Trading Notes for Today, February 4th

The new week starts with more selling. If the Federal Reserve is cutting stimulus on the belief the economy is improving and able to stand on its own accord, why the ISM manufacturing report for January showing contraction to 51.5% versus the 56% expected? How much faith do you have in the outlook or the Fed as a result of that number? Thus, the 2.3% decline in the broad indexes on Monday. All the noise aside, if the economy is not continuing to show signs of growth, no matter how small, investors are going to head to the sidelines. Case and point… Monday.
We discussed the need for clarity if the markets were to find their footing and continue the previous trend. However, if the clarity is the economy is getting weaker already, the downside trend will gain momentum and the clarity will embolden the sellers. The move on Monday broke key support levels and pushed the indexes down to the next support level… all in one day. Today will be a key day for the markets relative to any bounce of holding at the current level of support. Be patient and if the downside accelerates you have to raise cash if you have not already done so.
Sectors to Watch:
  1. S&P 500 index broke the support at 1775 and never looked back closing at 1741 on Monday. The back and forth trading last week gave way to the downside as the economic data rocks the boat for investors. The index lost 3.6% for the month of January and 2.3% the first day of February. The next support was 1745 and that gave way at the close. Index volatility has picked up as well with the VIX index hitting an intraday high of 21.5 and testing the October highs. The downside is in play and we have to respect the direction short term. Watch for opportunity to add to the short side if we remain below 1745.
  2. The NASDAQ closed last week at 4103, today at 3997. The 106 point drop is largest since 2011 and was a 2.6% decline on the day. This remains the most volatile index of the broad markets. The technology index has been attempting to hold the uptrend, but the move Monday opens the downside.  The uptrend is still in play off the November 2012 lows. The acceleration/leadership in the sector since October has the trend still in play. The large caps have been a drag on the index of late, but still looking for leadership here is support is established near term. 
  3. Dow remains in the worst shape of the major indexes technically. 15,710 support gave way as the index fell 326 points to 15,372. The trendline is broke off the November 2012 low and it is the first of the major indexes to cross below the 200 DMA. That give a exit signal for long term positions. Some support at this level, but the target now would be 14,750. DXD is the short ETF we recommended on the break of support. Take what the market gives for now.
  4. Russell 2000 Small Cap index broke 1120 support and closed at 1094 down 3.2% on the day. The close broke below the trendline off the November 2012 low. The move triggered the play in TZA, short ETF for the index. Watch for bounce with the broad markets, but the negative sentiment is in play short term.
  5. Europe (IEV) fell to $44.35 on the day as it reverts to trading in unison with the US markets. The country was picked as one of the top plays for 2014 by many analyst, but that is not working out for now. We would need to move back above $45 to stop the bleeding on the downside. EPV is the 2x short ETF for Europe and hit the entry on the break lower.
  6. Natural Gas (UNG) rallied more than 17% the last two weeks and then sold back to support at $23.25 and produced a small bounce on Monday. The volatility has picked up as the weather and the speculation are deciding who is right. The cold weather blast is giving reason to believe usage will arise along with plenty of speculation of what that will mean for price looking forward. The natural gas stocks (FCG) sold lower  and still is not aligned with the commodity. Watching for the opportunity if it develops. If not, looking to short UNG. Balance will be result either way.
  7. China (FXI) worries sent the country ETF to support at the $34 level and consolidation. The global worries however, were the downside winner pushing the ETF down 2.4% on Monday. The challenge is the sentiment remains negative along with the economic forecasts. The break of the $34 level gave signal to add to FXP with the target at $31.80 on FXIshort term.
  8. Gold miners (GDX) fell as gold bounced on Monday.  It has turned sideways as the price of the metal can’t rise through resistance. I am ready to take the exit from this position tomorrow as gold seems stuck and the risk of the trade is rising. Watch for any move higher as an exit point.
  9. Bond yields continue to drop and push bond prices higher. The thirty year bond fell to 3.54% and is down 40 basis points the last month.  If the economic picture is positive and the Fed is cutting stimulus… shouldn’t rates be ticking higher? As seen in trading on Monday… it is telling us money is moving from the risk of stocks. TLT broke above the 200 DMA.

The models have raised cash as a result of hitting stops. With confirmation of the downside today we will add to short positions with caution as we are sitting on an near support. There are short term trading opportunities and setups as well in place. We are still willing to hold cash and let this unfold for now as some clarity is gained in reference to outlook short term. The outlook has turned negative and downside confirmation is in play. Technical damage has been done and potentially more on the way as the intermediate trendline broke opening the downside move from a longer term perspective. No reason to panic and no reason not to add positions if the opportunity arises. The key is to manage the risk of your emotions in relationship to the reality or results of the market short term.

Pattern Trading Setup:

Monday the VIX index spiked above 21 and matched the October high. Is this the climax for now in the selling? Time will answer that, but the selling was overdone in relationship to what is worrying investors. If the fundamentals were the cause, then more downside for an orderly adjustment in pricing would be expected, but that isn’t the real worry in play. Remember… markets are efficient over time and emotions short term. Be patient and disciplined.

  1. OREX entry $6.90. breakout from consolidation and resistance. biotech still leading.
  2. AMLP entry $17.85. Reverse H&S breakout. MLPs starting to gain interest.
  3. QQQ entry $85.10. Move through resistance and follow through on bounce off support.

Pattern Trade Tracking & Follow Up:

  1. TZA entry $18.70. Break of key support. Waiting for the conviction and support break. Stop $19.20. expect volatility with the leverage.
  2. SDS entry $32.05. Break of key support. Waiting for the conviction to show on the downside. Stop $32.50. expect volatility with the leverage.
  3. GILD entry $81. Upside still in play. In consolidation pattern again. Stop 77.40.
  4. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher Stop $119. No momentum in the trade and looking to get out a break even or better. 

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.
  • 2/3 held the gains and still in position to move higher.