Trading Notes for Today, January 9th

Notes to Note: 

The follow through move on Thursday made it to the next resistance point, but it is still not an overly convincing move. It has that feeling of one foot in the door and one foot out. Some speculated it was short covering in front of the jobs report today, some believe it is Fed induced with comments about when rates will rise, and some believe better same store sales helped. It is that splintered belief that is unsettling about the bump higher. This remains a trading market environment and nothing more at this point. You take the trades for what they are, but looking forward it is still a complete roll of the dice on how the economic picture will unfold.

Looking at the charts we are in the precarious position of resistance at various levels. IBB hit the previous highs as an example and now needs to push through to new highs. IWM hit the $118.50 mark and needs confirmation to break through. SPY is at $206 resistance and needs to push through resistance. As good as the move was on Thursday the next resistance level is in play for the leaders and want  to be leaders. For me, this will will be the key for today’s trading.

Futures are flat, Asia was flat, Europe is flat… it is up to the jobs report at 8:30 am to provide a spark on the upside. Wouldn’t be surprised to see a day of rest as we head into the weekend… keep your focus and set your stops to manage the risk of the uncertainty that remains in the market.

The ten-year bond gave up some ground on Thursday as yields move to 2.01% or up 6 basis points. The bond has gained 0.8% this week hitting a new closing 52 week high, but is testing the move higher on the rally in stocks. The question remains: is this move telling us something about stocks? To this point no… it is simply acting as a defensive buffer when any selling takes place in equities or a flight to quality. Until the Fed hikes interest rates and/or there is a threat of inflation moving higher it remains a safety issue not an indicator for stocks.

The NASDAQ closed at 4736 Thursday up 87 point or 1.8%. That puts the index up 11 point for the week. A nice double top pattern reversal is not turning into a double ‘V’ bottom type pattern. We tested support at 4555 and reversed off the low. The long term uptrend is still in play, but the risk of moving lower has not been negated necessarily by the move higher. There is the jobs report tomorrow and earnings are on the horizon along with the December sales reports. Plenty to watch.

The S&P 500 index closed at 2062 up 36 points or 1.8%. It is now up 4 points for the week. The index has struggled to start the week, but has found some footing and held the uptrend off the October lows. The leadership in the move has came from the defensive sectors on Wednesday and some growth sectors on Thursday. Still need to see some risk on trading to believe the bounce is more than just a bounce. Key resistance at the 2060 mark and in need a catalyst to push through that level and beyond the previous highs is the uptrend is to continue. As stated above there are plenty of things on the horizon that can offer the needed catalyst… 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 for a move back to the 1150 mark… that all happened on Tuesday with the index hitting 1153. The close at 1195 today up 19 points or up 1.6% on the day puts the upside back in play. 1220 is the next hurdle to jump for the small caps.

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. Buying has now pushed the index back to the 17 level. A move back to 14 would complete the round trip of selling then buying or another ‘V’ bottom on the major index.

The Dollar (UUP) continued higher on Thursday at $24.50 (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 investors struggle with uncertainty about both the US and Global economic picture. The bounce back from the five days of selling to start the new year is a plus, but we still have to clear critical resistance levels and deal with an onslaught of data heading our way. Jobs report today, earning start next week, more economic data out next week, etc. I stated we needed a catalyst to keep the party going on the upside… All the data may well provide that catalyst for the markets. If the news is bad we return to the downside test with the sellers stepping back in. This remains a traders market with plenty of risk to deal with.

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. We stated not to take the initial selling as a clear sign of the market caving in on themselves. The bounce the last two days has provided some relief, but there are still plenty of questions on the horizon that only the data will provide going forward. This remains a traders market and the news will continue to provide for the volatility and direction day to day. There are many moving parts as we discussed above and we will wear our patience hat and see how investors feel relative to stocks. Take it one day at a time for now and understand the trading environment short term.

Solid Rallies on Thursday: XLB, XLK, XLE, XLI – some growth sectors finally

Rallies worth Watching Friday: XLK, XLE — need XLF to join the upside move

Didn’t Rally on Wednesday: XLU, XLF

Sectors of Interest from Thursday:

The homebuilders (ITB) jumped again today gaining 2.4% and recaptured the highs from November. Digging into the sector the leaders were the supplies USG, LPX, OC, TREX, etc. The builders moved higher, but it those supplying the building materials that made the move today. The charts of these are worth some study as they do present some opportunities.

Emerging markets (EEM) jumped back to the previous high to complete the double bottom pattern, but it does need to break higher and clear resistance at the $39.50 mark on the ETF. High risk in the sector as the uncertainty pertaining to the global economic picture is on the table. However, if the US markets are in rally mode I would for this sector to tag along. Europe, China and others are moving higher the last two days as well.

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. THURSDAY: Moved to $48.65 on some buying. UCO entry at $8.60? Worth watching as a trade opportunity. See ONLY ETF Watch List

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. THURSDAY: inside trading day pushed to the upside and could offer a short term trade back to the $80.50 level. ERX would be the ETF to trade on the move. $55.10 entry ONLY ETF.

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. THURSDAY: If rally continues today look for trade in TBT (short bond) as trade on the move.

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. THURSDAY: still holding up well and got the bounce back to the $315 mark. Looking for a break above resistance today as upside follow through.

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. Upside in play, but need to clear resistance today to keep the move higher in play.
  2. GOOG – entry $503.65. Bottom reversal. March 505 calls. patience on the entry if it gaps open.
  3. TWTR – entry $39.30. Break from basing bottom. Trade off the long term position below.
  4. EEM – entry $39.55. Trade of double bottom pattern. Very volatile sector currently, but oversold and will bounce if the worries subside near term. Gapped past entry.
  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. Gap Open past entry point. Still watching for test.
  6. PXLW – entry $4.80. Break of downtrend line. Semiconductor sector and looking for some leadership to return.

Pattern Trade Tracking:

  1. JD – entry $25. Break from base or bottom trading range. Internet sector. Need follow through on upside with some volume. Stop $24.
  2. 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
  3. 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.
  4. 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. FRIDAY: Testing the bottom of the current range and bounced … bounce we added to our positions. 500 @ $77.50 Thursday.
  • 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. FRIDAY: Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. 
  • 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. (ADDED 2500 shares at $17.15 and target is $18 on the move.)
  • 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. FRIDAY: Still need to clear the $50.80 resistance, but holding up well for now and was close on Thursday.