Trading Notes for Today, February 18th

Monday, February 17th — Market Closed for President’s Day
Market Outlook:
‘Buy the dip’ has taken on a daily theme for the markets as they opened lower again on Friday, and again the buyers stepped in. The market has been moving straight up for the last two weeks without much in terms of a test on the downside. How long does it maintain this movement without a test? As we always say the future will happen in time, but what matters is here and now. Stay focused on what you should be looking at and don’t get distracted by the noise of the talking heads and others giving you “advice”. As I stated in the video updates last week the technical data is more accurate currently than the fundamentals. Play what you know versus what you think. What is the current focus for stocks and what are we watching in this abbreviated week of trading?
Sectors to Watch:
  1. VIX index dropped to 13.5 on Friday. After hitting 21.5 on February 3rd the reversal has been just as quick to move lower as it was on the rise. We discussed increase volatility pointing to a potential trend change… that fizzled as quick as it began. We established a short term trade entry on SVXY at $54 and sold half of the position at $60.20. The stop now goes to $62 on the balance. The target was hit at $64 and we closed at $64.40 on Friday. We may look at taking half of the remaining position off today if we the $64 target fades. If any anxiety picks up we may lock in our gains and exit the position.
  2. Sector Rotation is underway again in the broad index. Healthcare (biotech and medical devices), Technology (semiconductors and internet), both continue to set up solid patterns and break to the upside. Materials (metals, precious metals, building supplies and energy), Utilities and REITs are adding to the upside with new leadership. The good news is money is moving within the market versus leaving the market as it was two weeks ago.
  3. S&P 500 index bounced off the support of 1810 level on Thursday and closed at 1838 on Friday to add to the upside. The index has not posted a new high as other indexes and is in position to test lower before moving through the previous highs. Watch to see how this plays out short term, but don’t assume anything as this plays out. We added SPY (entry $178) and we have adjusted the stop to manage the risk (S&P 500 Model).
  4. The NASDAQ added 116 points last week. It is the clear leader for the major indexes and the leadership from semiconductors, technology and biotech has kept the upside push in play since hitting the low on February 3rd. Manage your risk relative to the short term gains on positions in each of these sectors.
  5. Dow is in the same boat as the S&P 500 index. Attempting to regain the upside and push beyond the previous high has not played out. A test and then push higher may be the move short term. The large cap (blue-chip) stocks are lagging currently. Thus, watch to see if these indexes catch up or remain a drag going forward.
  6. Russell 2000 Small Cap index like the Dow and the S&P have been lagging as well. The 1150 level now poses some resistance on the upside. Another test lower prior to a move to the previous highs may well be the course of action. Watch for the index to play catch up or continue to lag as an indicator for the markets overall.
  7. Europe (IEV) The index is trading in unison with the US markets and the rally has been in line with the US as it closes at the previous high. Now we want to see a follow through and break to new 52 week high. Emerging markets are still weak, but managed a bounce as well with $40.25 the level to watch on EEM.
  8. Other sectors to watch — Oil is hitting resistance at the $100 mark, momentum is on the upside and worth watching. Gold broke above resistance at $1290… is it ready to make an upside run as it closes above the 200 DMA. Treasury bond yields attempting to move higher? Watch how bonds react this week.
  9. Review the Weekend Update.

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

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

ONLY ETF Model (updated – 2/14/14)

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

ONE EGG Model (updated – 2/14/14)

Pattern Trading Setup:

As we end the week our focus it to manage the risk and look for the opportunities. The weather is making a good excuse for the economic reports to no be good and that is keeping the buyers engaged. Set your stops and keeping going forward.

  1. YY entry $68. double bottom reversal. Entry at $68 on test early today.
  2. SCTY entry $76. Consolidation triangle. Need follow through to positive day on Thursday.

Pattern Trade Tracking & Follow Up:/10

  1. VIPS entry $106.50. Break higher from consolidation wedge pattern. Stop $108 on move higher.
  2. EEM entry $38.75. Bottom reversal and continuation higher. Stop $38.25
  3. EFA entry $65.25. Bottom reversal and continuation higher. Stop $65
  4. SVXY entry $60.10. Bottom reversal and continuation higher. Stop $62.
  5. SPY entry $178. Bottom reversal. Broad market index in position to bounce. Stop $179.50.
  6. FANG entry $54. Ascending triangle breakout. Test and move higher. Energy sector. Stop $56.
  7. QQQ entry $85.10. Move through resistance and follow through on bounce off support. Stop $87.90.
  8. 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.
  9. 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.
  10. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher. Stop $125.50. 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.
  • 2/14 – Nice gain of 4.4% and now looking at raising the long term stop on the position.