Trading Notes for Today, February 20th

Market Outlook:
Dow breaks an eight-day win streak as investor concern over the Fed minutes and IMF warning leads to late day selling. What, if anything does that mean for today? Therein lies the major question going forward. The markets have been willing to look the other way the last two weeks, but maybe the data is starting to worry investors again. Time will tell and it is a good time to tighten stops and manage the short term risk. If you are looking longer term not much has changed over the last month, but it is still good to be aware of your surroundings.

Was Wednesday a key reversal day with the intraday action? That is what we will watch today and tomorrow relative to any follow through on the downside. Was the reaction to news or was the reaction to a sustainable impact on the markets? Only time can answer that question, but the FOMC minutes could have a lasting impact as investors were not expecting talk about a earlier rate hike in 2014. This may create another buy-the-dip action from investors.

VIX index showed a definite reaction to the data jumping  back to 15.5 on Wednesday. I am looking for a move to 17 as a response and then moving lower again. This would set up SVXY for another trading opportunity if it plays out moving forward.

Financials (XLF) are on my watch list today from the perspective of the downside. A break of the $25.25 level would raise my interest in being short the sector as a trade opportunity. Entry $18.10 on SKF as trade to watch short term.

Transports (IYT) turned down 2.6% the last two trading days and that is worth our attention. The sector has not participated in the bounce off the February 3rd reversal, but could be building a trading range short term. Looking for a move above the $131.40 as break higher from the current consolidation or a move below the $126.20 mark on the downside short trade. April 125 Put would be of interest on IYT.

Emerging Markets (EEM) remains a sector of conversation. The weakness has been obvious and the talk plenty. The bounce off the February 3rd low is still in play, but the last two days have struggled to make any progress. $38.50 is the support level to watch for now and if broken could offer a short opportunity as well. A move above resistance at $40.20 is key on the upside should it develop.

Sectors to Watch:
  1. VIX index remains below 14 despite a push higher early on some selling the S&P 500 index. As we stated over the weekend the worst is over for now, but I would not rule out any major shifts either. After hitting 21.5 on February 3rd the reversal made a quick move lower as buyers stepped in to buy stocks. 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. The move towards support early resulted in a bounce and we closed at $65.40. Watching and looking at the stop moving up to $64.20.
  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 attempted to move to new high, but reversed to close lower at 1828. Still looking to clear the January highs going forward. Manage the risk of your positions and don’t assume anything… up or down. We added SPY (entry $178) and we have adjusted the stop to manage the risk (S&P 500 Model). 1810 is the level to watch short term.
  4. The NASDAQ dropped 34 points Wednesday erasing Tuesday’s gains for the 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. 4180 is the level of interest for support short term.
  5. Dow continues to struggle and Wednesday was not different for the index. The large cap stocks have been a challenge for the broad market overall. The test lower on Wednesday has my attention on the downside if the current bounce fails to hold.  $27 on DOG would be the entry level to watch is the downside builds.
  6. Russell 2000 Small Cap index tested back to the 1150 level which was broken on Tuesday. A decisive move back below this level would open the downside trade opportunity. The index has lagged the NASDAQ leadership and could test lower again.
  7. Europe (IEV) The index is trading in unison with the US markets and the rally has been in line with the US and Wednesday was no different with the selling. We got the follow through and on the break above the 52 week high, but that is currently being tested. Need to hold $47.70 currently. Watch the downside risk if the US markets test the recent move higher.
  8. Other sectors to watch — Oil cleared the $102 mark, momentum is on the upside and worth watching and managing the risk of the trade. Gold broke above resistance at $1290… is it now testing the $1325 level of resistance. Treasury bond yields attempting to move higher? FOMC minutes pushed the yield on the 30 year bond back to 3.7%. Watch how bonds react going forward.
  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 – 2/19/14)

ONLY ETF Model (updated – 2/19/14)

S&P 500 Index Model (Updated – 2/19/14)

ONE EGG Model (updated – 2/19/14)

Pattern Trading Setup:

Today’s opportunities:

  1. PXLW entry $5.25. Reversal top and test of support. Held the support at $4.80 and now positioned to reverse direction back toward upside. Software sector.
  2. SCTY entry $76. Consolidation triangle. Need follow through to positive day on Thursday. Got it Tuesday and took the position. Stop $76. (Re-post from reversal and stop on Wednesday)
  3. TQNT entry 9.37. Flag on break higher. Looking for continuation of the upside move. Semiconductor. Erratic open and trade not taken today. Watching today for positive move. (2/18 post)
  4. AEIS entry $27.85. Triangle consolidation breakout. Energy sector. Passed on entry with volatile open. Watching today for the trade with positive day. (2/18 post)
  5. GILD entry $82.85. Consolidation breakout and continuation of uptrend. Look for test or $84 max entry for the trade. Got early test and watch for the day. Still looking for entry on positive day. (2/18 post)
  6. YY entry $68. double bottom reversal. Entry at $68 on test early today. Waited on the gap higher? Tested back to $68, but late in the day. Watch for entry point if positive day. (2/14 post)

Pattern Trade Tracking & Follow Up:

  1. FTK entry $24.75. Flag continuation of uptrend. Energy sector moving higher. Stop $23.80
  2. SCTY entry $76. Consolidation triangle. Need follow through to positive day on Thursday. Got it Tuesday and took the position. Stop $76. Stop HIT
  3. VIPS entry $106.50. Break higher from consolidation wedge pattern. Stop $108 on move higher.
  4. EEM entry $38.75. Bottom reversal and continuation higher. Stop $38.25
  5. EFA entry $65.25. Bottom reversal and continuation higher. Stop $65
  6. SVXY entry $60.10. Bottom reversal and continuation higher. Stop $63.
  7. SPY entry $178. Bottom reversal. Broad market index in position to bounce. Stop $182.
  8. FANG entry $54. Ascending triangle breakout. Test and move higher. Energy sector. Stop $56.
  9. QQQ entry $85.10. Move through resistance and follow through on bounce off support. Stop $87.90.
  10. 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.
  11. 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 $538.
  12. 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)

  • 2/18 – Raise stop to $58.95 currently and manage the move to the new high according to your risk. With the price moving through the top of the Bollinger bands some downside activity may be on the horizon or a continuation of the top consolidation.
  • 2/19 – $16-19 billion acquisition of WhatApp pushed the stock down 2.5% after the announcement in after-hours trading. Watching to see how investors react in trading today.