Trading Notes for Today, July 30th

Notes from Tuesday’s Trading:¬†

Opposite reversal from Monday, but same result. The worries remain in sight with the FOMC meeting concluding today and offering some insight to the Fed on interest rates, stimulus and Q2 growth expectations. Then there is the ADP jobs report, and earnings. Throw in the good news from Twitter after-hours and maybe we see a positive open? Regardless the chop is happening based on clarity, belief and geopolitics. That will not all be resolved today, but hopefully we get enough to keep the trend intact and some opportunities to trade.

Bubble talk continues to garner headlines and it is almost like 1998 in terms of what the talk is all about. I am not in disagreement with the facts about earnings growth, economic growth, etc, relative to stock prices. What I am focused on is the trend, both short and long term. The short term trend is sideways and choppy on uncertainty. The long term is higher and waiting for the short term to decide up or down. Thus, patience is the best course of action as this all plays out.

FOMC meeting today will be the focus and I am not expecting as much volatility and more drifting into the 2 pm announcement. Patience is the key for now and focus on discipline with any opportunities that arise.

We remain positively cautious. One day at a time remains the mantra.

Sector Notes: 

  • Treasury Bonds (TLT), continue to rise despite the predictions of lower bond prices.¬†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) nice run higher over the last six days. We closed negative last night after a positive open and that could invite some short term selling on the lack of belief in China’s reports. I still like the upside technically. Fundamentally I will leave that up to your interpretation.¬†Hit stop on the EGG trade at $40.95. Watch for the next opportunity.
  • 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. Watch and see how it breaks out.
  • Gold¬†drops back to the 50¬†DMA and¬†speculation is running the price up or down. no clear direction in the metal and not interested 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. Downside is getting entrenched short term.¬†Watch to see if a reversal sets up or not?
  • Transports (IYT) hit new¬†highs¬†last week and starts the week with two days of selling? Is this another sign in favor of the correction headline? Watching to see if the trend holds on the upside and the 50 DMA is coming into play.¬†Still positive trend in play watch the response to the last two days of trading.
  • 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. 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. Short trade is back in vogue with RUSS.

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. The test will come with the Wednesday FOMC results and minutes. The buyers and sellers continue the tug-o-war of who is right as seen on the charts. The current choppy markets are a result of the growing debate. The bolder the sellers become the bigger the volatility will be day to day. The longer term trend remains on the upside currently.
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 3.22% currently. We can lay some blame a the feet of the geopolitical risk, but that is transient in its effect. Despite the stronger jobs report and outlook on employment rates remain near their lows for the year.¬†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? The FOMC meeting will shed some light on Wednesday. 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 how 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. Earning growth for Q2 is 8.7 versus 2.2% in Q1 to this point. The increase is positive and in line with expectations. The big question mark remains looking forward. Sustainable growth in earnings relative to slow economic growth. All questions about the economy remain in play for the near term.

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 three weeks. The next phase of reports have begun. Investors are showing signs of caution as money rotates to lower risk asset classes and sectors. The data remains worrisome relative to the Fed hiking interest rates, weaker global economies than expected, inflation talk is 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 Р7/29/14)

ONLY ETF Model (updated Р7/29/14)

S&P 500 Index Model (Updated Р7/29/14)

ONE EGG Model (updated Р7/29/14)

Trade Opportunities:

  1. IWM – entry $114. bottom reversal. technically oversold and in position to move higher if the broad markets trend higher.
  2. INTC – entry $34.40. gap higher consolidation and continuation. Semiconductors have sold off 7% and upside bounce on tap.
  3. Interesting setup of note… NFLX short trade. $420 Jan put on break lower. Indicators are lining up for a test of the move higher in the stock. Watching to see how it unfolds.

Pattern Trade Tracking & Follow Up:

  1. 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
  2. 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.
  3. 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.
  4. EMB –¬†entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
  5. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  6. 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.
  7. 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 17.50.

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.
  • 7/29 – Stop hit on selling Tuesday. Watch how Twitter announcement impacts the stock today. Upside is still in play and it we fill the gap left on earnings it will provide an opportunity to buy the shares back.