Trading Notes for Today, January 28th

The markets sold lower to start the day and then some buying only to sell lower into the close.  The reason for the selling remains mixed through the headlines. China, earnings, economic projections, speculation and more. My favorite headline is, “the S&P 500 is teetering on brink of a technical precipice!”  It just sounds dangerous. Regardless of the reason the fact that the markets are attempting to shift direction/trend short term is news enough. The reason is always clear after-the-fact. In other words hindsight will clarify what is happening and why. That doesn’t help you and I now… or does it? We cannot predict the future and that unto itself should help understand the need for patience.
We are at the point of decision technically for the broad indexes. We discuss those levels below and what action we will take should those levels break and the index move lower. Watch, plan and execute according to the discipline and strategy you want to deploy. Know that having a belief is only part of the process. Letting the market confirm your belief is the other half along with adjusting direction to stay in alignment with the market. One day at a time is how we have to approach the current environment.
Sectors to Watch:
  1. S&P 500 index traded to the 1775 support level on Monday. The bounce didn’t hold up well, but was enough to close above support. Now what? Break support on SPY at $177.60 and the short side becomes of interest as a trade. SDS entry $32. If the bounce does hold in trading today SPY would need to clear $179.25 to be of interest along with an upside catalyst. Trading up in the pre-market watch to see if it last.
  2. NASDAQ added another 45 points to the downside on Monday to close at 4083 and near the 50 DMA. A break of this level opens the downside trade opportunity with DXD. The earnings disappointment from Apple after hours has the index trading down 12 points pre-market at 3491 on NASDAQ 100 index. QID is at $62.95 up nearly 0.7% in response. Use $63 as the max entry point for any trade today. However, be aware of the fact that SPY and DIA are up more than 0.5% in the pre-market and will have an influence on this index other than Apple.
  3. Dow is in the worst shape of the major indexes technically. 15,710 is the next level of support which 117 points below the close. Not enough to interest me on the downside to support, but if the two indexes above break lower they will likely take the Dow with them. DXD trade with entry at $30.10 or better ($29.50 would great entry point). Test of support and a bounce would make it interesting. Would have to be accompanied by a meaningful catalyst.
  4. Russell 2000 Small Cap index broke fell to 1120 support and closed at 1127. A break below support opens the short trade with TZA entry $18.60 (leveraged ETF). The index could be the leader on the downside if both technology and biotech continue sell near term. Upside reversal off support? Need to be accompanied by a catalyst to trade.
  5. Natural Gas (UNG) gave up 5% of the gains on Monday. Is the rally over for the commodity? Not likely with the next blast of cold air heading east. The natural gas stocks (FCG) have not responded to the commodity and are still on the watch list to buy. A test to $22.50 on the commodity (UNG) would be of interest for an upside trade. 32
  6. China (FXI) bounced off the test of the low at $34. The worries remain, but looks like it wants to hold this support level near term. Watch your stops and protect against the bounce, but the downside pressure isn’t going away anytime soon.
  7. Gold miners (GDX) testing the move with $22.50 support in play.  Gold prices moved above the $1255 level, but have struggled since to add to the upside gains. No inflation worries for one, but the FOMC meeting starts today maybe they can stir up some interest.

The models are updated and stops have emptied the portfolio. Friday was a mess and the continuation on Monday didn’t help. The failure of the bounce to hold was a concern in the afternoon. We will set back… regroup and determine the best course of action as we progress through the week. We are watching the support levels as defined above and we will act accordingly. Technical damage has been done and potentially more on the way as the trend is challenged. No reason to panic and no reason not to add to positions if the opportunity arises. The key is to manage the risk on trades more aggressively as volatility is on the rise.

Pattern Trading Setup and Tracking:

  1. Hit more stops as the selling continues. The drop on Friday broke up many patterns and puts an adjustment period in play relative to this strategy. However, support lines now come into play as a derivative of the strategy for short trade setups. We will look to see how Monday unfolds and make our adjustment accordingly.
  2. QID entry $$62.80 ($63.45 pre-market on Apple) max entry $63.80. Break of key support level.
  3. SDS entry $32.05. Break of key support.
  4. TZA entry $18.70. Break of key support.
  5. SVXY entry $62.25. Play on decline in volatility as fear subsides. If works may exit before the close today with target of $65.
  6. Follow up on previous trades or posts:
  7. FIO – Entry 9.45. Double bottom. technology sector still leading. Stop $9.18.
  8. WEN – Entry 9.12. Break from trading range. Fundamentally performing well in tough sector. Stop $8.95. STOP HIT.
  9. JBL – Entry 17.60 test. Broke above resistance $17.48 and testing. Stop $17.60.
  10. TQNT – Entry $8.50. follow through on break from trading range at $8.50. Semi’s still moving higher. Stop $8.50. STOP HIT.
  11. GLD – Entry $121. Bottom reversal. Trade back to the $125 level. Took entry on move higher Stop $119.

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.