Trading Notes for Today, December 9th

Notes to Note: 

I spoke too soon about nerves calming over oil this weekend… it’s BACK! Crude fell 4% and took the market on a wild ride. The worries are mixed as to the overall impact or benefit from lower oil prices. If you view the energy sector as growth sector the decline in oil is going to get ugly the further it falls. As a growth sector declining prices impacts margins and that in turn hurts earnings which leads to lower stocks prices. Throw in the leverage used by these companies and you have a double whammy effect on the price of the companies. On the other hand it is good for the expansion of the economy as consumers have more discretionary dollars. Thus, far that impact has not shown up in the economic data, but some believe it will make a significant difference. Either way the main issue from oil is uncertainty and that prompts selling in stocks. The good old flight to quality comes into play yet again with the long bond (TLT) up more than 1% in response.

The yield on the 10-year bond fell again Monday hitting 2.25% and IEF was up 0.4% in response. The movement to bonds is an indication that investors are looking for safety or a hedge to their portfolios looking forward.

The NASDAQ closed down 43 points Monday similar to the 64 point drop last Monday question is will it bounce back like last week? As we we go forward this week the same issues face the index and we have discussed the potential test to the 4611 level.

The S&P 500 index fell 15 points and testing the move lower from last week. The 2019 level is what we stated as the level to watch short term for a potential test going forward.

The Russell 2000 index started the week with a move to the 1168 and back below the 1170 mark and leaves 1153 as the same support level from last week.¬†¬†We started the week looking for a break above 1190. Monday didn’t help that argument.

The Volatility index made it’s way below 12 and tested the 11.55 support level¬†last week. The bounce back to 14.6 on Monday didn’t translate into the VXX price as the implied volatility¬†is too high.¬†We got a similar spike last week that faded by week-end. Watching to see if the upside gains any momentum.

Dollar closed at new high Friday, but fave some back Monday, continues to gain strength with the index (DXY) now at 89.12 that now eclipses the high from June 2010. Interesting that interest rates continue to hover around the 2.3% level on the ten-year treasury bond. Remember we started the year at 3.02% on the bond?

Economic News from Last Week:

Thursday is retail sales data and could have an impact on the retail sector going forward. Expectations are for only 0.4% growth in November. This is one to watch.

Jobs report showed 321k new jobs added in November, but it has little impact on the markets overall as the quality is an issue relative to economic benefit. Economist however, raved about the results, politicians raved about the news and the markets yawned. This is a data point to watch next week for some after the fact response. There was plenty of data that was not as attractive as the top line number. Consider the participation rate remained at 62.8% and worst since 1979! Underemployed was at 11.4%. After six years of stimulus we have created exactly 2 months with more than 300k jobs added, Reagan period recovery produced 23 months by comparison with one adding over 1 million jobs. Not to mention less population. System is broken.

Factory orders were awful!  Negative 0.7% versus 0.2 growth expected. That goes with the negative 0.5% in September. Remove the defense spending and it is negative 1.2%.

Consumer Credit was 93% student and automobile loans. Bank of America reported last week that sales from credit cards were off from 2013 November data. Consumer isn’t spending or least not with debt.

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…

Crude oil moved to $65.84 and below the $67 mark again. XLE made a move back to $82 level failed and tested lower to end the week. This would lead me to the belief that a base may build in the sector before any definitive direction is decided. Clarity relative to oil prices is needed in order for the stocks to rebound accordingly. The IEA inventory data for crude showed a decline of 3.7 million barrels Wednesday, better than expected, but crude managed to close lower on the week. Until some clarity arises in oil and natural gas we will let this play out and then determine the best opportunity going forward. Anything else would be speculation and too high risk.

MONDAY: 4% drop in crude keeps the sector on the downside and XLE dropped 4.1% adding to the downside pressure and breaking the next level of support. Remember the simple rule of trend analysis… Short the rallies in an established downtrend. Looking at chart this started in July for the stocks and it has not held a rally attempt since. ERY is the leveraged short trade.

Natural gas is falling further with UNG dropping below support at $19 on UNG on¬†Thursday. The short trades were plentiful, but it did manage a bounce on Friday to close back above the $19 level. This begs the question on direction? Up or down? EIA report released Thursday showed a decrease in supply, but warmer weather projections for the next week plus prompted the decline in the commodity. Simply put… speculation rules¬†over data. The bounce on Friday was maybe some sanity returning, but I will watch to see how it unfolds next week. The three largest producers XOM, CHK and EOG all been beaten down as well¬†Oversold is oversold, but this could bounce and watching to see how it responds. (See Friday’s Notes posted on natural gas)

MONDAY: Followed oil lower dropping 4.8% and puts a nail in the coffin of the bounce attempt from Friday. Downside in play and confirms the previous downtrend continuation with the move. KOLD is the short trade ETF for natural gas.

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 6% the balance of the week and just shy of the September high. The upside is in play if you can stomach the volatility of the move.

MONDAY: Started higher and closed lower. The move is extended and broke through the topside of the uptrending channel. Watch for some testing, but the upside is still in play off the March lows.

Semiconductors remain a leaders for the broad markets, but they look extended and we are raising our stops to manage the risk of the position. Ride it as long as it retains momentum, but protect the downside risk.

MONDAY: Tested along with the broad indexes. The 1.4% drop is worthy of note, but the uptrend is still in play. Watching the $83.28 mark to start and the ten day moving average.

Retail is suffering at the hands of an 11% drop on Black Friday sales. I think this is going to shift 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.

MONDAY: Moved to the 91.55 level of support and holding. The $90 level is the stop.

Small caps tested the 1153 support level and the focus has shifted to the break through the 1190 level on the upper end of the range. Break could offer an upside play or you could find the leadership and trade that as well. IBB is one of the key leading parts of the index.

MONDAY: The Russell 2000 was off 1.1% on Monday to lead the downside. 1170 level failed again, but still in the trading range looking for definitive move for direction short term.

Biotech still leading the upside, but IBB and XBI are showing some topping. Need to see a follow through on the upside if the leadership is to continue. One to watch this week.

MONDAY: The one bright star on the board gaining 1.5% and leading IBB to a new high.

Technology needs to step up and take back some leadership other than the semiconductors. Internet (FDN), Social Media (SOCL), Software (IGV) and Networking (IGN) all need to step up the game. All are worth digging into the ETFs to find the leadership within each.

MONDAY: Sector declined 1.1% to lead downside. No help as all the sub-sectors were down to lead the sector down.

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

* The positive economic data last week did not produce much in terms of a positive upside for stocks. Will there be  a delayed reaction this week or have the expectations been set too high heading into next year that the numbers where disappointing to investors? Watch for more positives to develop as we push towards year end.

*¬†OPEC and Russia stance on cutting oil production remain an issue. It has shifted to the back burner for now, but it will be watched through the supply data and the price of crude going forward. Due to the weekly release by the EIA on supply, the temperature isn’t likely to get too warm any time soon. Consensus believes that OPEC will cut output over the next 1-6 weeks to help the issues with supply. Too much talk and speculation and not enough action or fact.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes. Not much is expected until the December 16th 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. Next week is the FOMC meeting.

* 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.

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 testing on sales data. (posted to the Sector Rotation Strategy) 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 disappointing to Black Friday? putting pressure and testing the support.¬†TODAY:¬†Hold the 20 DMA and bounce back towards the previous highs.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. The move has been steady, tested and challenged, but still trending higher.¬†Manage your stops.¬†TODAY:¬†consolidating near the highs and watching for clear move higher. May add on conviction break 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. Nice break higher on Friday and worth adding if we hold the move. TODAY:¬†Hold the move from Friday and look for opportunity to add to position.
  • 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. The upside follow through as been the consistent leader for the broader index. (We own XLV in the S&P 500 Strategy) First sector to recapture the September highs¬†and set the pace for the upside to continue. TODAY: Letting it run and managing the risk as hit another new high on Friday.
  • Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.) Hit the entry point and upside remains¬†in play with a new high and… watching how it unfolds this week. TODAY: Continuation of the buying from¬†Friday.
  • Europe (IEV) entry $44.25. Entry on break from the trading range top at $44.¬†The challenge has been expectations in Europe as the ECB has not followed through on stimulus.¬†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. TODAY:¬†Bounce higher to continue form clarity with ECB. (negative reports on Monday in Europe and that isn’t helping things. Manage your stops as this unfolds.)
  • 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. Some topping signs returned last week and watching how it plays out near term. TODAY:¬†Watch for move back above the $77.25 mark.
  • Preferred Stock Index (PFF) broke above the $39.50 level and rose nicely. 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:¬†Moving back on fear in the dividend sectors. Watch to see how it holds at the 200 DMA.
Watch List Opportunities:
  1. S&P 500 Model – Watch list updated.
  2. Sector Rotation – Watch list updated
  3. ONLY ETF – Watch list updated.
  4. Pattern Trade Model – updated
  5. 401k Update Posted for December.

Pattern Trade Setups:

  1. Need to find the magic catalyst for the indexes on the upside. Until the momentum gains it is a struggle for the markets to advance. Bias still on upside, but just barely…
  2. HD – entry $99.80. Ascending triangle. breakout and continuation of upside is positive trade. Retail sector, but heavy influence from housing sector. Target $105 short term.
  3. UVXY – entry $20.20. bottom reversal. The VIX gained upside momentum on Monday and in position for trade short term.

Pattern Trade Tracking:

  1. KBE –¬†entry $33.85. Banks ready to break higher. The sector has lagged and could resume leadership. Stop $33.
  2. 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. Stop $15.30
  3. INTC – entry $37.70. Pennant. Continuation of the upside move in place. Semi’s continue to be a leader for the broad indexes. Stop $$36.40.
  4. 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.
  5. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.
  6. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $36.
  7. DIA – entry $178.80. Breakout top consolidation. Follow through on positive move Tuesday to new highs and leadership in broad indexes. Stop $176.50.
  8. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $53.
  9. 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
  10. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.90
  11. 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
  12. 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
  13. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  14. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  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. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  17. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  18. 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.
  19. 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.
  20. 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.
  21. 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.
  22. 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) – ¬†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. Finally got the continuation breakout on the upside short term.