Trading Notes for Today, January 14th

Notes to Note: 

If Monday was about the price of falling oil and the potential impact on the economy… Tuesday was about the impact on the economic picture relative to the housing market. KB Homes set the tone early by beating earnings along with Alcoa. Then the results of a conference call showed things were shifting relative to margins and future outlook for growth. Reading between the lines and on the line literally was the impact on housing, at least from one companies view. The speculation relative to the heavy oil producing states was simply a matter of connecting the dots. Only time will tell how this unfolds, but it did reinforce the concerns about jobs and economic benefits in the areas directly related to the energy sector. XLE erased better than 2% upside in early trading and closed down 0.8% on the day. This is creating the reaction of sell first and ask questions later.

Overnight oil prices fell 1.3% and near the $45 mark again and that is putting pressure on the futures to the downside as well. Asia closed lower with Japan dropping 1.5% and China was off 0.4%. Europe opened lower with The FTSE off 1.5%. Not shaping up to be positive at this point.

It remains a traders market environment if you like volatility. News is driving analyst crazy as it drives the day-to-day action and the length of any directional move is 1-5 days. It isn’t necessarily a bad thing yet, but it does create choppy trading and bad signals. I am willing to be patient and let this settle down and define a direction.

Earnings may still set up to be a catalyst near term as we see just how good the growth was in the fourth quarter. If KB Homes is any indication of the mixed signals to come from earnings you may want to put on a helmet and chest protector for the coming volatility. December sales reports are out this morning and the banking earnings start today as well. Futures are not giving us much hope for a positive day.


The ten-year bond move fell to 1.88% or or down 3 basis points on Tuesday to continue the flight to quality or safety. The bond has hit a new closing 52 week high as well. The question remains: is this move telling us something about stocks? To this point I have said no… it is simply acting as a defensive buffer when any selling takes place in equities or a flight to quality. That is something to watch as the Fed wants to hike interest rates… Investors are voting the Fed won’t do it in the short term and feel enough conviction to buy bonds. Throw in the global issues economically and money is moving to treasury bonds as well. The money flow into the bonds is the cause of the move in the yield lower. Watch and let it play out short term.

The NASDAQ closed at 4661 down 42 points for the week. A nice consolidation pattern or trading range for the index as investors are undecided on direction short term. We tested support at 4555 and reversed off the low, but it is in position to retest that low short term. The long term uptrend is still in play, but the risk of moving lower has not been negated as seen in Tuesday’s trading day. We have to be patient and let this unfold. Respect the uncertainty and don’t force trades. QID entry hit as short trade against the index on Monday.

The S&P 500 index closed at 2023 down 21 points this week. Remained below the 50 DMA. Leadership is one theme I discussed last week and we still don’t have any clarity on that front. Telecom and healthcare ended the day positive, but that is two defensive sector leading again. Basic materials was the worst performer dropping 1.1%. Key resistance remains at the 2060 mark and support is 2000. Short trade in SDS hit entry point in trading today.

The Russell 2000 index fell was unchanged on Tuesday and still hover at the 50 DMA. Still within the trading range. The interesting note is it has held up well among the selling and the midcap as well showed some support near term. We will remain patient and watch for some clear indication in direction, but the trading range is holding steady for now.

The Volatility index spiked higher to start the week on oil prices. It cleared the 20.5 mark on the closet today with a high at 21.5. The index continues to rise on uncertainty and we are pushing the high from December. Some fear creeping in, but not enough yet to force the panic button to be pushed. As I have stated, it is important to understand that investors don’t like uncertainty about the future. The default is to sell and watch as it unfolds. We are at that crossroad again with a bias towards selling this week.

The Dollar (UUP) continued higher on the week at $24.45 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 92.25. The stronger dollar remains a positive from my view looking longer term. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future.

Crude Oil remains one of the components that was a catalyst to the selling to start the new year. It settled in the $46-50 range and if it fell back to $45.89 on Tuesday. The Goldman Sachs downgrade on the outlook for demand has put more downside pressure on the commodity. The downtrend is well established. Too much risk for my taste as a trade. Patience.

There is plenty of speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The downside is back the last two days and we have to see how this unfolds going forward. This remains a traders market with plenty of risk to confront in every trade.

What to watch this week…

We started with the jobs dilemma, that progressed to the decline in the price of crude, and Tuesday it was the weakness in housing from KB Homes comments! Oh what a tangled web we weave! The move lower shook investor confidence and now we shift gears yet again relative to the longer term impact and how to play this scenario going forward. The trading range says be patient and let it all unfold near term as everyone regroups, take a deep breath and see how today unfolds.

Banks (KBE and KRE) were up 1.3% to start the day, but ended down 0.5% on the day. The scare came from the comments about margin compression and slowing in demand from KB Homes. That only served to compound the issues and lack of faith heading into the earnings reports that start today. I believe they will be better than expected, but that does not seem to be the voting consensus from traders. Not willing to buy in front of the news, but it may well prove to be an opportunity on the other side.

Leading Sectors: IYZ, XLP and XLV

Sectors worth Watching: XLU

Laggard Sectors: XLY and XLB

Loser Sectors: XLK, XLF, XLI and XLE

Sectors of Interest for Trading:

The homebuilders (ITB) jumped to new high the last three trading days, but that came to a halt on Tuesday as KB Homes comments on the analyst call looking forward sent the sector back to the breakout point ITB. Energy is getting the blame and watching today to see if the selling continues as well as what other builders state about the outlook.

Semiconductors (SMH) are a sector that could offer some leadership along with technology overall if we can get off to a positive start on the week. TUESDAY: failed to keep the positive start again and holding above the key support at $52 for now. Watch for an opportunity on the reversal if the buyers show up again.

Gold Miners (GDX) The sector has benefited from the bounce in gold and moved through the resistance at the $20.50 mark on Monday to $21.40. Short lived as it dropped 4% on Tuesday despite no real losses in the metal. That is fear of stocks moving lower and thus sell now ask questions later was the theme. Still like the upside and the risk remains high.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. Upside in play and a test of the $79 level would be potential entry point. No test on Tuesday to speak of, but still watching how this unfolds.

China (FXI) uptrend remains, albeit volatile, off the October low. Technically the upside is in favor and worth trading if we can move through resistance and stomach the volatility that is likely to remain. Close above $42.50 is level to watch. Tested lower on Tuesday, but closed higher.

Basic Materials (XLB) have formed a symetrical triangle of consolidation and I am looking for a break from the pattern and establishment of the trend. The upside is the previous direction and is the likely direction statistically. Watching for the opportunity to unfold. Selling in the miners took the index lower, but still not decision on direction.

Watch List Opportunities:

  1. S&P 500 Strategy – updated
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy – updated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Volatility is back… we have to remain patient and selective with any positions. Manage the risk accordingly. Manage your stops along with the current volatility intraday.
  2. SDS – entry $22.75. Triangle breakout. Weakness is building in the index and downside protection is prudent at this point to hedge positions.
  3. QID – entry $40.80. Triangle breakout. Weakness in the large cap NASDAQ stocks are building negative sentiment and breaking lower. Another hedge position.

Pattern Trade Tracking:

  1. VXX – entry $33.60. Resistance breakout. Volatility is picking up short term and looking for the follow through on the upside move as uncertainty rises. $32.30.
  2. SUNE – entry $20.15. trading range. 200 DMA resistance overhead. Break above this level on volume would be trade to $23 or previous high. Stop $19.30
  3. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  4. ACAD – entry $33.60. triangle breakout. Looking to continue the upside trend following the break higher. Stop $33.60
  5. TWTR – entry $39.30. Break from basing bottom. Trade off the long term position below.
  6. GILD – entry $100.30. Bottom reversal follow through. Bounce back from the selling in December tested resistance and ready to move higher. Stop $99.40 HIT STOP
  7. GDX – entry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $19.50.
  8. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
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.
Long Term Opportunities: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Still trading sideways range as investors sort out the facts and fiction. Testing the bottom of the current range and bounced … bounce (we added to our positions. 500 @ $77.50 – 1/8) TODAY: Being patient with the indecision in the broader indexes and letting this unfold short term. Looking at the $75 put for March if the downside breaks.
  • Twitter (TWTR) –  Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (hit stops on our put contracts on the reversal last week.) Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 Friday.) TODAY: Follow through on the upside move last week would be a positive for the position going forward. 
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks were gaining some ground and I still like our position going forward. We add our long positions in stocks back (Added 2500 shares at the $16.35 mark  on 10/21). Stop is $15. (ADDED 2500 shares at $17.15 and target is $18 on the move short term as trade in the position.) (50 Feb 17 puts @ 60 cents. ADDED) TODAY: May need to add to our put contracts as this is not working out well as banks remain under pressure.
  • Whole Foods Market (WFM) 11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position. Small range as market keeps stock in check. TODAY:  Cleared the $50.80 resistance, and holding up well for now as we remain patient. breakout confirmation needed today.