Trading Notes for Today, July 24th

Notes from Wednesday’s Trading:¬†

Positive news in biotech (XBI) sends the sector up 6% on Wednesday as the data shows that the pontificating relative to the sector valuation may be wrong. Biogen and Intuitive Surgical beat expectations on earning sending both stocks up more than 12%. Facebook announced after-hours and at first got a negative response to the data, but the reality was much better than expected an is up 6% in the pre-market trading. A positive for the social media stocks. These two leaders (biotech and social media) have faded nearly 8% on valuation comments from not the least of which, Ms. Yellen. The push helped the broad indexes again post a positive day as they are also challenging the previous highs. The S&P 500 index and the NASDAQ 100 index have both move above the July 3rd high. The bigger question for me is how they progress moving forward.

More data from the oil sector relative to inventories Wednesday. For 7 of the last 8 weeks the inventories have declined more than expected. This shows demand is on the rise slightly, but enough to have refineries producing at 93.8% of capacity. The production is the highest level since the recovery started in 2009. Thus, the energy sector remains a positive looking forward and produced a modest gain. Watching to see how they unfold as well.

The global country ETFs have been coming to life again and show solid upside this week. This has been developing for several months and now with the break to new highs in several of the ETFs investors are starting to take note of the money rotation into the global markets. The developed countries are lagging behind the emerging markets in this move. They are worth tracking and managing the moves short term.

Positive day for all and we will see how it all unfolds today.

Sector Notes: 

  • Treasury Bonds (TLT) closed at a new high for 2014… wasn’t this supposed to be falling and rates rising? The bonds continue to communicate something other than a positive stock outlook, but yet stocks continue to rise. Repeat after me… the trend is my friend and I will not abandon my friend only protect against the downside risk of falling down.
  • Solar (TAN)¬†reversed the positive move from Tuesday and now we watch to see if the upside will return.
  • China (FXI) runaway gap for second day and new high for year as country ETF finally breaks higher. This is the EGG currently and managing the upside.
  • Energy bounced from¬†trading at the bottom of the current range with a solid gain of 1.4% the last two¬†days. Sentiment has not been strong as the sideways consolidation continues.¬†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. Oil inventory data may help the sentiment going forward.
  • Biotech¬†(XBI) large cap jumps 6% on earnings. IBB the small caps was up 2%. This put the sector back on positive ground and now in need of a follow through. watch and trade accordingly.
  • 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. Downside in control on Tuesday and Wednesday was flat… could take time to unfold the process short term, we will watch to see how it plays out today.
  • Oil moved¬†held near the¬†$103 level¬†and in position to reach for the previous highs on speculation and production disruption in Iraq and Ukraine. Very cautious on any trades. USO sitting on the 50 DMA on the move higher. Watching for a test of the bounce.
  • 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. Just as we stated yesterday downside in control and no signs of relief. Watch the latest inventory data out today.
  • China (FXI) jumped 2.3% Tuesday and 1.4% on Wednesday on a move higher and pushed above the July high. This is part of the move we though would materialize sooner.¬†See EGG Model Notes.
  • Transports (IYT) continues to hit new¬†highs and breaking higher. Still positive trend in play and the upside remain in play. Still a positive influence for the broad markets.
  • Small Caps (IWM) are the weak link as the index tested below the 200 DMA again, but managed to bounce back to the 50 DMA. 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 as it attempted to move back above $115 level again today. Would like to see a close above the $115.25 level. On the downside a¬†break of $112 will embolden the sellers.
  • Retail (XRT) broke support at $84.50 and bounced back, but not overly convincing on the move or any¬†follow through. The sector remains under the 50 DMA and troubled. 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. Tested the 50 DMA again watching to see how the sector plays out short term.

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 from both economic¬†data reports and earnings have been a positive influence on the markets. 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 few week, but the buyers believe growth is building in the US economy and they continue to buy on the dips. 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 last Friday. The sellers took a shot¬†the last two¬†week, but the move¬†was based on events, and did not result in any type of trend change only consolidation followed by buying. 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 3.25%. 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 IMF stated this week they believe the rate move from the Fed will be in the second half of 2015 and they pushed rates lower on Wednesday. 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 by October? 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 this unfolds.

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 as it relates 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, inflation talk in making its way into the conversation, 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 Р7/23/14)

ONLY ETF Model (updated Р7/23/14)

S&P 500 Index Model (Updated Р7/23/14)

ONE EGG Model (updated Р7/23/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. CURE  Рentry $96.25. new high consolidation breakout. Positive momentum in healthcare.
  2. JO – entry $33.40. bottom reversal and trend break. Agriculture commodities have been under pressure and value proposition. DBA reversed as well.
  3. AGN – entry $173.40. trading range breakout. Drug sector in favor on earnings. Patience.
  4. 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.

Pattern Trade Tracking & Follow Up:

  1. ALXN – entry $168.90. Trading range breakout. Pharma bouncing off the lows as sector. Stop $168.15.
  2. EMB –¬†entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
  3. CRUS Рentry $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 HIT STOP
  4. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.
  5. 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.
  6. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $42.30
  7. T Рentry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $35.50.
  8. 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.
  9. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
  10. 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.
  • 7/24 – Positive earnings news and trading higher after hours. We will adjust the stop higher today based on how this unfolds in trading. On Options trades use the stock price as exit point.