Trading Notes for Today, July 22nd

Notes from Monday’s Trading:¬†

Market struggled to find it’s footing to start the day, but managed to rally back and settle with minor losses. The root of the issues were Russia and Israel geopolitical/war concerns. The attention then turned towards earnings and the economic outlook for the US. After hours there was plenty of positive news to go around as earnings beat from NetFlix¬†and¬†Chipotle should put investors in a good mood heading into the Tuesday trading day. EMC and GoPro added as well on the upside with positive data points.

Today we get CPI and Existing Home Sales for economic reports. The question on the wholesale inflation making to the retail level will get some answers from the data today and housing needs a boost after some mixed reports. The consensus is for 4.99 million sales. ITB is testing support at the $23.50 level.

Below we address the key points by sectors for today’s trading.

Sector Notes: 

  • Restaurant sector is looking better at least from Chipotle’s view. CMG sales rose 29% and the data looked very positive for the company moving forward. It was trading up 9.5% after hours. However, the sector closed lower by 1.2% as McDonald’s and Yum Brands both were a drag on the sector. The sector is tracking similar to Retail with the winners and losers clearly separated. This is a stock picking sector more than buying the whole.
  • Energy¬†is trading at the bottom of the current range and looking weaker from the technical data over the last two weeks. Sentiment looks to be shifting more to the uncertainty to negative status. This is time to watch how it unfolds and look for the potential trades. Don’t assume we bounce back to the upside in the sector short term.
  • Biotech (IBB)¬†oversold bounce off the lows Thursday and Friday. I would expect some consolidation short term before any direction is played out. Held the bounce on Monday and watching for now.
  • Gold¬†is in a position to bounce higher, but I would expect it do so with volatility. Looking for trades in the metals and miners as this unfolds.
  • Oil moved back above $104.60 and could move back to the previous highs on speculation and production disruption in Iraq and Ukraine.
  • Natural gas (UNG) inventory is building and the drop in price is reflecting the concerns in the build up. We are a long way from winter and there may well be more downside to come.
  • China (FXI) still testing the moves on the upside as the geopolitical issues settle. We added the position, but we are watching for an upside follow through if the “news” settles. See EGG Model Notes.
  • Transports (IYT)¬†tested lower on the events, but moved back near the highs to end the week. Still positive trend in play and the upside remain in play.
  • Small Caps (IWM) are the weak link as the index tests below the 200 DMA again. The rotation from growth to value is still the question. Do we continue to see money move toward safety or will investors embrace growth again going forward. This is the key rotation play currently. Watch to see how it unfolds. Move back above $115 is key to the upside and a break of $112 will embolden the downside plays.
  • Retail (XRT) broke support at $84.50 and bounced back, but not overly convincing on the move Monday to follow through. Weakness in sales, weak outlook for the consumer, lower wages, higher energy prices, etc. Any wonder why the numbers are not lining up relative to growth. I believe this is a better sector for picking stocks than by the whole sector. Game Stop (GME) nice continuation on break above $42. NetFlix up on solid numbers for earnings and testing the move higher. Trip Advisor (TRIP) holding support at $100.70, but also has head-and-shoulder pattern in play. Expedia (EXPE) uptrend remains in play and testing support at $77. Point is there are opportunities and easier to manage the risk of the sector.
  • Midcap (MDY) $254 support in play. Head-and-shoulder pattern set up.
  • Electronic Sector attempting to rebound and show that grwoth isn’t dead based on Yellen and others banging on the valuations. Worth watching how it plays our short term and some nice technical setups in the sector. AKAM, STX, AAPL, etc. are consolidating and if they can resume leadership upside looks attractive to trade.

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

Market Story & Outlook:
Current Story of the market still involves uncertainty looking forward¬†and the second quarter results officially underway relative¬†to the data reports and earnings. The broad indexes have made a statement that investors believe the Fed is correct in their assumptions relative to growth forecasts. Albeit there were outside market events to deal with this past week and currently, but the buyers believe growth is building in the US economy. The sellers¬†continue to¬†believe the market is stuck in a 1-2% growth cycle and not much is changing relative to the outlook for growth.¬†The¬†Fed forecast for the second quarter of 4% isn’t looking to line up with the current data releases, but the true believers are still engaged in buying the dips as seen on Friday. The sellers took a shot¬†the last two¬†week, but the move¬†was based on an event, and did not result in any type of trend change only consolidation. The buyers remain in control as they create a bounce point for the¬†indexes¬†and remain in a long term uptrend.
The second phase of the story line is bond yields which were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields at the¬†start the year on the thirty-year bond were 3.94%. They moved to a low of 3.26% (Monday). They rose two weeks ago¬†to the¬†3.48% mark, but that has reversed yet again on the downside thanks to the geopolitical risk. The move higher was prompted by the jobs report and economic data pointing to the Fed following through with rate hikes early in 2015. The move shifted lower this week forfeiting all of the grains as geopolitical issues heat up.¬†The Fed has remained committed to low interest rates thus keeping¬†the yields low. The big question for now… will the Fed actually follow through on the extinction of QE? And, does the economic growth validate the need to raise rates moving forward sooner? Phase two remains a talking point which has not produced changes yet to a¬†point of market disturbance. We, like the rest of the world, will watch and see.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data growth. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over, the reports are coming in and thus far most have been positive. With 188 S&P 500 companies reporting, 105 have beat on the top line estimates. That is weak compared to long term historical data, but is an improvement over the last two quarters. There are still plenty of reports to come, but the start has been positive for the revenue side of earnings. This is a stat that shows the sustainability of growth in stock prices from my view and one to watch going forward.

This all adds up to worry relative to a lack of clarity and the belief. The underlying concerns have not been removed or dealt with and if anything they were brought to life the last two weeks. The next phase of reports have begun. So far investors have embraced the data as positive, but at the same time worrisome relative to the Fed hiking interest rates, weaker global economies than expected, and the growing geopolitical risks around the world. Throw in issues impacting oil prices and the trickle down effect to the consumer and there is plenty to worry about going forward. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.

RESEARCH MODELS:

The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated Р7/21/14)

ONLY ETF Model (updated Р7/21/14)

S&P 500 Index Model (Updated Р7/21/14)

ONE EGG Model (updated Р7/21/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. The bounce back on Friday was positive and left some interesting pattern setups. We are posting some below, but we do so with caution. The need for a upside follow through is key if we are to resume the upside move. The markets remain challenged on many sides and that creates false signals in the charts as the anxiety day to day creates a choppy market.
  2. SVXY – entry $88. trade on positive volatility. The VIX will drop if the fear factor subside again relative to the geopolitical issues. Looking for the afternoon move higher on Monday to continue in trading today. Target is $92 and stop is $86.
  3. C

Pattern Trade Tracking & Follow Up:

  1. CRUS – entry $24.65 if test and holds. Breakout to new recent high. Max entry $24.90. Semiconductor sector which remains positive in the current trend. Stop$24
  2. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.
  3. SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive. Stop $66.
  4. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $42.30
  5. T Рentry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $35.50.
  6. 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.
  7. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
  8. 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.
  • 7/22 – Raise stop to $67.80. Earnings are tomorrow…. it will be interesting, but based on research all is positive unless their is dirt under the rug somewhere. I still like the longer term outlook for the company.