Trading Notes for Today, January 8th

Notes to Note: 

Buyers step in at support, but are they willing to take on more risk in light of the current uncertainty looking forward?¬†Two concerns as we start the trading day… first, treasury yields continued lower despite of the bounce in stock prices. Second, volume was lower than the selling. We closed with and inside trading day and the jury is out on which side will take control from here. The futures are pointing higher on the day as oil prices remain steady and Europe is moving higher.¬†How do we approach the bounce off the low? As just that a bounce trade and nothing more at this point. If you look at the ONLY ETF strategy we posted a few bounce trades based on Wednesday’s move. This remains a trading market which favors this strategy for opportunities. Nothing is completely clear and the charts remain a bit of mess from the selling, but it has set up a few trades and we will treat them as that and nothing more for now. Still work to do if this move is to renew the upside trends.

The ten-year bond advanced in price again as the yields continue to find reasons to move lower despite the buying in stocks. The yield closed today at 1.95% or down 1 basis point. The bond has gained 1.2% this week hitting a new closing 52 week high. As we discussed last week this is acting as a contrary indicator to stocks going higher, but we continue to watch how this unfolds. Proceed with caution as the yields are accelerating to a climax run and may have hit a high in price short term.

The NASDAQ closed at 4650 Wednesday up 57 point or 1.2%. That puts the index down 76 point for the week. A nice double top pattern reversal in play with a test of near support currently at 4555. The long term uptrend is still in play, but the risk of moving lower has not been negated by the move higher. Inside trading day and looking for a resolution today.

The S&P 500 index closed at 2025 up 23 points or 1.1%. It is now down 32 points for the week. The index has struggled to find any leadership as all ten sectors lost ground in five downside trading days and Wednesday producing a modest inside trading day bounce. Energy is the downside leader losing 5.6%. Materials off 2.5% and industrials down 3.9%. Financials gave up 3.6% showing more weakness than expected in the selling. Consumer staples down 0.6% and healthcare up 0.8% (defensive sectors) held up the best, but still challenged in the current move. What do we make of the action? Uncertainty at its best plain and simple, patience as this all unfolds.

The Russell 2000 index broke below the¬†1190 level after a nice move through this mark to end the year. It did manage to hit a¬†new high near the¬†1220 mark before reversing back below the 1190 level again on Monday. I stated to watch a break below 1180 to short back to the 1150 mark… that all happened on Tuesday with the index hitting 1153. The close at 1175 today up 14 points or up 1.2% on the day. Looking to hold the support or test the December low with an inside trading day on Wednesday.

The Volatility index tested support at the 14 level, but when the data hit and the uncertainty jump with¬†the index rising to back near¬†the 23¬†mark, but has now moved back to the 19.3 level on Wednesday. Once again 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 at the spike higher and test shows. The question is will fear step in and escalate the selling? Still have to patient as this unfolds.

The Dollar (UUP) continued higher on Tuesday at $24.39 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 91.99. The stronger dollar remains a positive from my view going longer term. Still looking for more upside strength in the buck. 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. The impact to oil is showing as well near the $48.65 per barrel level.

There is¬†plenty of¬†speculation in the markets currently as all the new year prognostications are put forth and the negative data to start the December economic reports set the tone. I am not big on speculation or guessing where the market ends one year from now. But, the ability to look at the trendlines and determine the direction currently and going forward is key to managing your portfolio. Long term trendlines remain on the upside. The micro term trend (0-13 weeks) is where the problem currently exist. A double top pattern on the major indexes has set up a possible downside move.¬†That creates worry from a technical viewpoint. The data started out negative for December and that has the worry zone rising again. Global indicators are still week and Greece is back in the picture creating more uncertainty for the Euro zone. Bottom line is we are starting the new year with renewed uncertainty and that creates volatility. We have to be patient short term and take what the market gives. This is a trading market and time horizons are short term. Longer term positions must be managed on the longer term trendline as exit points. Understand and respect your surrounding relative to the market. Don’t over think your response. Plan and execute your plan according to the strategy you have deployed for the positions you hold. Let it unfold and respond accordingly. Attempting to predict the future generally ends bad.

Economic News for the Week:

ADP private sector jobs report was positive adding 241k new jobs. This was a question mark heading into the report and that is a positive for the jobs report on Friday. The trade deficit was better with oil prices continuing to fall and the FOMC minutes shed some light on interest hike time line. All is good… maybe.

ISM services for December were 56.2% versus 59.3% in November and below the expectations. This confirms what the manufacturing numbers showed on Friday… a slower December. Some slowing was expected, but it was weaker and that has put concern on the table about the US economy along with the global markets.

Factory orders were of 0.7%, durable goods were lower 0.9% and non-durable goods were down 0.5%. All less than expected and only adding to the concerns.

December data disappointed investors and the upside move on Friday turned sour. Markit PMI started with a miss reporting 43.9 versus 54.8 in November. Then ISM manufacturing came in at 55.5% versus the 57% expected and 58.7% in November. That set the tone for the trading Friday and may well overlap into next weeks trading if the numbers are not better in the services sector. This is a key point to watch as the data unfolds this week…

Some thoughts on news/events and statistics impacting investor psyche:

*¬†Worries are building again over the price of crude oil pushing lower towards the $48 mark. This worry isn’t going to be removed anytime soon. The weekly inventory reports don’t show any signs of demand rising short term. For now you have to assume this remains a concern.

* FOMC meeting was catalyst for the upside… still too much uncertainty relative to the outlook and what the Fed will do relative to interest rates going forward. Still looking at June/July time frame for hike.¬†Watch this to see how it impacts the psyche of the investor.

What to watch¬†this week…

Trading has begun in¬†earnest again with everyone back to work and¬†scratching their heads over the start to the year.¬†Don’t take the initial selling as a clear sign of the market caving in on¬†itself. There will be some shots on the upside to test the resolve of the sellers (Wednesday), but for now they have gained some¬†control. Today will offer further insight to the resolve of the buyers. There are many moving parts as we discussed above and we will our¬†patient hat on to see how investors feel relative to stocks. Take it one day at a time for now and understand this is a trading environment short term.

Solid Rallies on Wednesday: XLV, XLP, XLY

Rallies worth Watching Wednesday: XLK, XLF

Didn’t Rally on Wednesday: IYZ, XLE

Sectors of Interest from Wednesday: XLU (building a base), XLI (doji bottom?), SVXY (doji bottom?), FXI (ready to move higher despite previous selling), IRY (break from consolidation to new high), XRT (bottom reversal from selling) and IBB (positive reversal from selling).

Volatility Index (VIX) moved back to the 20¬†mark. The move on Friday left some question marks about the uncertainty levels still in the market. We closed off the highs, but the trade in VXX is still worth watching as the short term directional trade. WEDNESDAY: made move lower on the buying closing at 19.3… uncertainty is driving currently unless we drop back near the 14 mark.

Crude oil remain on the worry list closing at $52.81 as inventory data disappoints again. The stronger dollar is having¬†an impact relative to the¬†bounce in the buck on Friday. As if the commodity needs any more pressure than it already has on the downside.¬†Short side of oil is to be considered. SCO. WEDNESDAY: Moved to $48.65 on some buying Wednesday. SCO holding near the highs still… Watch for a bounce in crude prices ¬†to continue today and back near the $50 mark.

Energy (XLE) the sector has fallen 21.6% since the high in June. Oil has declined 51% during the same period. This is commonly referred to as a discrepancy. Either oil prices need to rise or energy stock price will fall to close the gap. This could offer a trade to be short energy stocks and long oil going forward. Food for thought. WEDNESDAY: inside trading day as stocks tread water in the sector. Test of the December low in play or bounce?

Treasury Bonds (TMF) jumping higher on the uncertainty pertaining to stocks. Broke through resistance on Monday and heading higher if this current move gains traction. Watching for test of the move as opportunity to add to holding. WEDNESDAY: More money flow into the bonds continues despite buying in stocks… take what they give, but understand the risk of the rise. Fear versus concern is the issue for the bond. If fear rises there is more upside.

Semiconductors (SOXX) are setting up with a double top as well and putting pressure on the technology sector overall. Without the upside leadership from the sector¬†this could be a catalyst sector for the broader indexes. Watching the downside play short term. If… SOXX can hold above $92 this week the upside trade may return, but for now the bias is on the downside. WEDNESDAY: added 1% on the upside and back to¬†the December lows. Not looking good short term. SOXS has been the trade.

Biotech (IBB) tested back to $293 and closed at $306 with a bounce off the lows. The key is how they unfold going forward. They are holding up after last week, but still need to see how it unfolds this week in trading. Time will tell as we own the biotech sector and will look to add if the upside holds to start the week. WEDNESDAY: still holding up well and got the bounce back above the $308 mark. Held the $293 support and back above resistance to close at $312..

Emerging markets (EEM) reversed the small rally on Friday with negative sentiment returning to the global markets. Downside trade is back and a test of the $37 level on EEM is likely based on the data and the sentiment in the sector short term. EUM short ETF. WEDNESDAY: Relief bounce off the selling to gain 2.1% Wednesday. Watch for follow through on the buying.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†Revisions to the investment options started January 1st
  2. Sector Rotation Strategy- NEW STRATEGY started on January 1st.
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Starting out with some interesting patterns and a psychology that is teetering on a negative bias. Watching how it unfolds at support today.
  2. GILD – entry $99.60. Bottom reversal follow through. Bounce back from the selling in December tested resistance and ready to move higher.
  3. EEM – entry $38.90. Trade of double bottom pattern. Very volatile sector currently, but oversold and will bounce if the worries subside near term.
  4. JD – entry $25. Break from base or bottom trading range. Internet sector. Need follow through on upside with some volume.
  5. JPM – entry $59.90. bottom reversal. banks have sold to the December low of support and ready to bounce? Watching to see if they follow through or find any upside momentum.
  6. PXLW – entry $4.75. Break of downtrend line. Semiconductor sector and looking for some leadership to return.

Pattern Trade Tracking:

  1. GDX Рentry $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.
  2. 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 as investors sort out the facts and fiction. THURSDAY:¬†Testing the bottom of the current range and setting up to bounce or fail… bounce we add to our positions.
  • 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. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)¬†Broke down and trading lower, we exercise the put if no bounce. $36 is potential support. Watching how to trade this near term. THURSDAY: failed to hold the bounce on Wednesday on a positive trading day? Big negative from my view. Watch how it reacts today.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks are finally gaining some ground and I like our position currently.¬†We add our long positions in stocks back as held support¬†and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15. THURSDAY:¬†All the way back to support AGAIN! Frustrating, but could give a trade opportunity on the position to buy above Wednesday’s high and sell at $18 for trade only.
  • 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. THURSDAY:¬†Still need to clear the $50.80 resistance, but holding up well for now.