Trading Notes for Today, December 5th

Notes to Note: 

Oil moves off the front page and the ECB moves on. Mr. Draghi failed to give any indication that the stimulus would start now in Europe and that sent the futures lower and the US markets reacted. But, later in the morning stocks rallied as Bloomberg reported that the ECB stated it is to start the stimulus in January. Talk about mixed signals. The market traded back near even on the day and this morning is all about the government jobs report. That will bring more fun relative to the direction or lack there of.

Crude oil continues to stay near the $67 level and some of the anxiety has come out of the trade for now. The stocks moved back to $82 level on XLE and tested lower on Thursday. A base may build in the sector before any definitive direction is decided. There is still some clarity needed if we are to accept the risk or assumption the worst is over. The IEA inventory data for crude showed a decline of 3.7 million barrels and could offer some help on the upside as the draw down was unexpected. Watching to see if there is any significant follow through going forward.

Gold miners ETF (GDX) fell nearly 10% in the closing second on Wednesday and then bounced back¬†just as quickly to close thirty-five cents below the previous price. The only report was by Barron’s stating something happened. These “occurrences” are growing in frequency and are disturbing as they create havoc for investors who use stops. No more comments on this move… Watch how you manage your positions. GDX was up slightly on Thursday relative to the close on Wednesday, but from my view was down forty cents or 2% on the day. Consolidating currently.

Natural gas is falling further with UNG dropping another 4% on Thursday broke the below the October lows.¬†The short trade confirmed to add to the position on the move. EIA report released Thursday showed a decrease in supply, but warmer weather projections for the next week plus prompted the decline today in the commodity. Simply put… speculation rules again. The three largest producers XOM, CHK and EOG were all lower on¬†Thursday. Oversold is oversold, but this could bounce and watching to see how it responds today.

China continues to produce bad economic data. But, the country ETF continues to push higher with plenty of volatility, but higher nonetheless. 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, off 0.5% on Wednesday, and up 3.1% on Thursday. The upside is in play if you can stomach the volatility of the move.

Semiconductors rose 2% on Wednesday erasing the test lower on Tuesday, but closed flat on Thursday. This sector continues to provide leadership and a new high. Keep your stops in place (pattern trading strategy below) and let it run.

Retail is suffering at the hands of an 11% drop (early indications) in Black Friday sales. 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. The key is to watch what the sectors and the data is telling you to find the best opportunities. TODAY: Hold above the $90 support and find the winners as this digest the news.

Russell 2000 Small Cap index dropped 1.6% on Monday and tested the 1153 mark of support again. Bounced 1.2% on Tuesday and 0.9% on Wednesday. Thursday gave up 0.6% back to the 1170 mark of support. The volatility remains in play and we continue watch for some clarity in direction short term. TODAY: 1190 is the resistance point to take out if upside is going to continue.

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:

ECB and Mr. Draghi failed to produce stimulus prior to the year-end. This is starting to sound a lot like the little boy who cried wolf… The markets react in Europe and the US to the news. This is NEWS… how it effects IEV and Europe are where we look. Sustainability of the concerns is what will create a short or long trade going forward.

ISM services tallied a nice jump to 59.3% to help keep the positive spirit in the markets on Wednesday. The expectation was for 57.7% and the beat shows a pickup in the services sector which should be expected if the economy is improving. This was a solid number for the economic picture.

ADP employment data slowed with the slowest private sector growth in three months, but still above the 200k plus jobs added. Productivity was up 2.3% and close to expectations. Unit labor costs were down 1% in Q3 showing not wage pressure still. Beige book from the Fed was positive showing activity expanding and some signs of optimism towards the economy. All good news for the markets.

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 sector was at the forefront to start the week and it still holds a key spot for investors. Moved to $82 on Wednesday, tested lower Thursday and now looks to be consolidation at the lows for now. Needs to have some type of catalyst it upside is to resume near term. Commodities have settled as well for now.

Small caps tested the 1153 support level and we were looking for a potential break lower to trade the short side. That failed to materialize as investors put money into the sector rally back above the 1170 level. Watching to see how the volatility plays out and if any opportunities result from the move.

Commodities are another question mark considering what is taking place with crude oil. Crude is holding near the $67 level currently and if that changes in either direction it will impact the outlook for the commodity. Natural Gas is the other new downside development this week breaking support on Thursday and looking more a short trade than upside. Gold wanted to rally, but stalled at the $1200 level and need a upside move if the positives are to continue. Grains are moving sideways with an upside bias, but nothing astounding with the agriculture side.

Global markets¬†want to move to the upside, but the lack of clarity about stimulus and oil prices is holding everything in a trading range for now.¬†Europe (IEV) holding near the recent highs¬†needs the ECB to step up and follow through on the stimulus or the downside will emerge victorious. Emerging markets (EEM) testing and moving¬†lower to support at $40.75 for now. TODAY: a break from the stall has been in view all week, but hit has not materialized… patience is the key.

Volatility index (VIX) What can you say? The volatility index turns volatile! Jumping to 14.3 on Monday and falling to 12.3 on Thursday. That reflects the lack of concern for the issues around oil now. 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: Need a follow through¬†move on the upside. Manage your stops.
  • 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: Bounced Wednesday and looking for move above the $94 mark. Note that¬†ARO, GES and PVH all guided lower to analyst. In addition, Bank of America reported credit cards are down 1.6% Thanksgiving weekend. Getting interesting as we progress towards Christmas.
  • 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.¬†TODAY:¬†consolidating near the highs and watching for clear move higher.
  • 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. TODAY: follow through to the new high posted on Wednesday.
  • 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 another new high on Wednesday and held.
  • 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: Continuation of the buying from Wednesday.
  • 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. TODAY: some selling on the ECB news Thursday and need to bounce back today… stops in place.
  • 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 the pressure on the downside and manage your stops.
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. Stumbled through Thursday as the ECB rattled the markets. The jobs report out today will or should set the tone for the trading day. Still a trading environment with caution a key issue.
  2. JNPR – entry $22.40. Resistance breakout ascending triangle. in an uptrend off the October low and progressing back to toward the $24.25 target. Expect volatility. FNSR in same sector in position to break from wedge pattern.
  3. VLO – entry $52. Consolidation range – break above the 200 DMA. The 2oo day has been resistance and a break bodes well for a run to the $54.50 level and then $57.50. Volatile sector of energy, but nice set up on the bounce.
  4. ACXM – entry $19.40. saucer breakout test. Software sector (IGV) broke higher and is testing the move if holds $19.30 level and continues higher take the entry.
  5. INTC – entry $37.70. Pennant. Continuation of the upside move in place. Semi’s continue to be a leader for the broad indexes.
  6. NWSA – entry $15.80. double bottom. Base is ready to break higher with target of $16.80 initially and not much resistance on the move.

Pattern Trade Tracking:

  1. BSFT – entry $28.10. flag breakout. The follow through on the move higher is the entry point. Could run back to the $32 high from February. Software sector is in position to break from consolidation pattern as well. (IGV) Stop $27.08.
  2. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.
  3. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $36.
  4. DIA – entry $178.80. Breakout top consolidation. Follow through on positive move Tuesday to new highs and leadership in broad indexes. Stop $176.50.
  5. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $53.
  6. 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
  7. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.90
  8. 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
  9. 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
  10. 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
  11. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  12. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  13. 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.
  14. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  15. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  16. 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.
  17. 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.
  18. 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.
  19. 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.
  20. 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.