Trading Notes for Today, July 2nd

Notes for Wednesday: 

The ISM manufacturing number was 55.3% versus 55.4% for May. Not the increase many were hoping for. The data point that saved the outlook came from new car orders, computers and chemicals¬†exceeding expectations. Digging into the number was not great, but sufficient. Construction spending was well below expectations increasing only 0.1% versus the 0.7% expected. There has been no big surge in housing relative to building. That shows the slow growth in jobs, income and sentiment. And there we have it… more mixed data from the US economy to start the June reporting. Despite the reports the market rallied on strong new orders in the manufacturing report, again we are looking forward for improvement not current. The market is trading on hope in tomorrow.

The Dow is closing in on 17,000, the NASDAQ was up 1.2% and the S&P 500 index is pushing near the 2000 mark. All is good in stock land and everyone remains happy with expectations of a growing economic picture for the second half of the year. The uptrend remains in play and we remain engaged and managing our stops.

Notes to Track:

  • Bad news for travelers over the 4th of July weekend… gasoline prices are at a six year high. Glad to see that the excess supply from the US is working to keep prices lower. This remains an issue as gasoline prices are pushing $4 per gallon versus $2.40 in 2009. Throw in the fact that income has not kept pace and we erode the discretionary spending… explains slow growth in the economy the last three plus years.
  • Banks remain a challenge as they rally early, but give back most of gains Tuesday. An early move above $33.65 on KBE looked promising to break from the current consolidation, but we will have to see how it plays out today.
  • Semiconductors (SOXX) renew upside leadership with a solid gain of 1% on Monday and a 1.4% gain on Tuesday closing at a new high. So much for the rolling top and concern of the run in technology sector coming to and end.
  • Telecom (IYZ) attempting to move to new highs again. Looking for some leadership, but each time we get to this level the sector finds a reason to stall. There are stocks within the ETF making some bottom reversal pattern breaks that are worth tracking as well.
  • Retail (XRT) is still a mixed bag as chart breaks through the volatile downtrend line off the November high. The break higher is a positive as investors find value in the sector despite the economic reports. Scanning the stocks is where I would spend the time versus the sector as a whole. NFLX and Wet Seal led the upside with solid breaks to the upside.¬†L Brands and Shoe Carnival also added solid days. The parts are where I like the opportunity in the sector.
  • Positive economic data from the land of China helped FXI follow through on the bottom reversal and add some upside on the day. Still like the upside looking longer term.
  • SVXY up 2.5% on the Tuesday and showing the lack of volatility remains with the buyers in control.

Practice patience and trade with discipline.

Market Story & Outlook:

Current Story of the market still involves uncertainty looking forward¬†as the second quarter officially comes to a close. The broad indexes have made a statement that investors believe the Fed is correct in their assumptions relative to growth forecasts.¬†The buyers believe growth is building in the US economy as the Fed stated in the last FOMC meeting. The sellers believe the market is stuck in a 1-2% growth cycle and not much is changing relative to that outlook.¬†The¬†Fed forecast for the second quarter (now second half of the year according to Yellen) of 4% may not¬†line up, see Monday’s ISM manufacturing data,¬†and that is where the potential challenge will lie going forward. The buyers remain in control as the uptrend resumed in the S&P 500 index hitting a new closing highs. As a side note, Goldman Sachs lower GDP estimates to 3.5% from 4% last week.¬†Maybe a sign of forecasts to come?
Earnings are the next chapter in the story of the market and they start next week. I am not going to attempt to understand the rationale behind slower growth and higher 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 along with the economic data.
But we have to remember to follow the trend and until it breaks we keep going. Keep your focus and understand your surroundings.

Sectors to Watch:

  1. S&P 500 index broke above the consolidation phase Tuesday. Trend is clearlyon the upside and we are managing our positions in the index. Semiconductors have resumed leadership for Tech and Telecom (IYZ) is back near the highs. Some defensive buyers and some buy on the dip participants in technology pushing them to a leadership role again. Watching as this unfolds heading into earnings and the second quarter economic update on tap.
  2. NASDAQ Index moved back above the March high and Tuesday added another 50 points on the upside follow through (so far so good). A move through the 4400 level on Monday helped set the stage for Tuesday. The index is approaching the closing high levels for the index going back to earl 2000. The NASDAQ 100 index continues to move up as the large cap stocks take on renewed leadership as well.
  3. Small Caps (IWM) РSmall caps tested and held the $116 level and moved through $117 last week. Tuesday the index moved above the March highs early, but closed at that level at the end of the day. We are still eyeing the March highs. Stop at $117 currently as we move it up on the gains Tuesday. Still in uptrend and we want to stick with the trade. Biotech adding momentum to the sector as well.
  4. Mid Caps (IJH) made nice move on the upside last week with a solid move higher on Tuesday. Watch for some leadership from the sector as we move forward. 3D printing is helping the sector on the upside.
  5. Energy (XLE) was one of the primary leader, but following the tumble lower last week it has stalled. Crude is dropping and tested below $105 again. This could impact the sector, but the services stocks (IEZ) are leading the upside. Alternative energy ETFs have stalled as well with TAN, FAN and PBW all holding steady. This is a sector that needs to maintain the upside going forward.
  6. Technology (XLK) broke through the consolidation range to new highs on Tuesday thanks to the SOX index. The help came from the renewed interest in the semiconductors (SOXX) which bounced more than 1% the last two days. After testing last week the sector was one of the leaders on the day. FDN has renewed the upside as well and adding strength to the sector. IGV broke higher to renew the upside run and I still like the outlook. Watch and manage your risk.
  7. Commodities¬†are a mixed bag of movement, but GLD continued the move higher on Monday and test on Tuesday, but held. The miners (GDX) moving higher¬†and the base metals (DBB) are adding to upside as well.¬†Oil (USO) is struggling to hold the upside short term. Natural gas (UNG) bounced off the lows, but barely. Agriculture (DBA) failed to break above resistance, but remains in good shape to break higher. Trading sector, but sparingly… other places more attractive.
  8. Transports (IYT) are in a consolidation wedge or triangle pattern with an upside bias in play. They broke higher on Tuesday and still look strong short term. The one challenge that could develop in the sector is a slowing in the airline stocks. Break higher is a positive all the way around.


Sector Rotation Model (updated Р7/1/14)

ONLY ETF Model (updated Р7/1/14)

S&P 500 Index Model (Updated Р7/1/14)

ONE EGG Model (New Scan Results Posted Р7/1/14)

Pattern Trading Setup:

Trade Opportunities:

  1. Solid move higher on Tuesday and we are looking now to re-balance our positions. I am going to look at taking some profits and freeing up cash for other opportunities. Tightening stops and watching how this unfolds into the long weekend.
  2. T – entry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher.
  3. NMBL – entry $30.75. Resistance and tight trading range. Technology sector moving higher.

Pattern Trade Tracking & Follow Up:

  1. VMW – Entry $98.45. Trading range. Break through resistance and run. In software sector. Stop $96.95.
  2. GILD Рentry $83.50. Cup and handle pattern. Biotech remains one of the leaders. Stop $83
  3. SPWR – Entry $40.80. Flag pattern. Broke higher with move in the sector. Looking for continuation move from the pattern. Gap open. Stop $40
  4. CRM – Entry $$58.25. bottom consolidation break higher. Consolidating on the break higher and looking for a follow through. Stop $58.70.
  5. AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up.
  6. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 16.62.
  7. GLW – Entry $21.75. Channel or trading range breakout. Watch and let volume drive entry. Stop $21.50.
  8. IGT – Entry $16. Pennant again set up to break higher. Stop $15.70
  9. TWTR – entry $38.15. bottom reversal and follow through. Bottom in? watching as trade for now, but could develop into more. Stop $37.50.
  10. SCTY – entry $55.31. bottom trading range. Break higher from the range as sector moves higher. TAN broke higher on Monday. Stop $67.45.
  11. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 92.63
  12. DDD – entry $51.70. bottom trading range. Break from the range with upside return. Stop $59.75.
  13. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play. Stop 73.84. Jump on Open Table acquisition raise stop and say thank you.
  14. FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt. Holding the move for now and Stop $64. Methodical melt to the upside. Watching, managing stop, and letting it go for now. Allowing room for volatility.
  15. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
  16. AKAM – entry $55. trading range breakout. Stop $60.50.
  17. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.50.
  18. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $48.50.
  19. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.15
  20. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $252.
  21. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $87.
  22. TRIP – entry $86.95. Higher low, ascending triangle. Be patient with entry as it needs room to validate the move on the upside. Internet sector oversold. Stop $105.

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.
  • 6/20 – We have updated above in the pattern trading notes, but the stall at support is like watching paint dry. Be patient and let this unfold as investors have been looking other places to put money to work.