
  4. CREE – entry $36.50. Bottom range breakout. Semiconductor sector. Stop $34.60. HIT STOP
  5. 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
  6. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.90
  7. 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
  8. EXAS – entry $24.25. descending triangle. Biotech is leader and this was from the scan of the sector. Looking for follow through on upside. Stop $24. HIT STOP
  9. LULU – entry $46. Cup. bounced back and at resistance. If test back near the $43.50 level and bounces we will shift the entry. Retail sector and improving sales. Stop $45.75
  10. NLY – entry $11.50. Trading range breakout. The REIT is mortgage related. Dividend and growth trade. Looking for move back to $12 plus the dividend. 10% dividend currently. Stop $11.40
  11. 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
  12. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  13. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  14. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here. Stop $130.10. HIT STOP
  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. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54. Stop $50. HIT STOP
  17. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce. Stop $76.80. HIT STOP
  18. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  19. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  20. 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.
  21. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $120. HIT STOP
  22. 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.
  23. 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.
  24. 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.
  25. 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) – $50 entry (10/20 – 1000 shares). 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.) Hanging onto support by a fingernail with small bounce and breathing room for now. Double bottom building and looking positive for now. ¬†
  • 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.