Trading Notes for Today, June 12th

Notes for Thursday:

Another day with a negative open and some buying to balance out to more consolidation and chop. Dow dropped 0.6%, NASDAQ 0.1% and S&P 500 0.35%. Nothing elaborate on the downside, but shows the current indecision that has developed again in the broad markets. Today we have the retail sales report for May and it could help redirect attention on stocks if the number is better than expected. We need to maintain focus, be disciplined with our stops and let this unfold without chasing stocks for now. Plenty of patience required in the current market cycle.

Look for news to be the driver and that could create more chop like we experienced the first three days of the week. Bond yields are rising in earnest the last few¬†days and the break of support at $111 on TLT adds risk to the holding Treasury bonds. TBT is on the radar as a trade or hedge on this move short term. Hitting some resistance at the $63.93 mark short term.Take what the market gives, don’t assume anything, and avoid over trading into these choppy waters.

Market Story & Outlook:

Current Story of the market still involves some¬†uncertainty about why we have started the next leg higher, but for now everyone is willing to accept the move. Despite the rally¬†off the recent lows and the move to new highs on the major indexes, we still have unresolved¬†issues economically, fundamentally and with growth in earnings. As we have discussed the markets underlying challenge is the economy. The tug-o-war is, ‘buyers’ believe the economic improvements currently being prognosticated at 4% growth for the second quarter are a given. That means we must ignore the first quarter contraction in GDP (minus one percent). ¬†Last¬†week the data reports were better relative to May’s data improvements over April. The buyers are getting¬†some validation (not four percent worth) and they were willing to put¬†money to work in stocks. The ‘sellers’, on the other hand, believe the economy is growing slower at a rate of maybe 1-1.5%. First quarter GDP validates that belief, in their opinion. The buyers are winning currently as the uptrend resumed the S&P 500 index hitting a new closing high. We…¬†have to be cautious, take the trades we are comfortable with and keep looking forward, and managing our risk as we go. If we consolidate the move higher near term, don’t make any assumptions the downside is taking control. A pullback within the trend would be completely normal.

The second phase of the story line is, bond yields were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields to start the year on the thirty-year bond were 3.94%, currently they are 3.49%. That is not what was prognosticated, but the rise of nearly 20 basis points the last week puts the bond in a position of moving lower. The question is how much lower and will the economic data support a move higher in the bond yields? All good questions and ones that were asked in January. The story line may be shifting some, but we still have a discrepancy of where yields should be versus where they are. We have to watch as this plays out going forward.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall. 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. They are and remain a concern for investors longer term.

This all adds up to uncertainty and a lack of clarity for stocks. Despite the move higher in stocks the underlying concerns have not been removed or dealt with. We are now in the last month of the second quarter and the next phase of report will begin in four¬†weeks. June’s reports will be forth coming shortly and it will all add to the story going forward. As we always say, and attempt to do, take what the market gives and protect the downside risk of your portfolio.¬†Until we have clarity¬†stick with the trend and for now that is on the upside. Patience and discipline are key to success long term.

Sectors to Watch:

  1. Small Caps (IWM) РInside trading day on Tuesday followed with some selling on Wednesday. It continues to hold the upside move from the May lows. After passing the test of the $111 the index broke higher gaining nicely and holding those gains for now on the test. Clearing resistance at the 110.20 level was the basis for the upside position. The trade has panned out on the upside. Raised the stop to $114.50.
  2. REITs –¬†The¬†sector remains in a uptrend, but the last three¬†days has tested support. Gave back the short gains from last week¬†and hit the near term stop at $71.30. I am¬†still interested in this position with a longer term time horizon, but we will have to watch for the opportunity as this plays out.¬†¬†S&P Model still owns with $70.60 stop in place.
  3. Emerging Markets РUptrend is in play, and the break from the consolidation on Friday is gained some modest momentum and small test on Wednesday. The uptrend remains in play following the consolidation as we adjust our stops and manage our risk. Still have a 12-36 month outlook on the sector to move higher. Entry $43 on EEM hit. Stop $41.76. Emerging market bonds (EMB) moved below the 10 DMA and possible double top. Watch the downside risk of the trade.
  4. Bond yields moved up 20+ basis points the last few days and is putting the fixed income under selling pressure with key support levels near by. Hit the entry point on TBT (ONLY ETF Model) as an opportunity or hedge against the bond short term.
  5. Energy (XLE) remains a leader as the sector move to a new high. Be cautious and adjust your stops according to your time horizon. Remains in a uptrend and the positive outlook for crude oil is keeping the sector in favor for now. Watch the parts as well with OIH, IEO and XOP all attempting to break higher.
  6. Crude oil remains speculative and was flat on Wednesday. The supply data showed more usage around the world, but with the sideways chop returning and excessive speculation in the commodity some downside short term may be in the cards.
  7. Semiconductors broke from the wedge consolidation pattern to the¬†upside¬†and followed through with a three week positive upside¬†gain.¬†Added¬†a position to our model (SOXX @ $80.35 entry).¬†I like the upside¬†as¬†the technology stocks¬†have¬†recovered some of the lost momentum. Adjust your stops on positions.¬†XLK moved back to the current highs at $36.80 and broke above $37 (added position)… now managing the risk of the trade going forward. Hit new high with the index gaining traction again. Stop XLK $37.70.
  8. S&P 500 index moved through the 1900 level and  to new high for the index at 1951. Uptrend remains in play and watching for the upside momentum to continue short term with some checks and balances along the way. Financials has been adding a boost of late on the upside. test of the 10 DMA in place. Patience as this plays out.
  9. NASDAQ 100 (QQQ) broke to a new high and closed at $92.75. Large cap stocks are leading the way for the broad markets currently. We maintain our positions, adjust our stops and let it run for now. The index completed four days of moving sideways. Low volume and no volatility to speak of.
  10. Natural Gas РUNG fell 4.8% the last three days break support and hitting stops on the trades. Crude is getting all the attention and money is worried about the strength of oil versus natural gas. Inventory data of late has favored oil. FCG made nice move above resistance at the $22.75 level early, but faded to close right on the number. Still like the upside looking longer term. Watch and set your stops accordingly.
  11. Healthcare – Biotech (IBB, BIB) broke above the resistance point and completed a bottom reversal pattern. We added the sector in the models. This will be a key indicator if investors are willing to return to the risk trades. Tested modestly, but still looking positive for now with a renewed push higher. Pharma stocks XPH moved to the upside as money rotates back into the sector.
  12. Global РEurope (IEV) moved to new highs last week, but is testing the move of late. Uptrend is still in play and the outlook remains positive.  The EAFE (EFA) hit new highs and the move higher continues as it trades in unison with the US equities. The Emerging Markets (EEM) broke higher as well and showing some signs of moving higher and monitoring our stops there as well.
  13. Utilities (XLU) breaking lower after move back to the April highs. Could retest the lows at 41.40 short term. Watching to see how this new twist unfolds. Weekly chart shows a potential double top set up. Watching the downside risk

Models:

Sector Rotation Model (updated Р6/11/14)

ONLY ETF Model (updated Р6/11/14)

S&P 500 Index Model (Updated Р6/11/14)

ONE EGG Model (New Scan Results Posted Р6/11/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly.
  2. XOP – entry $78. breakout. looking for test of the move to new high. Max entry $79 if no test on the move higher.
  3. STX – entry $54.90. bottom reversal test. Tech remains strong currently.
  4. JO – entry $34. bottom reversal. bounce off support and volume? Watch.
  5. C – entry $49.65. Bottom reversal from trading range and move through the 200 DMA. Banks are moving higher currently.
  6. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play.

Pattern Trade Tracking & Follow Up:

  1. XOP – entry $78.40. reverse head and shoulder. part of the energy sector attempting to break to new high. Stop $77.90.
  2. FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt. Holding the move for now and Stop $62.30.
  3. NPSP – entry $33.80. Pennant. Continuation of the upside breakout in biotech stock. Stop $33.
  4. ANIK – entry $48. trading range. biotech moving higher again. Stop$47
  5. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $47.50
  6. BAC – entry $15.35. trading range. Banks moving to the upside. Stop $15.35.
  7. AKAM – entry $55. trading range breakout. Stop $55.50.
  8. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.40.
  9. EXPE –¬†entry $73.90. Downtrend break and follow through. ¬†Stop $71.90.
  10. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $72.
  11. UNG – entry $25.25 test of the double bottom breakout. Run to $27 and decision time for the commodity. Trade and exit if outlook doesn’t improve in commodities. Stop $25.25. HIT STOP.
  12. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $46.49.
  13. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $20.50.
  14. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.80
  15. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $240.
  16. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $83.
  17. ERX –¬†entry $106.42. uptrend test of support in consolidation. Energy is one of the leaders and looking for upside continuation of the previous trend. Stop $114.
  18. 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 $99.90.
  19. AAPL – entry $84.29. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $91.
  20. GE – entry $26.30. Trading range breakout. Value stock coming back into favor. Gapped on earnings above the entry… patience. Got the test early and added the position. Stop $26.30.

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)

  • 4/28 – Tested support at the $54.85 level. Watch to see if it breaks support. If it does the downside trade in order. (Trade result…¬†FB –¬†sold to support at the $54.80 level held and working higher. The bounce has worked its way to $59.78 and added some shares on a move to $60.05.¬†The target would be $63.50 or top end of the trading range currently trading in. Stop $58.30. HIT STOP)
  • 5/12 – solid bounce off the low, but remains within the trading range. could trade the move back to the upper end of the range at $63. Watch today to see how it moves. 5/15 – The move lower stays within the range, but pressure is being put on the growth stocks again. Watch for a short trade if we break from the current trading range.
  • 5/19 – Definitely has moved into a consolidation period and not much happening worthy of the risk at this point. The range has narrowed and the risk of trading has risen without some clarity in the stock as well as the sector. SOCL has dropped more than 20% the last two months, and in light of that move, FB is looking good short term. Be patient for now and let this all unfold.
  • 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.