Trading Notes for Today, February 13th

Wednesday produced a day of consolidation for most of the major indexes. There is still plenty of work to do relative to the upside and a follow through on the major indexes is certainly part of the desire. Below is part of yesterday’s notes referencing this issue and the key sectors to track moving forward. The development of the leadership is paramount to the upside continuation. We cannot assume we are heading higher again as the result of a few days on the upside. The transition back to an upward bias will take time and commitment from the buyers.
“From my perspective the big question looming short term is the ability to hold the reversal off the lows. A test is likely in the coming days, but it must establish, worst case, a higher low and a continuation of the uptrend. Technology, healthcare and financials will play a key role in that progress as we discussed last night. Semiconductors are doing their part up another 0.9% today and breaking above $74 resistance on SOXX. Networking, internet and software held their own today and are in position to help lead technology. Healthcare tested the move to new high today. Pharma, medical devices and biotech are helping, but the providers continue to struggle. Financials are still not in gear from my view. They have made a good attempt to move higher, but the banks are not helping to the degree they should be if the sector is going to provide the needed leadership. Watch all of this to see how it comes together short term to determine the direction going forward. Up or down… it is still a flip of the coin from a short term outlook. See nightly video update for more details on this outlook.”
Today the futures are starting out on the downside. As we noted last night some consolidation or testing would be normal. The bigger question is the level of conviction from the buyers at this point… trade or longer term perspective. Most comments from analyst have a bias towards the longer term, but only time will validate hypothesis. For that reason we have to manage our risk in accordance with out time horizon. Technicians made not of the doji candlestick on Wednesday on some of the major index charts. Watch and see how today plays out and look for the opportunities in the noise.
Sectors to Watch:
  1. VIX index dropped to 14.5 on Tuesday and held that level on Wednesday. A move lower would put the index back in the lower end trading range and establish the next leg higher… at least short term. We established a short term trade entry on SVXY at $54 and sold half of the position on Friday at $60.20. The stop now goes to $61 on the balance. The target remains near $64 and we closed at $62.96. We may look at taking half of the remaining position off today if we hit the $64 mark. With the trend continuing to move lower on the VIX we add to the position as stated in the S&P 500 Model which we are tracking separately for that model. Watch today for VIX to hold below the 16 level if anxiety picks up during the trading day.
  2. S&P 500 index bounced off the low and moved through resistance at the 1810 level on Tuesday and held the move on Wednesday. We added SPY (entry $178) position posted on Friday (S&P 500 Model).  The index is at a level of testing the move higher. Watch and manage the position relative to the volatility.
  3. The NASDAQ rallied 60 points on Friday, added another 22 points Monday, 42 points Tuesday and 10 points on Wednesday. There may be a test of the move near term as the index will not climb straight up. Decide how you want to address any such move prior to the event to keep your emotions in check. Technology (XLK) moved above resistance at the $35 mark and continues higher. Semiconductors (SOXX) were up another 0.9% to lead the index again and the ETF held the above the $74 mark. Index at resistance or testing point.
  4. Dow tried to make up for the lack of participation Tuesday and consolidated the move on Wednesday. The index moved back above the 200 DMA and is attempting to regain some upside momentum. The large cap stocks making a move and helping the index. 16,093 target short term. Still not the leader, but worth a trade on the move higher.
  5. Russell 2000 Small Cap index tested 1090 support and has now bounced back to resistance of the previous up trendline. If the uptrend is to continue it will have to take out this level and regain the upside momentum. I would still like to see more of a leadership role from the sector, but for now we will see how it acts at this key resistance point short term. Watch for further follow through on the upside short term.
  6. Europe (IEV) moved back above the $45 level with a nice follow through in an attempt to fill the gap left on the downside move. The index is trading in unison with the US markets and the rally has been in line with the US as it continues to move higher. Emerging markets are still weak, but managed a bounce as well.

The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated – 2/12/14)

ONLY ETF Model (updated – 2/12/14)

S&P 500 Index Model (Updated – 2/12/14)

ONE EGG Model (updated – 2/12/14)

Pattern Trading Setup:

Markets continue to find the upside opportunity in news. The Fed talk to Congress gave the next catalyst and now we watch to see how long that plays out. Manage the risk and take what the market gives.

  1. C – entry $50.10. V bottom break higher. If test $49 and hold lower entry on test.
  2. VIPS entry $106.50. Break higher from consolidation wedge pattern.
  3. XLE entry $85. complete bottom reversal through resistance. Gap open and sold lower from the beginning. Watch to see if it moves through entry today.
  4. TBT entry $71.80. Complete bottom reversal. Gap open and watching as I didn’t chase it. Watch today for test and entry point. If not pass and look elsewhere.

Pattern Trade Tracking & Follow Up:

  1. EEM entry $38.75. Bottom reversal and continuation higher. Stop $38.25
  2. EFA entry $65.25. Bottom reversal and continuation higher. Stop $65
  3. SVXY entry $60.10. Bottom reversal and continuation higher. Stop $61.25.
  4. SPY entry $178. Bottom reversal. Broad market index in position to bounce. Stop $179.50.
  5. FANG entry $54. Ascending triangle breakout. Test and move higher. Energy sector. Stop $56.
  6. QQQ entry $85.10. Move through resistance and follow through on bounce off support. Stop $87.90.
  7. BHI entry $57.15. consolidation breakout. Oil Equipment sector. Stop $58.50. Nice break higher and expect a test of the move as follow through.
  8. AAPL entry $510. Bottom reversal. Sold on earnings disappointment, but still looks attractive looking forward. We will manage the risk of the trade, but upside should return. Stop $528.
  9. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher. Stop $122.60. Is this the momentum we have been waiting for short term? Watch how it responds to the move on upside.

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: (see Facebook research page for archive of posts)

  • 1/27 – Tested lower on Monday, but managed to hold support at $53.45. Watching how it trades today relative to the broad market and support. Stop on the remaining shares is now at $50, but may raise that further if negative market sentiment picks up.
  • 1/29 – Beat earnings with upbeat data and outlook. The stock runs after-hours near the $60 level. Watch to see how it trades today. Need to hold above the $58.50 level and then look for entry to add to our position. Patience is key with the broad markets struggling.
  • 1/30 – Big pop for the stock gaining 14.1% and most of that happened pre-market on the earnings release Wednesday night. Good for our existing position and now we look at how to manage the stock going forward. Today will be important relative to follow through on the move. We added $15k of value on the move!
  • 2/2 – Stock held the upside move and now we see how the negative analyst treat the stock? We will make decisions on stop adjustments and profit this week depending on how this gap higher trades.
  • 2/9 Held the gap higher in the face of selling. Friday moved higher adding 3.4% to the upside. Social stocks are getting hurt by earnings and forward guidance, keeps me on guard here relative to our position. Raise stops to $54 for now and let it run.