Trading Notes for Today, January 30th

The sellers return to capture more downside and put the markets in position to test lower. As we stated in the update last night the catalyst is shifting more towards the earnings disappointments. The guidance looking forward has not been encouraging from some of the key companies such as Apple. What some have been concerned about for the last 3-4 quarters is starting to look more like a reality than many believed. How does it play out? That is anyone’s guess, but one thing is certain, investors hate uncertainty. Unfortunately that is exactly where we find ourselves currently.
After-hours Qualcomm and Facebook added some positive news to earnings both beating and trading higher. Maybe they will have a positive impact on today’s open.
Sectors to Watch:
  1. S&P 500 index tested below the support at 1775 to close at 1774. Until there is more clarity on the horizon the index may now be content to trade at the current levels. The next support would be 1745. Index volatility has picked up as well with the VIX index hitting an intraday high of 19. A move back towards the 15 level would show the anxiety is dropping and a bounce may follow. The spike that started on Thursday of last week is not over yet. Watch $32.05 mark on SDS as downside opportunity if the index continues to break and trade towards the next level of support.
  2. The NASDAQ index closed below the 4075 support level and the 50 DMA again today closing at 4051. The technology sector is leading the downside along with semiconductors. The next stop may be 4000 on the index for support. QID is in play currently.
  3. Dow is in the worst shape of the major indexes technically. 15,710 is the next level of support and we tested that level on Wednesday. A break of this level and the 200 DMA comes into play short term. Large cap stocks have been the weak link in this test lower and it isn’t showing signs of improving near term. The index is down 5% YTD and leading the downside charge. The up trendline off the November 2012 low is still holding up and is unison with the 200 DMA. DXD is the short ETF if we break support.
  4. Russell 2000 Small Cap index held 1120 support again after a bounce back to the 1135 mark on Tuesday. The close was below the trendline off the November 2012 low. The move below the long term up trendline is a negative for the index and the overall outlook for the broad markets. TZA is the leverage short trade on the index.
  5. Europe (IEV) bounced 1% on Tuesday and reversed on Wednesday. Not what many expected with the positive economic data in Germany and the eurozone over the last week. We would need to move back above $46.52 to hold the uptrend currently. $45 is the next level of support to watch.
  6. Natural Gas (UNG) tested for two days to digest the 17% move from last week and then added 10% on Wednesday. The cold weather blast this week along the southern states is adding to the demand outlook. The natural gas stocks (FCG) we up today enough to hit the entry point, but they have lagged the commodity significantly. Still looking for the upside to respond.
  7. China (FXI) bounced off the test of the low at $34. But, worries sent the country ETF right back to support at the $34 level again. A break of this level and adding to FXP is the trade with the target at $31.80 on FXI.
  8. Gold miners (GDX) tested the move with $22.50 support in play and bounced Wednesday as gold move up 1.2%.  Gold prices moved above the $1255 level to $1262 and is trading higher early. The metal has struggled to add to the upside gains. Still looking for a upside catalyst to boost prices.
  9. The FOMC meeting ended today and with the results were as expected with more stimulus cuts and hope of an improving economic picture. Another $10 billion is the goal. The reaction was muted as the indexes were already trading lower on the day. The inflation mandate remained, but then there is no inflation. Some selling into the close, but we will see the true response in tomorrows trading.
  10. Earnings have not disappointed thus far in reference to the lowered expectations and outlook. The worries are growing in relationship to this issue as investors start to realize the pick up in the economy is not translating into to growth in earnings. I am not surprised, but some seem to think this is the first time this has been stated. The worry is creating volatility in conjunction with the emerging market concerns. If this dominates the sentiment the downside will remain in control with the sellers gaining strength.
  11. Facebook beats earnings expectations and is up more than 8% after-hours. This could impact technology stocks today along with Qualcomm beating after-hours as well and is trading up 2.5%. The better earnings are the more the worries will be put to the side, but for now we take it one day at a time. Remember Amazon reports tonight after the bell as well.

The models have raised cash as result of hitting stops, but we continue to look for the short term trading opportunities as this all unfolds. Tuesday’s bounce was modest and it failed to result in any progress following Wednesday’s selling. We are willing to sit and let this unfold for now as some clarity is gained in reference to direction short term. 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 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 on trades more aggressively as volatility remain in play.

Pattern Trading Setup and Tracking:

  1. Downside taking on leadership… Watching for follow through and conviction.
  2. EGN entry $71.20. Break from trading range again.
  3. GILD entry $81. Test hit stop. upside still in play. Looking for some upside conviction to take entry.
  4. SDS entry $32.05. Break of key support. Waiting for the conviction to show on the downside. 
  5. TZA entry $18.70. Break of key support. Waiting for the conviction and support break.
  6. Follow up on previous trades or posts:
  7. YRCW entry $20. Cup & handle breakout. Transports were leading see if they recover.
  8. SVXY entry $62.25. Play on decline in volatility as fear subsides. If works may exit before the close today with target of $65. Held overnight and Stop $64. Gapped lower and exited the trade at break even $62.25. HIT STOP
  9. QID entry $62.75. Use patience on the entry today. Stop $62.10. Watch any rally short term.
  10. FIO – Entry 9.85. Double bottom. technology sector still leading. Stop $9.85.
  11. JBL – Entry 17.60 test. Broke above resistance $17.48 and testing. Stop $17.60.
  12. 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.
  • 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.