Trading Notes for Today, February 7th

Nice upside move in the broad indexes as money comes in Thursday on the jobless claims report. That presents a challenge for today’s jobs report to be better or at least meet expectations. If it doesn’t that would likely push the markets lower on the news. The jobless rate is expected to fall as well and we all know the news on that front with the participation rate at 62.5%, which is the lowest in 35 years. The point is simple good numbers should lead to a positive day, bad number give up Thursday’s gains.
Thursday’s move was not the most convincing move in an attempt to bounce off the recent lows. The volume was okay, but the breadth of the move was so-so. Some short covering maybe, some buyers hoping for a better than expected jobs report are the general suspects, thus putting pressure on a number that is not likely to be overly convincing about the economic picture. We will take what it gives and keep looking forward.
Twitter (TWTR) fell after-hours on Wednesday and it was worse on Thursday in trading, dropping 24.1% to $50 and not far off the IPO price in November. Interesting reaction, and more interesting will be the follow through moving forward. Linkedin reported Thursday night and was down nearly 8% on the news. There challenge was forward guidance. The ETF SOCL is focused on this asset class and may set up a short trade on this data.
The yields on Treasury bonds have move up the last couple of days in response to buying in equities. Not enough to say it is reversing, but enough to get my attention to watch. The thirty year bond is 3.67% and up 12 basis points off the low. If the news is positive tomorrow, it could add to the rise in rates short term and open an opportunity in TBT to short the bond.
We will be patient today and take what the market offers heading into the weekend.
Sectors to Watch:
  1. VIX index dropped to 17.2 on Thursday and as we stated yesterday it offered a short term trade entry on SVXY. entry $54 and i t is now the stop as we go into the trading day. Expect a bounce higher if the news in good on the jobs front. Good news would be enough of a catalyst to spark a rally in the ETF near $62.
  2. S&P 500 index broke the support at 1775 on Monday and Thursday closed at 1773. The upside conviction is still not overwhelming and some follow through on the upside would help. I am still willing to be patient here and see how it plays out today and into next week.
  3. The NASDAQ rallied 45 points on Thursday after testing the 3970 mark on Wednesday. Technology followed suit gaining 1.1% and semiconductors were up 1.6% to lead the index. Downside trend still down, need a move back above the 50 DMA if we are going to reverse the micro trend.
  4. Dow remains in the worst shape of the major indexes technically. The index bounced back above the 200 DMA on Thursday to close at 15,628. The move pushed back above the trendline as well. Not enough on the day to convince me on the upside and we will watch to see how it plays out today.
  5. Russell 2000 Small Cap index broke 1120 support and tested 1090 support. Broke the trendline off the November 2012 low. Trend shift is in process short term as the 10 DMA crosses below the 50 DMA. Got the bounce with the broad markets, but not impressive and the negative sentiment remains in play short term.
  6. Europe (IEV) moved back to $44.93 on Wednesday and followed through on Thursday above the $45 level. The gap open left no room to add to our trade, but it did help the potential of a reversal . The index is trading in unison with the US markets and a rally would be in line if the jobs report helps today.
  7. Natural Gas (UNG) welcome to the land of volatility and speculation. Back to $24.30 support and watching to see how it plays out short term. Downside pressure is building in the commodity as traders look for a realistic level going forward. The natural gas stocks (FCG) remain in a consolidation pattern and no upside breakout yet. Watching for the opportunity if it develops.
  8. China (FXI) worries sent the country ETF to support at the $34 level and it has been showing some consolidation at this level. Gained 1.6% on Thursday, but still in the downtrend for now. Clear $34.75 and we can talk about the possibility of short term trade on the upside.
  9. The short bond trade (TBT) has bounced nicely the last two days. entry trade at $71.70 if this move gains some momentum. A potential move back to $75 is in the making if the fear comes out of equities short term. Patience as we define a reasonable entry point.

The models have raised cash and we are patient to let this emotional trading settle. There are short term trading opportunities and setups in place, but we will see how Friday trades. We are willing to hold cash and let this unfold as some clarity is gained in reference to outlook short term. The jobs report is news at this point more than substance to the fundamental data. The balance of the economic data the last week has not been good enough for this to be a lasting catalyst. The outlook has turned negative and downside micro trend is in play. Technical damage has been done and potentially more on the way as the intermediate trendline broke creating confirmed weakness technically. 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:

The follow through day on Thursday was positive, but lacked that punch you want to see when a longer term trendline has been broken. Thus, the jobs report this morning is key to giving the move more momentum. Watch to see how the market react following the data and how it trades early. If all systems are go we will look to add positions.

  1. SPY entry $178. Bottom reversal. Broad market index in position to bounce.
  2. FANG entry $54. Ascending triangle breakout. Test and move higher. Energy sector.
  3. SGG entry $54.65. Trend reversal. Agriculture.
  4. CORN entry $31.60. consolidation/bottom breakout. Agriculture.

Pattern Trade Tracking & Follow Up:

  1. QQQ entry $85.10. Move through resistance and follow through on bounce off support. Stop $84.
  2. BHI entry $57.15. consolidation breakout. Oil Equipment sector. Stop $57. Nice break higher and expect a test of the move as follow through.
  3. 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 $507.
  4. TZA entry $18.70. Break of key support. Waiting for the conviction and support break. Stop $19.20. expect volatility with the leverage.
  5. 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. HIT STOP
  6. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher Stop $120.75. No momentum in the trade and looking to get out at break-even or better. Watch how it responds to the jobs report and move stop up. 

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.
  • 2/7 holding the gains and still in position to move higher as the consolidation pattern develops near the current highs. 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.