Notes from Monday’s Trading:
Reversal from the early selling shows the buyers are still willing to buy on the dip. Why? Your guess is as good as any I have heard overnight. The data was not good from the housing side, but the Market PMI Flash data was positive or at least in line with expectations. Not enough for the markets to reverse and move higher, but they did anyway. Thus, we continue to see the choppy movement overall and that is making any short term trading tough for now. Longer term positions we just hang tough and let it sort out the argument for higher or lower.
Homebuilders fall further on the news the pending home sales were disappointing. This goes with the rest of the data in the sector the last week. ITB fell 1.3% and is at support a break here opens the downside even further. The OCT 23 Puts would be the trade of choice if the downside follows through.
This remains a choppy market as seen on Monday. The intraday swing is what happened all of last week with the up and down trading. Remain disciplined and let this sort out versus getting churned by the chop. FOMC meeting starts today and the speculation will begin. Remember jobs report on Friday will also be watched along with more than 160 earnings reports. It all adding to the choppy markets.
We remain positively cautious. One day at a time remains the mantra.
- Utilities (XLU) gained 1.4% on Monday as money moved towards defensive positions. This is another sign of money leaving growth and finding higher ground.
- Treasury Bonds (TLT), wasn’t this supposed to be falling and rates rising? At some point we either believe the economic outlook or we don’t and until their is clarity money is buying bonds. Watch and hold until the reversal take place.
- China (FXI) runaway gap for fourth day and new high for the year as country ETF finally breaks higher. This is the EGG currently and managing the upside.
- Energy defines what is happening in the broad market overall. The sentiment has not been strong as the sideways consolidation continues. The sector attempted to break higher from the range last week, but failed to do so. The challenge remains the price of crude and the outlook for demand. Inventory and global data are pointing to higher demand, but now there are not as many believers. Buy on the rumor and sell on the news? Watching to see how this unfolds.
- Gold drops back to the 200 DMA and speculation return to bounce 1% on Friday, but flat on Monday. Still not a healthy chart nor is the data overly confident. Watching for now.
- Oil sold again to $101 and held, but it remains below the 50 DMA and potentially testing the $100 support level. Uncertainty and speculation at work.
- Natural gas (UNG) inventory is building and the drop in price is reflecting the concerns in the build up. Didn’t hold the bounce last Thursday and failed to hold the bounce on Monday. Downside is getting entrenched short term. Watch to see if a reversal sets up or not? Downside is still the trade for now.
- Transports (IYT) hit new highs last week and sold down 1% on Monday. Still positive trend in play and the upside remain in play. Watch the response to Monday’s move.
- Small Caps (IWM) are the weak link as the index tested below the 200 DMA again. The rotation from growth to value is still the question. This is the key rotation play currently. Downside back on Friday and Monday. Watch as the short trade may set up again (TZA).
- Retail (XRT) broke support at $84.50 to end the week. Does this signal more selling to come? Small loss on Monday and we are watching to see how this unfolds short term.
- Russia/Ukraine… this is far from over, but out of the headlines currently. Don’t assume this will not have an impact moving forward. The Russia ETF (RBL) declined last week and started lower on Monday. If this returns to the headlines Russia will fall further. Watching to see how it unfolds. RUSS is the short ETF for the country and we have been willing to step into the trade when appropriate relative to the risk.
- See last nights Notes post for more sectors.
Practice patience and let this new chapter of the markets story unfold.
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.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 7/28/14)
ONLY ETF Model (updated – 7/28/14)
S&P 500 Index Model (Updated – 7/28/14)
ONE EGG Model (updated – 7/28/14)
- GLUU – entry $7.35. pennant pattern. looking for break and continuation of the upside.
- INTC – entry $34.40. gap higher consolidation and continuation. Semiconductors have sold off 7% and upside bounce on tap.
Pattern Trade Tracking & Follow Up:
- JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook. Stop $34
- CLF – entry 16.20. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher. Stop $16.
- QID – entry $46.88. Bottom reversal. The break lower in the semiconductors is a negative for the index and earnings from Amazon will impact the index today. Watch for downside trade as NASDAQ looks toppy. Stop $46.50.
- EMB – entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
- PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
- 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.
- MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $44. HIT STOP.
- DBB – Entry $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.
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. Move stop to $73.90.