Trading Notes for Today, February 5th

I can’t say the selling reversed, but the buyers did put some money to work… but, for how long? Tuesday was needed to give some reprieve from the selling, but there is still plenty of work to do and worries to overcome. Scanning the market move raised other points of interest relative to sector rotation. Consumer Services (XLY) was one of the leaders gaining 1.2% on the day. It is important to look at the chart and note the aggressive selling on Monday and the move on Tuesday looks normal or justified. The same can be said for transports (IYT) and energy (XLE). The primary disappointment remains with the financials (XLF) which gained 1%, but remains below the $20.90 level it needed to recover to maintain the longer term trend. There is still plenty of work to do and obstacles to overcome. For that reason we remain focused on the trend and the sentiment for the broad indexes. Take it one day at a time.
Sectors to Watch:
  1. S&P 500 index broke the support at 1775 on Monday. The move back to 1755 on Tuesday was positive in that we held the support of the next level, but there is still plenty to address and risk to manage as this all unfolds. Index volatility subsided some with the VIX index moving back to 18.6 on Tuesday. The volatility is alive and well, but there is still plenty of work to do. The downside is still in play, but if the bounce on Tuesday can gain traction their will be plenty of opportunities to pursue.
  2. The NASDAQ gained 34 points to move back above the 4000 mark of support. The challenge now will be for a follow through on the upside when the technology sector was the biggest laggard on the day. The uptrend is still in play for the sector off the November 2012 lows. The leadership from the sector since October has the uptrend still in play, but the large caps have been a drag on the index of late. Need the growth sectors to maintain their leadership and established support near term.
  3. Dow remains in the worst shape of the major indexes technically. The index bounced back to the 200 DMA and hit resistance on the day. The trendline was broken off the November 2012 low and it is the first of the major indexes to cross below the 200 DMA. There is some support at this level, but the downside target could be the next level of support at 14,750.
  4. Russell 2000 Small Cap index broke 1120 support and tested 1090 before bouncing back 0.7% today. The close remained below the trendline off the November 2012 low. Trend shift is in process short term. Watching for bounce with the broad markets, but the negative sentiment is in play short term.
  5. Europe (IEV) moved back to $44.75 on the day as it continues to trade 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 Monday. Protect against the reversal and manage your stops.
  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. That turned into a big bounce on Tuesday up more than 8%. The cold weather blast is giving reason again to believe usage will rise along with plenty of speculation of what that will mean for the price looking forward. The natural gas stocks (FCG) also gained 2.9%, but still are not aligned with the commodity. Watching for the opportunity if it develops.
  7. China (FXI) worries sent the country ETF to support at the $34 level and attempting some consolidation. The emerging markets remain a challenge for investors as money flows away from the sector risk. It did bounce 1% on Tuesday, but remains near the lows. Watching to see how this plays out today. Manage the risk of the FXP trade.
  8. Gold miners (GDX) gained 1.2% on Tuesday, but has turned sideways as the price of the metal can’t rise through resistance. I am ready to take the exit from this position today as gold seems stuck and the risk of the trade is rising. Watch for any move higher as an exit point. Raise stop to $23.20. If moves above $24 hold position.
  9. Bond yields continue to drop and push bond prices higher. The thirty year bond rallies as rates move 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? Bonds are making a statement looking forward and it isn’t related to growth of stocks. The flight to safety is in play.

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:

Got the bounce on Tuesday that left you more questions than excitement. I want to see a follow through on the upside with some conviction from the broad indexes. The posts on the entry points below are examples of no enthusiasm at the entry points. Be patient and let this all take its course.

  1. 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.
  2. OREX entry $6.90. breakout from consolidation and resistance. biotech still leading.
  3. AMLP entry $17.85. Reverse H&S breakout. MLPs starting to gain interest.
  4. 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 at 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.