Trading Notes for Today, June 3rd

Notes for Tuesday:

It will be hard to beat the mix up on the ISM manufacturing reports, but I am sure there will be more interesting new as the week unfolds. Today markets are pointing lower, but that has yet to pan out over the last week plus. As always you have to protect against the downside risk, but take what the markets give going forward.

I am traveling this week and the video updates will not be posted due to challenges with uploading the files remotely. Updates will be posted as normal.

Market Story & Outlook:

Current Story of the market boils down to the simple issue of uncertainty. Despite the rally¬†off the recent lows, we still have unresolved¬†issues economically, fundamentally and earnings growth. The bridge to nowhere has been being built the last two weeks and for now the outcome is positive. This¬†move¬†was founded¬†on no specific reason and we need to manage it accordingly. As we have discussed the markets underlying challenge is the economy. The ‘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). ¬†This week the data reports¬†were better and¬†part of the reason behind the current move higher. The belief of the buyers got some validation (not four percent worth, but some) and they 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, their opinion. The buyers winning currently as the uptrend resumed short term with the S&P 500 index hitting a new closing high. Clarity will be the key to how this ultimately plays out. In the meantime we have to be cautious, take the trades we are comfortable with and keep looking forward, and managing our risk as we go.

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 3.3% or they have declined 64 basis points pushing the long bond up nearly 13% for the year. 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. The above issues of growth in the economy are showing up in the bond prices as investors push money in that direction. The big move lower in yield last week only adds to this worry.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data has not been 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. Running scans using the PEG ratio shows clearly the challenges arising in this indicator. Just another pieces of the story we have to monitor to determine our outlook and belief.

This all adds up to stocks losing value if the economic growth going forward is weaker than expected. As we have been saying for more than a year, fundamentals don’t matter, until they matter. Activity in the markets short term¬†are saying the still don’t matter. The VIX index would validate that as it resides near lows.¬†Until there is anxiety from investors the downside will remain talking point more than a reality. Until we will have clarity¬†stick with the trend and for now that is back on the upside. Patience and discipline are key to success long term.

Sectors to Watch:

  1. Small Caps (IWM) РThe sector added to the test from Friday closing below $113, but holding above the 200 DMA. Clearing resistance at the 110.20 level was the basis for the upside position. Watch to see how this plays short term and manage your stops accordingly. Entry hit at the $111 mark and using that as the stop for now.
  2. REITs –¬†The¬†sector remains in a uptrend, but has spent the last two weeks¬†moving sideways. The move through the $71.36 mark on IYR was a new high and closed above this level on Friday and Monday. I am¬†still interested in holding¬†and managing this position with a longer term time horizon. The worry which was present the last two weeks may be giving way to optimism. Set your stops according to the risk you are willing to accept as this unfolds.¬†Hold positions and¬†keep moving forward.
  3. Emerging Markets РUptrend is in play, but the uncertainty of the markets is still a concern with the current topping formation in play.. Set your stops accordingly and focus on the horizon as we still have a 12-36 month outlook on the sector to move higher. Entry $43 on EEM hit last week. Stop $41.76.
  4. Bond yields moved to new lows again last week on the thirty year bond. The bounce of 7 basis point on Monday could show positive economic data creeping into the bond again? Watch TBT as an opportunity or hedge against the bond short term. The sentiment on yields is lower short term, but I would not be overly aggressive with that stance.
  5. Energy (XLE) remains a leader, but has picked up some volatility short term and is in a consolidation period. Be cautious and adjust your stops according to your time horizon. Technically in a trading range, but at the top side and attempting to break higher. Crude moved lower on in reference to inventory worries closing at support of $102.50. This is something watch short term along with any impact. For now the outlook is higher for the stocks, but watch oil prices, they may have an impact on the sector near term.
  6. Semiconductors broke from the wedge consolidation pattern to the¬†upside¬†and followed through. 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. 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.
  7. S&P 500 index moved through the 1900 level and  to new high for the index at 1924. What does it mean now? Uptrend back in play and watching for the upside to continue short term. Volume has been a concern along with defined leadership. Technology has helped, but still plenty of work left to do on the upside. Manage stops and keep going forward.
  8. NASDAQ 100 index has been the bounce back index, after selling lower the last nine weeks, the index closed back at the March highs. The close above 3737 would push to a current high and keep the move intact. Large cap stocks are leading the way for the broad markets currently. QLD hit entry At $100.70. and has moved up nicely on this break higher.
  9. Natural Gas РUNG is testing support again at $24 and holding. Double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry on Wednesday). FCG is attempting to reverse from recent selling as well (hit entry at $22.16 on Wednesday). Positive move reversing the short term downtrends. Watch and set your stops accordingly.
  10. 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. CURE, XLV broke to the upside showing strength short term in the broad sector. Pharms stocks PJP, XPH moved to the upside as money rotates back into the sector.
  11. Global РEurope (IEV) continues to hold near the highs, but has stalled for now. Germany (EWG), Spain (EWP) and Italy (EWI) have all made moves higher. The EAFE (EFA) hit new highs and the move higher continues. The Emerging Markets (EEM) have been consolidating sideways and showing some signs of topping near term. Watching the whole picture, but for now the upside remains in play.


Sector Rotation Model (updated Р6/1/14)

ONLY ETF Model (updated Р6/1/14)

S&P 500 Index Model (Updated Р6/1/14)

ONE EGG Model (New Scan Results Posted Р6/1/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly. Still not believing this is a sustainable trend. Small test on Wednesday, but the upside bias remains… focus.
  2. STI – entry $38.95. trading range. Banks attempting to break higher.
  3. BAC – entry $15.35. trading range. Banks moving to the upside.
  4. AKAM – entry $55. trading range breakout.

Pattern Trade Tracking & Follow Up:

  1. EXPE –¬†entry $73.90. Downtrend break and follow through. ¬†Stop $71.90.
  2. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $70.35.
  3. 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 $24.80.
  4. AMZN – Added Option. Bottom reversal. Tested move on Tuesday. Upside challenged by margins and other fundamentals from last earnings report. Could move to $338 on this bounce. $310 $17.65 entry (Wednesday), Stop $15.65.
  5. TAN –¬†entry $40.38. Bottom reversal. Previous leader, but in the growth sector side. Looking for the reversal to validate on the upside. Tested to $0.25 and bounced adding the trade short term. Stop $40.40. HIT STOP.
  6. FDN Рentry $56.60. Bottom reversal breakout and test. Looking for test of the move. This is another growth leader previously. Only want entry on test and hold. Tested the move and held adding the position. Stop $56.
  7. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $45
  8. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $19.80
  9. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.50
  10. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $236.70.
  11. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $80.50.
  12. BIDU – entry $164.50. Trading range. Following the large cap NASDAQ stocks. Made the move higher and letting it play out. Stop $162.85.
  13. YELP – entry $58.15. Base and bottom reversal. Technology bounce and upside. Stop $65.25. HIT STOP
  14. 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 $106.42.
  15. 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 $94.05.
  16. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $620.
  17. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  18. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $77.
  19. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $8.01.
  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 $25.70.

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.