Trading Notes for Today, July 18th

Notes from Thursday’s Trading:¬†

News driven day heightens fears and markets move lower. As an investor we all know that news is an event and has a short term impact on the markets. However, when the news in the headlines it seems more dramatic to the financial markets than it generally pans out. The threat of harder sanctions on Russia had pushed the futures lower, and then the news of a passenger plane shot down over the Ukraine sent the indexes even lower. The question is will the news and horrific event (rebels killing 298 passengers on a Malaysia air flight) send the markets even lower heading into tomorrows trading day? Not a question many of us want to ponder in light of the event itself.

Some thoughts on the situation are as follows… First, investors are already nervous over the contemplation that prices are too high on stocks. According to Ms. Yellen biotech (down 6.2% since comment) and social media (down 4.4% since comment) are the two worst offenders. The word bubble has been thrown around more than quantitative easing last year. Second, does the worries over the price levels reach a tipping point as a result of the news events and geopolitical strain? Third, how will the institutional money respond? Fourth, and last, can yields on bonds really move back below the May lows producing yet another bond rally?

Lost in the days events was economic data and earnings, the previous drivers of direction. The housing starts were well below expectations and the homebuilders fell 2.5% on the day. Weekly jobless claims continued lower and the Philly Fed manufacturing report joined the Empire State number showing solid growth. The challenge is holding the belief in the future economic improvement in light of the current data points. This is the exact issue that has been creating the uneasy sentiment towards valuations and the comments on “bubbles”. Earnings were equally as mixed with Microsoft cutting 18,000 jobs and writing off $1.7 billion in the process. There were some ugly numbers in the regional banks and as KRE fell 2.3%. This all adds up to a cautious tone and warning. I am not jumping to any conclusions on Thursday’s news and data, I am only stating to use your stops, manage your risk and remain disciplined. The key going forward is to determine is this chain of events is a catalyst for a trend change.

Too much news and too many different what if’s to want to take on new positions heading into the weekend. Good time to be patient and see how this unfolds in the coming days. Patience the one word I have grown to respect in terms of investing.

Sector Notes: 

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

  • Energy reversed the upside move from Wednesday and is back near the bottom of the current trading range. The sector is reacting to the events and data relative to demand and supply. Patience will only go so far as we use $98.20 as an exit point for our positions.
  • Biotech (IBB) down 6.2%¬†¬†in response to Yellen comments. $246.70 support was broke on Thursday¬†and the¬†50 DMA gave way with the¬†200 DMA now the next target. BIS is the ProShares UltraShort Biotech ETF trade we added and we raised our stop on the gain.
  • Gold sold off 2.3% Monday and dropped 0.95% Tuesday¬†and bounced on the events. The gold miners (GDX) moved higher as well with GDXJ the big winner on the day. Watch as this is currently nothing more than a trading opportunity on news and speculation.
  • Oil was up on the supply report Wednesday gaining 1.3% and¬†2.2% on Thursday’s news events. The price back to $103.75 overnight leaves the upside in play with the speculation of supply disruptions in Russia and Ukraine.
  • China (FXI) tested on the news events of the day and was fairly stable overnight ending the trading day flat.¬†We added the position on the test and will have to monitor closely today as the trading day begins. See EGG Model Notes.
  • Transports (IYT)¬†tested lower on the events and will be looking to see how it follow through going forward.
  • Small Caps (IWM) – Small caps broke support at $115, failed to hold at $114 and closed below the 200 DMA. The rotation from risk to value is in play and all exit points hit on any trades. The short side of the trade is in play to $111 and then$108 depending on the momentum. TZA is the short side ETF.

Practice patience and let this new chapter of the markets story unfold.

Market Story & Outlook:

Accelerating¬†fear from Ukraine/Russia conflict growing, Iraq continue to deal with geopolitical issues that threaten oil production, Portugal’s financials stability, economic data, Ms. Yelllen’s comments on bubbles and now some uncertainty are rocking the optimism¬†in the US markets.¬†There are always¬†hiccups along the way, but the key question is will this develop into a catalyst or tipping point fora ¬†trend change? Now is when you have to let the story unfold one day at a time and ignore the carnival barkers in the media. News is just news and events are just events. It is how they potentially effect the trend of the market that matters in time. Stay focused and take the news, data and events in perspective.
Earnings are the¬†current¬†chapter in the story of the markets and they started¬†off with positive results thus far. Thursday showed some of the mixed data points from companies looking forward. 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 regional banks disappointed in the lack of progress made relative to revenue. The lower interest rate issue prevail and Thursday’s move in yields didn’t help the cause. Technology has been mixed as the rotation to new cloud and mobile technology continues. Patience as the numbers are reported and decisions are made on their overall impact on the markets direction.

Sector Rotation Model (updated Р7/17/14)

ONLY ETF Model (updated Р7/17/14)

S&P 500 Index Model (Updated Р7/17/14)

ONE EGG Model (New Scan Results Posted Р7/17/14)

Pattern Trading Setup:

  1. The market is shifting this week and we have taken the approach to raise stops and take the exits. Now we watch and see how this unfolds and take the resulting opportunities. Be patient and don’t force trades are hold falling stocks. Tough to want to add new positions taking into account the current events and the weekend. We will watch and see who today plays out.
  2. 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 РHIT STOP.
  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 HIT STOP
  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. HIT STOP
  7. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $51.80 HIT STOP
  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

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.