Trading Notes for Today, March 25th

Below are the comments I started the week of trading with, and Monday we got some response from investors relative to some of these concerns. The downside move in the NASDAQ left a void between the index and the rest of the market that will be addressed in time. The biotech sector was the cause and one key sector to watch today. I am not convinced the downside push is going to last, and that means patience on our part to see how this unfolds. I address the sectors to watch below.

Monday’s Notes: The topping action we discussed two weeks ago is still building, it is just taking longer to work through with the bounce back to the previous highs. Each top takes on it’s own characteristics and this one is struggling on several fronts. Last week it had to deal with the FOMC news and the comments from Fed Chair Yellen. It is still dealing with what is going to happen, i.e. uncertainty. We know QE is phasing out $10 billion at a time and now down to $55 billion per month. Economic data the first two months of the year are far from promising relative to future growth moving above the 3% level. This has been an ongoing issues and remains an uncertainty for investors. Geopolitical issues with Russia and Ukraine are not over and they offer more uncertainty in the global markets. Throw in North Korean actions and the US has issues that may develop, or it creates another area of uncertainty. The point is there is plenty on the table and plenty to keep the market from advancing.

On the other side, the argument for the markets continuing to move higher are not very convincing either. The primary question is are we breaking as a result of the uncertainty or just re-positioning for other sectors to lead, or rotation? Financials did give up gains on Friday, but the sector does have some leadership in stocks like JP Morgan, Citigroup and Capital One to name a few. Electronics are breaking down some, but are still in a strong uptrend. Semiconductors are still leading with some rotation within the sector on leaders. It is easy to want to be negative, but is discipline that looks for the leaders and follow them.

What are we looking for Today?

Plain and simple… follow through on the downside leadership… biotech. We discussed yesterday that we wanted to know what character the market was going to take on going forward? The answer to that question is the key issue facing the market overall. The downside exerted itself on Monday, but there is still plenty of work to do if that is the near term direction of choice. Thus, remain patient, let it unfold and don’t force trades. I am posting less to the Watch List on the models by design… I don’t want to put money at risk until we can clearly define the risk. That said, I will post some short term trades as they unfold.

Outlook for the Week of March 24th (Weekend Update)

Sectors to Watch:

  1. S&P 500 index watch for 1840 support (held it on Monday) and 1885 resistance. Now we watch to see if the support and bounce works or we return to test the downside support yet again. SDS is posted as trade opportunity on ONLY ETF Model and below on pattern trades.
  2. NASDAQ 4244 support (broke it and tested 4190) and 4370 resistance. Looking for solution to the break lower? Short or bounce back? We added QID from the trade list below and ONLY ETF Model on Monday.
  3. EFA to hold support ($64.50 ). Europe (IEV) will be key part of the solution with support at $46.50. Let it unfold going forward. Held support, attempted to bounce on Monday, but the US markets kept the indexes in check.
  4. Emerging markets (EEM) Break the downtrend line back to the upside and I am interested. Monday this pushed toward the breakout point of $39.50. Watch for trade, but don’t fight the US market going forward.
  5. Bond yields tested 3.55% last week and with the selling on Monday, tested that level again? Rotation to safety? For now I would say yes, but we have to watch to see how it trades going forward.
  6. Healthcare (XLV) broke support closing below $58.44? Look for a bounce back, if fails to do so the short side of the trade will develop. We posted the short trade using put options on XLV in the Weekly Update last Saturday. We added that position on Friday and we continue to monitor the outcome with a stop at break even on the entry.
  7. Financials (XLF) hit new highs last Thursday. Gave back on Friday. Banks (KBE) did same, watch how they open this week. Regional Banks (KRE) Could be strong as stress test less of a drag. Brokers (IAI) stock picking sector. Insurance (KIE) stock picking sector. MONDAY: no great changes, but the sector did hold the support levels and now we watch how it unfolds the balance of the week. Raised our stops on positions.

NOTE: There are other trade opportunities posted in the Weekly Outlook for March 17th if you want to review them. We will continue to monitor the list throughout the week and add to this list what meets our risk/reward strategy for each model or pattern list.

Models:

Sector Rotation Model (updated – 3/24/14)

ONLY ETF Model (updated – 3/24/14)

S&P 500 Index Model (Updated – 3/24/14)

ONE EGG Model (updated – 3/24/14)

Pattern Trading Setup:

Today’s opportunities:

  1. No simple answers for a market in transition without direction or clarity. The choppy waters are not worth navigating sometimes. Biotech (IBB) and Internet (FDN) have challenges as they lead the downside. Watching for a bounce or the downside spreads among other sectors. Rotation thus far has not been significant other than treasury bonds. We will be patient for now and continue to watch how this unfolds.
  2. SDS – entry $29.11. bottom reversal. If we get further downside action to the FOMC meeting. Looking for opportunity to trade the news reaction if it develops and hedge positions.

Pattern Trade Tracking & Follow Up:

  1. QID – entry $57.35. bottom reversal. If the negative in stocks like AMZN, NFLX and ALXN continue downside will accelerate. Stop $56.60
  2. AKS – entry $6.65. Trading range. Looking for follow through on breakout. Materials sector. Stop $6.42.
  3. STX – entry $52.23. base, descending triangle. technology sector. Stop $52.
  4. OREX – entry $7.58. Trading range breakout. Continuation of the uptrend after the support test on the trendline. biotech sector. Stop $7.35. HIT STOP
  5. NLY – entry $$11.40. Continuation breakout. Move above the 200 DMA a plus. Mortgages on the rise in demand and will benefit Annaly. Stop $11. Reversal on interest rates moving higher.
  6. XLK – entry $36.20. Reversal from selling. Watch for follow through move. Stop $35.75
  7. JPM – entry $57.60 ($57.75). higher low, with 200 DMA as trendline. Followed through and added position. Stop $57.33
  8. SMH – entry $43.95. Test of support. Semi’s sold off with broad market. Upside still attractive if the broad indexes bounce. Stop $43.70.
  9. GMCR – entry $109. Test of vertical  move higher. Stop $109. Nice follow through on Friday, raised stop to even. let it run if the move continues. Hit Stop!
  10. VTSS – entry $3.82. Consolidating after move higher. Semiconductor. Stop $3.85.
  11. NEE – Entry $91 on the test of the breakout at $90. Stop $92.75. Testing the high.
  12. RF entry $10.50. Breaking from consolidation. Financials. Confirmed on the upside. Stop $10.50. Nice upside move from the bank finally.
  13. TQNT entry 9.37. Flag on break higher. Looking for continuation of the upside move. Semiconductor. Stop $12.50. Gap higher and still moving higher, adjust your stop.
  14. FTK entry $24.75. Flag continuation of uptrend. Energy sector moving higher. Stop $26.25.

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)

  • 2/18 – Raise stop to $58.95 currently and manage the move to the new high according to your risk. With the price moving through the top of the Bollinger bands some downside activity may be on the horizon or a continuation of the top consolidation.
  • 2/19 – $16-19 billion acquisition of WhatApp pushed the stock down 2.5% after the announcement in after-hours trading. Watching to see how investors react in trading today.
  • 2/24 – Continuation of the upside momentum. Plenty of news and comments on the stock, but the buyers remain confident short term. Looking at adding a trade on the stock with options. Watch to see how it trades today.
  • 3/1 – rolling top? Watching to see how this plays out short term and will look for a hedge on the remaining position this week. Raise stop to $63.75.
  • 3/5 – Target upgrade and stock runs higher on the move. Move stop to $65.90 and what how this plays out from this point patiently.
  • 3/12 – Setting up to add a $70 put contract for June at $6.85. 20 contracts. Looking at how we trade the balance of the week and if any weakness develops in the stock.
  • 3/13 – Added 20 puts @ $70 for June at $7.05 today. This will act as a hedge against the position and add some profit if the shares break support.
  • 3/24 – Holding support at the $66.50 level. If we break lower the downside could accelerate towards the $60 mark. Keep stop in place on the shares and manage your put contracts. HIT STOP and held out put contracts. Watch to see how this plays out going forward. Look to lock in gains on half of the position if the selling accelerates.