Trading notes for today, July 17th

Notes from Wednesday’s Trading:¬†

All is well… everyone has thought about the bubble talk from Ms. Yellen and decided she isn’t going to act even if she believes it is true. Despite the talk about sector valuations being high in biotech and social media, she references employment as the catalyst for the Fed to act earlier in raising rates. Please note that has nothing to do with the valuation of stocks. She knows that the price of oranges are too high, but she doesn’t want to do anything that may disrupt what happens with bananas. If we could all be so lucky as to use this rationale in managing our lives it would be wonderful.

Anyway, back to the real world for a moment, technology stocks moved higher by 1.1% on the positive earnings from Intel. The stock gained more than 7% on the day and the semiconductors as a sector were up 1%. In contrast, the social media (SOCL) stocks were¬†down 0.4% and biotech (IBB) was down 1.4%, that is the power of the Fed’s comments. For now the words have sent investors to look at sectors not mentioned in Yellen’s comments relative to valuation. This may present an opportunity in the both IBB and SOCL going forward because we all know she isn’t going to act unless the P/E ratio of the S&P 500 index spikes near the 30 level. Since it currently resides near 18 there is plenty of room for the Fed to procrastinate any “sudden” changes in rates. If you don’t believe it… look at the yield on the ten and thirty year bond… they both moved lower today.

The retail sector continued to struggle following the weaker sales data for June. XRT tested support near the $84.50 mark and held today, but we are still concerned about the downside risk in the category relative to growth in the economy and consumer spending. There is plenty of banter in the media relative to this topic, but it still comes down to the facts not the speculation. Sales are not growing. That aside this remains a stock picking sector.

On the economic front the Fed’s Beige Book was released today and it shows improved labor markets across the country. Not surprisingly the data fell in line with what the Fed has been pontificating the last 3-6 months. No surprises is good news to investors.

Industrial production was just below expectation at 0.2% growth, capacity utilization was unchanged at 79.1% and the producer price index (PPI) was up 0.4% and showing more inflation at the wholesale level. Oil prices are having an impact and could cause more inflation at the consumer level looking forward. More worries for investors to add to the growing list.

Earnings were the other catalyst on the day with¬†Intel beating expectations and leading the upside. Yahoo and Bank of America however, didn’t fare quite as well missing and tumbling lower. Tech, as stated above, did just fine on the day, but banks (KBE) fell 1.6% in response to BAC.

BRICS leaders announced the launch of a $100 billion development bank and a currency reserve pool on Tuesday. This is the first step toward what many call “reshaping the Western-dominated” international financial system. How this unfolds will be of interest to the world economies in time. For now it is an effort to give the emerging markets more say in global finances. The biggest concern is China’s desire to be a larger shareholder and decision maker in the bank.

It remains a data driven market currently with earnings and economic news driving the activity. Stick with the trend, manage your stops and let it play out one day at a time.

Sector Notes: 

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

  • Energy is the benefactor of crude moving higher on inventory data and speculation. The move is XLE puts it back in a position to continue the upside and break higher. XOP got the start of a bottom reversal with move up of 1.8% Wednesday. IEZ also made nice upside move with the services stocks making a solid reversal. Watching crude as the driver… if it continues to gain on the upside the stocks will get¬†stronger.
  • Biotech (IBB) down 2.4% Tuesday and 1.5% on Wednesday in response to Yellen comments. $246.70 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, but held on Wednesday. This is stock picking sector and scanning the ETF today for opportunities you can see the break higher in SVU as an example. AMZN broke from trading range, KMX and PETM gapped higher on earnings, AN on sales and KR holding near the highs. Scanning for the opportunities.
  • Gold sold off 2.3% Monday and dropped 0.95% Tuesday, small bounce today. The gold miners (GDX) lost another 3.1%¬†Tuesday equaling the drop from¬†Monday, and up 1.9% Wednesday. That draws a line for support?¬†$25.50 is the level to watch on GDX for support. Trading opportunity still a potential as this settles out.
  • Oil was up on the supply report today gaining 1.3% and USO produced a nice bottom reversal worth our attention going forward. Crude closed at $101.15.
  • 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 $38.650 mark. (SEE EGG Notes)
  • 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. Hit the entry point Tuesday.
  • 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. Still watching support and the downside for the sector.
  • 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 Wednesday on another failed attempt to move higher, but watching.

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.

Models:

Sector Rotation Model (updated Р7/16/14)

ONLY ETF Model (updated Р7/16/14)

S&P 500 Index Model (Updated Р7/16/14)

ONE EGG Model (New Scan Results Posted Р7/16/14)

Pattern Trading Setup:

  1. SPWR – entry $39. Tested $36 support and held with an upside opportunity short term.
  2. AMRI – entry $20.90. cup breakout and test. hold support of the breakout and look for entry and trading on the bounce in biotech.
  3. EEM – entry $44.30. Break from consolidation. Upside opportunity still in play. Gap open and never challenged the opening higher… watching today again.
  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 $42.30
  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 17.25.
  6. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 94.50.
  7. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $51.80
  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 $22.55
  10. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $90. HIT STOP

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.