Trading Notes for Today, July 16th

Notes from Tuesday’s Trading:¬†

Opposite trading day from Monday as the Ms. Yellen set the tone for the market in her testimony to Congress. Thankfully this only happen twice a year! The best quote of the session today was, “Valuation metrics in some sectors do appear substantially stretched ‚Äďparticularly those for smaller firms in the social-media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.” ¬†First that is vague, second how would she really know or be qualified to comment on valuation of specific sectors in the market? and third, why even make the comment?

It did however prompt a response from investors. Biotech (IBB) fell 2.3% on the day in response to the comments and back to testing support at the $250.50 mark. Social Media (SOCL) fell 1.2% bounce off the low of the day and holding $18.90 level. These are the events that are a challenge for investors as they blindside the market and prompt a sentiment change. Watching this tomorrow to see how it follow through or if investors see this as an opportunity.

Market is starting to take on characteristics of large caps value being safer than growth. This happened in March with the S&P 500 index moving sideways and the small cap stocks moving lower. Watch to see if this unfolds again and re-position money in that direction if we get confirmation.

Retail sales data was out this morning and it was not good, growing 0.2% in June and 0.4% ex-autos. The numbers was expected to be 0.6%. Auto sales have been up, but the deep discounts being offered showed sales off 0.3%. Home improvement stores fell 1% reflecting a slowing in spending in the housing sector as well. This data doesn’t bode will for the 3.5% GDP growth being forecast for Q2.

Earnings were the other catalyst on the day with JP Morgan missing on the revenue side, but beating on the earnings side. The stock was up 3.6% on the day. Banks (KBE) held their gains today up 1.1%. Goldman Sachs (beat earnings today) was up 1.3% and Bank of America (reports tomorrow) was up 1.7%. I still like the sector short term on the positive results.

The Empire State manufacturing index rose to 25.6 versus 17.3 expected. That was a great improvement for the region and bodes well for other data going forward in the sector. Maybe the economic outlook is improving? Time will tell.

Speculation was running in the headlines on Tuesday that the UK would hike rate in the November time frame. Yellen eluded to the Fed moving up their timetable if the employment data continued to improve. This could interesting as we approach the fourth quarter.

The data had investors handcuffed most of the day. Watching to see how today will play out following the introduction of the news, earnings and economic data.

Sector Notes: 

Below are notes of interest and what we are watching looking forward:

  • JP Morgan and Goldman Sachs added to the positive earnings in the large money center banks. KBE was up more than 1% on Tuesday and looking for the good news to continue this morning with Bank of America reporting.
  • Biotech (IBB) down 2.4% on Yellen comments. $250.50 support in play based on the move. If we break lower today it could move to the 50 DMA support or the even the 200 DMA. BIS is the ProShares UltraShort Biotech ETF if the trade develops.
  • The¬†sales reports released on Tuesday validated the slowing in consumer spending. Retail¬†(XRT) dropped on the day in response and today we are looking to see how the sector responds after thinking through the data.¬†The luxury end of the sector is doing well, but the lower to middle portion is experiencing a slow down.¬†This is a stock picking sector if you are going to put money to work. AUG 85 Put (entry on move below $85 on stock).
  • Rumblings again in Russia and Ukraine issues. RUSL lost 5%¬†the last two days¬†and watching to see if this develops more downside pressure. $20 is the key support level and¬†RUSS is the short side trade on Russia and the move back above $10.50 is¬†interesting.
  • Gold sold off 2.3% Monday and dropped 0.95% today. The gold miners (GDX) lost another 3.1% today equaling the drop on Monday. That breaks the trendline and opens the downside to further selling if the buyers don’t step in soon.¬†$25.50 is the level to watch on GDX for support.
  • Crude oil remains in a slump.¬†The break below the $100 mark on Tuesday puts the downside in play, but still looking for hold near this level and bounce. Patience in any trades with the sector for now. EIA lower outlook for usage of crude globally and speculation is subsiding for now.
  • Volatility made a move on the upside last¬†week with the VIX index making a move¬†above 13. Monday the VIX retreated to 11.4 and¬†Tuesday closed just above the 12 level. No clarity on direction and intraday movement is in vogue for now.
  • China (FXI) as we noted in the weekend notes, did make the reversal and continuation of the upside on Monday, held on Tuesday and looking for upside follow through today. The gap open avoided the entry price to add the position, but we will watch how it trades near resistance at the $38.40 mark and potential trade at the $38.50 mark.
  • Emerging Markets (EEM) pushed back near the current highs after some brief selling last week. Holding a move above the $44.20 level would be of interest.
  • Transports (IYT) breaking from the consolidation pattern near the $149 mark. This is a positive for the major indexes overall. Lower gasoline and oil prices would help if the prices remain lower near term. Watch for the industrial (XLI) sector to move on this activity.
  • Utilities¬†produced a small bounce after heavy selling on Monday. The sector (XLU) started higher, but gave up the gains on the Yellen comments, but managed to hold on to a 0.5% gain for the day. Still watching support and the downside for the sector.
  • S&P 500 index tested 1960 support, bounced and is moving back towards the previous high.¬†After a very mixed week of trading in the index¬†with¬†the¬†leadership¬†being¬†tested, but back on the upside as we start a new week of trading.
  • NASDAQ Index¬†tested¬†the 4350¬†level held¬†and has bounced back with a solid gain on Monday. The index is still in a positive trend and continues to hold above support. The leadership from technology, telecom and large caps stocks (The NASDAQ 100 index) continues the¬†leadership for the broad index.¬†Keep your stops in place and¬†see how it plays out near term.
  • Small Caps (IWM) – Small caps¬†tested the 50 day moving average and the held above the $114 support. Watching to see if the upside resumes with a close above the $116 as a trade opportunity. Not overly impressive on Tuesday, but watching.
  • Technology (XLK) false test lower and¬†broke¬†higher above the $39 mark on¬†Monday and tested the move on Tuesday. The¬†semiconductors (SOXX) are consolidating near the high and worth watching as well.¬†¬†FDN tested $58, held and¬†solid move on Monday to continue the¬†upside¬†trek. IGV made solid move on the upside as well with IGN the laggard of the sector. Watch and manage your risk.
  • Consumer Staples (XLP) moved¬†off the lows and held¬†last¬†week. This is a defensive sector on the rebound and could offer some upside opportunity as well. Watch for entry at the $45.25¬†which was hit on Monday.

Practice patience and trade with discipline.

Market Story & Outlook:

Temporary fear from Portugal’s financials stability, Ukraine and Iraq continue to deal with geopolitical issues that threaten oil production, and optimism in the US markets are still being fueled by the belief the economy is getting stronger. However, Yellen comments did have an effect on the growth sectors. The focus remains on a optimistic outlook both domestically and internationally. Any hiccups along the way are soon pushed to the side on the belief of improvement going forward. Thus, markets started a recovery on Friday and followed through on Monday. Remember, regardless of what we believe, the outlook is positive and that is keeping buyers engaged¬†with¬†the trend line moving higher. Watch for rotation on the Yellen effect.
Earnings are the¬†current¬†chapter in the story of the markets and they started¬†off with positive results thus far. I am not going to attempt to understand the rationale behind slower economic growth and higher stock prices. But, the stock buybacks have been the key ingredient to keep prices rising. Throw in some mergers and acquisition activity and you have plenty of ‘reasons’ for stocks to go higher. This earnings period is going to be interesting relative to the reaction from investors as the data is released¬†going forward. The financial sector has started on a positive foot, but there is plenty to come with both regional banks and technology reporting.
Until there is a reason to doubt the projections about the future the trend is moving up and we move with the trend.


Sector Rotation Model (updated Р7/15/14)

ONLY ETF Model (updated Р7/15/14)

S&P 500 Index Model (Updated Р7/15/14)

ONE EGG Model (New Scan Results Posted Р7/15/14)

Pattern Trading Setup:

  1. SPWR – entry $39. Tested $36 support and held with an upside opportunity short term.
  2. ALXN – entry $165. Trading range move higher. Healthcare is a leading sector.
  3. EEM – entry $44.30. Break from consolidation. Upside opportunity still in play.
  4. LNKD – entry break below $156.10. Bear flag. Resuming downtrend after bounce attempt. In the social media sector. Short stock or 160 Aug Put.

Pattern Trade Tracking & Follow Up:

  1. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $43.50
  2. T Рentry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $34.75.
  3. GILD Рentry $83.50. Cup and handle pattern. Biotech remains one of the leaders. Stop $86
  4. AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up. Stop $93.30
  5. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 16.75.
  6. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 94.
  7. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
  8. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
  9. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.15
  10. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $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.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.30.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.
  • 6/10 – Adding shares today on the move higher in pre-market. Added 500 @ $64.20 on Tuesday. News of Facebook adding the President of PayPal to staff prompted investors off the sideline on the idea. Watch and manage the risk after the euphoria evaporates.
  • 7/11 – Added the position back of 1000 shares at $65.15. Upside opportunity is still in play.