Trading Notes for Today, December 3rd

Notes to Note: 

Crude oil takes a backseat on Tuesday as the broad markets post a gain with Small Caps leading the indexes higher with a 1.2% gain.¬†But, please note that oil is still in the backseat… they have not been thrown from the car yet! The question of direction still remains and there is plenty of issues on the table. Economic data, growth, retail, auto sales, housing, global issues with commodities as well as domestically, and geopolitical issues still brewing. The list is endless as we all know, but the key will be to follow through on the buying posted on Tuesday. From my view that is still a big challenge going forward.

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 2.4% Tuesday and we have to see how today unfolds.¬†Volatility at it’s best.

Energy stocks followed through on the midday bounce on Monday with a solid gain of 1.1% on Tuesday in¬†XLE. At one point it was up nearly 2% as buyers started to step in and buy what they deem to be a value. Crude eroded again on Tuesday dropping 3% and the tug-o-war is one to watch as this plays out short term. Fundamentals take on a key role in the sector going forward. Those with the best balance sheets will survive. Don’t chase, let it unfold and the best opportunities will present themselves.

Retail is suffering 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. I think this is going to be a stock picking sector going forward. The bloom is off the rose, so to speak, with the drop in sales. Now it is time to find the winners and the losers. TRIP, OWW, SAH, OUTR, KMX are some that show upside promise following Tuesday’s Trading.

NASDAQ drops 1.3% and brings the 4700 level of support back into play. That lasted one day as the index bounced off support and still has issues, but gave some room to work out where it moves from here.

Russell 2000 Small Cap index dropped 1.6% on Monday and is testing the 1153 mark of support again. Bounced 1.2% on Tuesday to keep the upside in play, but the volatility may be more than I am willing to deal with. Need to define some direction short term to get me interested relative to the risk of the trade.

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.

Construction spending was well ahead of expectation posting a 1.1% increase. This is good for the sector as the doubters have been out in full force relative to the growth. Commercial is starting to gain some traction as well as the homebuilders. FLR and JEC both posted solid gains on the news bouncing off the recent lows.

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? TUESDAY: sold off 3% of the bounce from Monday and continues to raise questions about the outcome going forward. Patience is key to letting the noise settle.

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. TUESDAY: fell 1.6% on Monday, rose 1.2% on Tuesday and today we decide what is next… bias remains with the sellers.

Commodities are another question mark considering what is taking place with crude oil. Grains (JJG) is trying to break higher. TUESDAY: made move above $38.73 Monday, move back to $38.09 on Tuesday and still not making a convincing upside break higher¬†. UNG fell 4% in sympathy with crude… demand is rising with the cold weather short term?¬†TUESDAY:¬†fell another 3.4% to add to the 3.7% decline on Monday.¬†I still have to believe this is a potential trade on the upside short term. Watching to see if opportunity in UNG materializes. 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 as it settles in at or near lows. 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.¬†TUESDAY: gave up 1.2% and still looking for a solid follow through on the upside.

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 Tuesday. 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) What can you say? The volatility index turns volatile! Jumping to 14.3 on Monday and falling to 12.8 on Tuesday. That reflects the lack of concern for the issues around oil on Tuesday. Watching to see how this unfolds with the uncertainty in the energy sector. Patience is a virtue.

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.¬†TODAY: looking for a resolution near the high to continue or test the move higher.
  • 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.TODAY:¬†Held support after dropping more than 2% on Tuesday.
  • 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.¬†WEDNESDAY:¬†Follow through on the push higher for the index.
  • 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 as hit an new highs on Tuesday.
  • 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. TODAY:¬†Holding short term support and looking to test support short term.
  • 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. Need to hold above the $25.25 mark.
  • 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 –
  2. Sector Rotation –
  3. ONLY ETF –
  4. Pattern Trade Model –
  5. 401k Update Posted

Pattern Trade Setups:

  1. Produced some positive on Tuesday, but still have plenty of question marks. Need to see commodity prices stabilize and discussions surrounding stocks return to a normal flow of data. Emotions are still high and uncertainty still an issue. Still a trading environment with caution a key issue.
  2. DIA – entry $179. Breakout top consolidation. Follow through on positive move Tuesday to new highs and leadership in broad indexes.
  3. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector.
  4. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move.

Pattern Trade Tracking:

  1. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $53.
  2. 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
  3. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.90
  4. 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
  5. 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
  6. 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
  7. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  8. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  9. 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.
  10. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  11. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.