Trading Notes for Today, March 31st

The activity last week was one of uncertainty as the market danced, rotated and sold. The dancing was a result of the news uncertainty around the economy and geopolitical issues. The rotation was money moving from growth to value and the selling was money leaving stocks for bonds. A little something for everyone.

Today ends the quarter and that means data the balance of the week relative to the economy. It also means earnings will start soon, adding to the data of how the economy is doing. If we are going to get a defining catalyst relative to market direction this should be it.

As I stated in the weekend update, we have to remain patient as this all unfolds and investors make the shift based on the data provided along with the spin from analyst. 

What are we looking for Today?

The events from last week of money moving into the global markets versus the US. The EAFE index finally showed divergence from the US markets and it is important to see how that unfolds moving forward. Do we find opportunities in the global markets short term or is will it be a longer term trend for investors to take advantage of? Answers to questions is what I would like to see most.

Will the bounce finally materialize the last day of the quarter? Will it amount to anything? NASDAQ is testing the 2012 trendline, will it hold or break lower to start a downside effect for the broad markets? There are plenty of question marks short term that will impact the longer term outlook for the markets. Trend reversal never happen easily and they create plenty of questions in the process. Thus, we have to remain patient as this all unfolds, taking what the market gives one day at a time.

Be patient today as we end the quarter and turn on the data faucet. 

Outlook for the Week of March 31st (Weekend Update)

Sectors to Watch:

  1. S&P 500 index watching to hold 1840-1850 support and 1885 resistance. There is a descending triangle pattern of consolidation and it is likely to continue until the data reports determine the next catalyst, up or down. For now we watch and take what the market gives overall.
  2. NASDAQ broke support, but managed to find support and bounce at 4126 and the 100 DMA on the close. The impact of selling growth stocks did it’s damage on the index short term. How do we trade this index this week is still being determined. The bounce had no conviction, but was enough to hit our stops on the QID trade. The open today and Tuesday will give some clues.
  3. EFA is held support ($64.50 ) and moved through the entry point of $66.50, but left a doji on Friday? Thus, we look to see how this trade plays out today. The opportunity to buy into the position last week was clear, but the technical indicator short term is worth watching. As we stated in the weekly update, the first signs of divergence are in motion and we need to see if it follows through.
  4. Emerging markets (EEM) Brroke the downtrend line back to the upside and shows interest from investors short term. We hit the entry point and it gapped higher on Friday. Watching to see how this follows through on the week and we will have to remain patient with the position near term.
  5. Bond yields broke support at 3.55% Thursday. Question… if markets are rotating/moving in anticipation of higher interest rates, why are rates moving lower currently?  Rotation to safety? Obvious answer, but looking forward rates will rise if the Fed follows through. Fear of growth is driving money to safety in the short term. Bonds are currently a trade only. Watch and let this play out. The sector still has elevated risk longer term.

Models:

Sector Rotation Model (updated – 3/29/14)

ONLY ETF Model (updated – 3/29/14)

S&P 500 Index Model (Updated – 3/29/14)

ONE EGG Model (updated – 3/29/14)

Pattern Trading Setup:

Today’s opportunities:

  1. QID – entry $59. Looking for test back to $57.60 and then continuation of the micro trend higher in the downside ETF. Let it unfold by testing lower first.
  2. EDC – entry $25.50. Trading range breakout. Finally got the move higher in the emerging market index and looking for the follow through this week.

Pattern Trade Tracking & Follow Up:

  1. JNJ – entry $96 ($95.75). trading range breakout. Look for test of the move and entry near $96. If higher don’t chase. Added after opening test.
  2. WDC – entry $90. trading range breakout. Follow through on upside move. Stop $88.50.
  3. QID – entry $57.35. bottom reversal. Watch the Tuesday bounce? any legs? Stop $58.75. SOLD half position at $59.50. raised stop on balance. HIT STOP
  4. AKS – entry $6.65. Trading range. Looking for follow through on breakout. Materials sector. Stop $6.42.
  5. STX – entry $52.23. base, descending triangle. technology sector. Stop $54. Raised stop to see how this breakout plays out. Tested Thrusday watch today and take exit if fails.
  6. 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. HIT STOP
  7. JPM – entry $57.60 ($57.75). higher low, with 200 DMA as trendline. Followed through and added position. Stop $59
  8. SMH – entry $43.95. Test of support. Semi’s sold off with broad market. Upside still attractive if the broad indexes bounce. Stop $44.25.
  9. NEE – Entry $91 on the test of the breakout at $90. Stop $92.75. Testing the high.
  10. RF entry $10.50. Breaking from consolidation. Financials. Confirmed on the upside. Stop $10.50. Nice upside move from the bank finally.
  11. TQNT entry 9.37. Flag on break higher. Looking for continuation of the upside move. Semiconductor. Stop $12.75. Adjust your 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)

  • 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.
  • 3/26 – Sold on buyout news and hitting next level of support? Bounce in play. Watch the puts and look to sell half to lock in nice gain and hold half with stop at $62.90 on stock.
  • 3/27 – Sold half (10 contracts) in the morning decline and bounce at $12.6o locking is a gain of $5.55 per contract. Nice gain on the position. We hit stop on the remain 1000 shares at $63.75 and still own 10 puts. Looking to exit the puts today if the stock moves higher and then we will address how we want to play the stock moving forward. Looking at selling puts with a strategy of having the stock put to us if it drops near the entry level we would like town the stock. This would assume the risk on the downside has played out near term.