Trading Notes for Today, June 6th

Notes for Friday:

Solid day of gains posted Thursday by the major indexes and the trickle down effect from there. Small caps were the leader and added some spunk to the trading day. What do we take away from the day? Simply that buyers are still willing to put money to work and they see more optimism going forward than most. The leadership from technology is helping and with the addition of small caps the belief is more gains on the horizon. Only time will tell and if the upside gains momentum the question is for now long? Always willing to get on the bus, but I want to know where my exit is in the event the ride isn’t smooth enough.

ECB set the same tone the US did with throwing everything at the economy to stimulate growth and avoid disinflation. That helped US stocks as well as the European stocks post solid gains on the day. Today it is the US turn as we post the May jobs report. Expectations are to add 210k new jobs. A disappointing number will likely take its toll short term. Watch and see how this impacts the futures prior to the open. Make adjustments if necessary to your stops, etc.

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 with earnings growth. The bridge to nowhere has been being built the last two weeks and for now the outcome is positive. There are some cracks in the upside, but speculating at this point does us no good. The current upside move was founded on no specific reason and we need to manage it accordingly. The jobs report may act as a catalyst if the data is better than expected. However, if bad, it may still act as a catalyst on the downside.

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). ¬†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 3.43%, which is up 10 basis points this week. That is a start in the right direction of what should transpire with interest rates, if the markets are going higher in stocks, but there is a long way to go for this to equalize. 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 ECB stepped up stimulus in Europe on Thursday and that added some additional pressure for bonds. Let this sink in and the details be laid out before making any additions on the news.

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. In four weeks we start this process over again and it could impact the markets overall.

This all adds up to… it doesn’t matter just buy stocks. We want the fundamentals to matter, and they may someday, but for now they don’t, and most investors are buying now and asking questions later. 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 a talking point more than a reality. Until we will have clarity¬†stick with the trend, for now that is back on the upside. Patience and discipline are key to success long term.

Sectors to Watch:

  1. Small Caps (IWM) РSo much for the three days of testing the $111 mark as the index breaks higher gaining 2.1% on the day. Clearing resistance at the 110.20 level was the basis for the upside position. We persevered along with others and now the trade has panned out on the upside. Looking for a move through the $115 level now. Raise the stop to $113.
  2. REITs –¬†The¬†sector remains in a uptrend, but has been¬†moving sideways. That ended officially Thursday with the jump higher gaining 1.5% and pushing through the $71.36 mark and closing at a¬†new high. 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 did give way to optimism. Set your stops according to the risk you are willing to accept based on the move.¬†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. Stop $41.76. Still holding in the trading pattern top for now and break below $42.50 would be a negative on the downside. Equally a move above the $43.50 level would be a plus for the upside.
  4. Bond yields moved to new lows last week on the thirty year bond. The bounce of 14 basis point the last three days pushed bonds lower. Yields were higher to start the day, but reversed on the ECB announcement? Still watching 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. TBT hit entry point of $62.50 Tuesday. Add if we move above $63.30.
  5. Energy (XLE) remains a leader, but has picked up some volatility short term, consolidation and now hitting ne highs again. Be cautious and adjust your stops according to your time horizon. Poised to run higher on the positive outlook in the US and EU stimulus. Crude had another volatile day with a spike lower early and then sold rallied back to close flat on the day and still holding support of $102.50. This is something to watch short term along with any impact.
  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. Added 2% the last three¬†days¬†to confirm the upside. 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 on Thursday with the index gaining traction again.
  7. S&P 500 index moved through the 1900 level and  to new high for the index at 1940. What does it mean as we accelerate to another new high? Uptrend back in play and watching for the upside momentum 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. Financials were up as well as healthcare to help lead the index.
  8. NASDAQ 100 (QQQ) back at the March highs $91.34 and cleared that level Thursday with a solid upside day. The close at $92.30 hits new high and keeps 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. Stop $105.60.
  9. Natural Gas РUNG tested support at $24 with a double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry) and letting it play out for now short term. FCG is attempting to reverse from recent selling as well (hit entry at $22.16). 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 with a renewed push higher the last two days. 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 – Europe (IEV) moved to new highs¬†on Draghi’s news today. 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 (see above).
  12. Utilities (XLU) breaking higher from the test lower. Cleared resistance at the $42.40 level. Look for entry on a test of that level or $42.80. Hit the entry and now challenging the previous highs at $43.50.

Models:

Sector Rotation Model (updated Р6/5/14)

ONLY ETF Model (updated Р6/5/14)

S&P 500 Index Model (Updated Р6/5/14)

ONE EGG Model (New Scan Results Posted Р6/5/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly.¬†Today ends the week with the Jobs Report…
  2. RF – entry $10.50. trading range breakout test. Solid move higher and $10.50 entry hit on Thursday. Look for test and entry to the trade.
  3. FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt.
  4. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play.
  5. NPSP – entry $33.80. Pennant. Continuation of the upside breakout in biotech stock.

Pattern Trade Tracking & Follow Up:

  1. ANIK – entry $48. trading range. biotech moving higher again. Adding to the existing position. Stop$47
  2. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $47
  3. BAC – entry $15.35. trading range. Banks moving to the upside. Stop $15.20.
  4. AKAM – entry $55. trading range breakout. Stop $53.50.
  5. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$38.25.
  6. EXPE –¬†entry $73.90. Downtrend break and follow through. ¬†Stop $71.90.
  7. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $70.35.
  8. 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.
  9. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $45
  10. 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. NICE jump on Tuesday.
  11. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.50
  12. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $236.70.
  13. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $81.42.
  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 $9.20. HIT STOP
  18. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $8.01. HIT STOP
  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 $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.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.