Trading Notes for Today, January 31st

Positive earnings from Qualcomm and Facebook set the tone for trading Thursday with technology stocks leading the major indexes higher. The tech sector (XLK) was up 1.2%, Internet (FDN) added 3.4% and biotech (IBB) gained 3%. The large cap stocks have been a challenge for the broad markets, but added to the upside today. Unfortunately, after-hours Amazon disappointed by missing earnings and put some interest back in the open today. It is currently trading lower by 4% after being down 8% following the news. Watch to see if it impacts the sentiment on the day.
Our focus remains on the major indexes and their ability to hold support currently, but equally as important is the ability to resume the upside going forward. The sellers are not done as seen in the after-hours trading with Amazon. Be patient, be disciplined and focus on your objective. Sometimes the best trade is no trade. Today we are looking for a follow through on the upside bounce.
Sectors to Watch:
  1. S&P 500 index tested below the support at 1775 and bounced again back to 1794 on the day. With four days of ups and downs the index may be content to trade within the current levels. The next support would be 1745 and resistance at 1810. Index volatility has picked up as well with the VIX index hitting an intraday high of 19 and a test back towards the 15 level would show the anxiety is dropping and a bounce may follow. The index made it to 16.6 today as a start in that direction. The spike that started on Thursday of last week is not over yet. Today look for the follow through on the bounce back towards the resistance levels.
  2. The NASDAQ index gained 70 points to close at 4122 and back near the Monday opening bid. The index has been extremely volatile on the week with the technology sector leading the downside along with semiconductors. 4000 is the next level of support and 4135 resistance. Watching to see how this plays out today. A follow through on the move higher would be a plus short term. The technology sector led by the Internet (FDN) stocks pushed the index higher. Watch how Amazon impacts the open today down $18 currently.
  3. Dow is in the worst shape of the major indexes technically. 15,710 is support and we tested that level on Wednesday. Thursday posted a modest gain of 0.7% lagging the other indexes. Large cap stocks have been the weak link in this test lower and it isn’t showing signs of improving near term for the index. The up trendline off the November 2012 low is still holding up and is in 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 1139 mark on Thursday. The close was back above the trendline off the November 2012 low. That was a positive and we have to watch to see how it plays our from here. The 30 DMA would be a good target to clear on the upside as breathing room for the index.
  5. Europe (IEV) bounced 1% on Tuesday and reversed on Wednesday, held on Thursday with no big changes. 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) so much for the 10% gain on Wednesday as the ETF erased 9.2% Thursday! What happened today? Some of the speculation was sucked out of the market or profit taking would be another version. The cold weather blast pushing up usage and speculation driving the price higher. The natural gas stocks (FCG) 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. Again a bounce on optimism in the US markets not China. Be patient and let this test of support play out. A break of this level and adding to FXP is the trade with the target at $31.80 on FXI short term.
  8. Gold miners (GDX) bounced Wednesday as gold move up 1.2%.  Sold on Thursday as prices went lower. Gold prices moved above the $1255 resistance level last week, but moved back below that level on Thursday. No follow through on the upside move as stocks rallied on Thursday. Miners continue to consolidate, but like plenty of stocks currently the upside is a challenge. Keep stops in place and see how the consolidation plays out.
  9. Bond yields continue to drop and push bond prices higher. If the economic picture is positive and the Fed is cutting stimulus… should rates be ticking higher? This may be telling us that something is wrong with the Feds view or investors are too worried about the future. Either way this is another indicator for the worriers to watch. TLT hitting against the 200 DMA.
  10. Amazon disappoints on earnings after-hours to put the pressure back on the large cap stocks. It is trading down 5% and not looking good despite the positive outlook for payment processing and other opportunities for the company. Margins were less than expected and the miss wasn’t even close. Google on the opposite side was positive with the stock up 1% after-hours, following a gain of 2.5% on the trading day. Again earnings are hit and miss, but overall disappointing.

The models have raised cash as a 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 followed by Wednesday’s selling, and Thursday’s buying and… We are willing to sit and let this unfold for now as some clarity is gained in reference to outlook 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 your emotions in relationship to the reality or results of the market versus what speculation is being put forward from analyst.

Pattern Trading Setup:

The bounce on Thursday needs an upside follow through or we are just back to the up and down trading we have experienced all week. Support levels held, now the question is if the upside can follow through?

  1. QQQ entry $8.60. Move through resistance and follow through on bounce off support.
  2. SDS entry $32.05. Break of key support. Waiting for the conviction to show on the downside.
  3. TZA entry $18.70. Break of key support. Waiting for the conviction and support break.

Pattern Trade Tracking & Follow Up:

  1. EGN entry $71.20. Break from trading range again. Stop $71.50.
  2. GILD entry $81. Test, hit stop. upside still in play. Looking for some upside conviction to take entry. Stop 77.40.
  3. YRCW entry $20. Cup & handle breakout. Transports were leading see if they recover. Stop $22.
  4. QID entry $62.75. Use patience on the entry today. HIT Stop $62.10. Watch any rally short term.
  5. FIO – Entry 9.85. Double bottom. technology sector still leading. Stop $11. big gain stop up.
  6. JBL – Entry 17.60 test. Broke above resistance $17.48 and testing. Stop $17.60.
  7. 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.
  • 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!