Trading Notes for Today, June 27th

Notes for Friday: 

We are back to a choppy market following the concerns about Iraq and not so great economic data. Throw in some comments from the Fed on interest rate hikes and you are good for an opening drop. The buyers are still willing to step in on the dips as they did on Wednesday and Thursday. Today ends the week and we don’t expect much in terms of changes to the market and the current direction of lack of. More consolidation heading into the end of the quarter would be expected.

Utilities are leading the S&P 500 index off the last test lower on June 12th. Telecom, Heatlthcare and Energy are also adding some upside pressure. But, without more effort from the other sector the index will be challenged to make further gains. A look from the April 11th pivot point that started the current short term uptrend shows the weakness in technology, industrials and consumer staples taking a toll on the overall picture with downside pressure.

Looking at the high on June 19th as a downside potential pivot we find Healthcare as the clear leader on the upside with Basic Materials and Consumer Discretionary attempting to lend a hand. The downside leadership is Consumer Staples and Industrials. Financials and Energy have added to the downside pressure as well.

As you can see in the charts the lack of strong leadership on the upside is allowing some weakness in other sectors to create a choppy market environment currently. Time will tell how it plays out, but for now waiting and letting the direction unfold is a prudent course of action.

Practice patience and trade with discipline.

Market Story & Outlook:

Current Story of the market still involves uncertainty looking forward (albeit the Fed sees things as completely rosy). Despite the renewed rally¬†off the recent lows, and the move to new highs on the major indexes, there are still those¬†unresolved¬†issues economically¬†and¬†fundamentally with¬†growth. With slow growth of the economy being the¬†underlying challenge. The tug-o-war is, ‘buyers’ believe the economic improvements currently being prognosticated by the Fed¬†for the second quarter (now second half of the year according to Yellen) are a given. That means we must ignore the first quarter contraction in GDP (minus one percent), the mixed data in the economic reports comparing¬†May to¬†April, and May to June confirm a slowing consumer. The buyers view the FOMC meeting as furhter validation (from the Fed again) and they are putting 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%, and can equally point to data points to support their argument. The buyers are winning currently as the uptrend resumed in the S&P 500 index hitting a new closing highs. The sellers took a small shot of selling, but not enough to change the views of the buyers. By the way, Goldman Sachs just lower GDP estimates to 3.5% from 4%. The beginning of the downgrades on the economic growth?

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 3.41%. That is not what was prognosticated and the story line has not helped the current lack of direction in¬†the markets. The bonds are telling us something different than the Fed and economist.¬†FOMC meeting showed a lack of reality from the Fed, but that’s what makes them the Fed. I would watch for rates to start creeping higher if we end the second quarter on a positive note… economic data improves.

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. 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. With one week left in the quarter the rhetoric on this issue will increase in volume. Earnings are and remain a concern for investors longer term.

This all adds up to uncertainty and a lack of clarity relative to the data and the belief. The underlying concerns have not been removed or dealt with. We are ending the second quarter and the next phase of report will begin soon. 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.

Sectors to Watch:

  1. S&P 500 index remains in a consolidation phase the last week. As stated above Energy, technology, industrials and consumer staples are putting pressure on the downside of the sector. As noted in the nightly video we are seeing some positive moves in healthcare that are adding strength to the broad index, but it will not carry the index higher alone. Trend is still on the upside and we adjusted stops in the S&P 500 model to account for the shift in sentiment and holding for now.
  2. NASDAQ Index moved back above the March high and looking for a key follow through. A move through the 4360ish level and beyond would help. Watch for a continuation and break higher if the buyers are willing. The NASDAQ 100 index is already above those March highs and dealing with the consolidation near the current highs. This is another leading index that is struggling of late. INTC, GOOG, and MSFT are the three positives of the top 10 holdings. We will need more to regain their positive upside for index to break higher.
  3. Small Caps (IWM) РSmall caps tested and held the $116 level and moved through $117 on Wednesday. We are still eyeing the March highs similar to the NASDAQ. Watching to see how it plays out and holding positions for now. Stop at $114.80 currently. Still in uptrend and we want to stick with the trade. YELP, Z, SUNE and TRGP are providing the upside leadership.
  4. Emerging Markets (EEM) are consolidating again near the $44 level and looking for continuation on the upside short term. Leaders like PIN, RBL, EWZ and FXI have stalled and until this reverses we will watch to see how it plays out.
  5. EAFE (EFA) The index hit new highs last week and¬†testing the move again. Dividend distribution needs to be adjusted to the price quoted, but that doesn’t change the test lower. I like the outlook short term for the global markets. Watching EWC and EPHE on the upside. EWJ, EWG and IEV are all testing lower.
  6. Energy (XLE) remains a primary leader as the sector moved to a new high last week. However, Tuesday was the first big distribution day since the May 15th low. We continue to trail our stops based on the time frame we are tracking and let the profits run.  The bounce was modest on Wednesday and Thursday, but enough. We did get bounce back in some of the parts, but still worries short term. TAN, PBW and XOP showing leadership. UNG, USO and UGA sideways to lower and worth watching for impact overall.
  7. Alternative Energy is benefiting from the move higher in crude prices. Solar (TAN) jumped higher the last two week, tested the move and is now moving back in the uptrend. Wind (FAN) is consolidating near the highs in a descending triangle consolidation pattern. Look for upside break if the uptrend is to continue. PBW is still in uptrend as well.
  8. Technology (XLK) continues in the consolidation range near the highs. Has the leadership now run its course? SOXX has rolled over and is testing the uptrend line on the current move down. FDN has renewed the upside after the bottom reversal. IGV testing the renewed upside run and if we resume higher I like the trade. Too much noise and not enough clarity in direction for the sector. Watch and be patient for now. 
  9. Commodities (DBC) made a pivot to the upside on June 4th and the modest upside is still in play. SLV is the leader along with GLD on the break higher on June 18th. SLX has been moving as the base metals (DBB) head higher near term. DBA finally making move off the lows and moved above the $27.80 level for trade.
  10. Miners (XME) jumped off the low as support on June 2nd and have continued to benefit from the move in copper and steel. Gold (GDX) and Silver (SIL) miners have benefited from the move higher in metals prices as well, but both are consolidating near the current high in a flag pattern.


Sector Rotation Model (updated Р6/26/14)

ONLY ETF Model (updated Р6/26/14)

S&P 500 Index Model (Updated Р6/26/14)

ONE EGG Model (New Scan Results Posted Р6/26/14)

Pattern Trading Setup:

Today’s opportunities:

  1. AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up.
  2. VMW – Entry $98.45. Trading range. Break through resistance and run. In software sector.
  3. CRM – Entry $$58.25. bottom consolidation break higher. Consolidating on the break higher and looking for a follow through.
  4. PCLN – Entry $1225. trend continuation from consolidation. Internet space remains positive and move back to the $1300 level possible. 1220 Oct call $81 or better if you don’t want to buy the stock.
  5. SPWR – Entry $40.75. Flag pattern. Broke higher with move in the sector. Looking for continuation move from the pattern.

Pattern Trade Tracking & Follow Up:

  1. 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.
  2. GLW – Entry $21.75. Channel or trading range breakout. Watch and let volume drive entry. Stop $21.50.
  3. IGT – Entry $16. Pennant again set up to break higher. Stop $15.70
  4. GS – Entry $167.30. Flag breakout. look for test of the move on Tuesday. Don’t chase it. Stop $167.30. HIT STOP
  5. TWTR – entry $38.15. bottom reversal and follow through. Bottom in? watching as trade for now, but could develop into more. Stop $37.50.
  6. SCTY – entry $55.31. bottom trading range. Break higher from the range as sector moves higher. TAN broke higher on Monday. Stop $67.45.
  7. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 92.
  8. DDD – entry $51.70. bottom trading range. Break from the range with upside return. Stop $54.90.
  9. 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.
  10. 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.
  11. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
  12. AKAM – entry $55. trading range breakout. Stop $60.50.
  13. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.50.
  14. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $48.50.
  15. 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
  16. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $252.
  17. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $87.
  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 $102.
  19. 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. HIT STOP.

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.