Trading Notes for Today, May 16th

Notes for Friday:

Current Story of the market boils down to uncertainty. As we have discussed the current choppy markets are being pushed by the news of the day. However, the underlying challenge is the economy. The buyers believe the economic improvements being prognosticated at 4% growth for the second quarter. The sellers believe the economy is growing slower at maybe 1-1.5%. The buyers are winning as the uptrend remains in play. The April economic data is causing some heartburn as the growth has still not shown up in the numbers. Thus, the current choppy markets. The longer term outlook is for growth to return, if it fails to show up, eventually the sellers win and the correction takes place. We continue to track this story line and will act accordingly as it unfolds.

Thursday was one for the sellers as the major indexes tumble more than 1% on the day. Data wasn’t bad, jobless claims fell 24,000, CPI was in line with expectations at 0.2% rise on the core index, Empire state index was much better jumping well above expectations, capacity utilization fell slightly and the homebuilders index fell to 45 well below expectations. The lack of confirmed growth in April is the challenge and it is impacting investor psyche for now.

Yields dumping again spiking bonds higher. The activity this week is showing anxiety from investors and more rotation. The first phase of this move was movement from growth to the dividend stocks, and now we are seeing the movement to treasury bonds. This again is something to watch as this unfolds. More rotation should impact the VIX index to move higher, as it did on Thursday, reflecting the building fear in the broad markets.

It’s Friday and we end another week without direction. However, the sellers the last two days have shown interest and could make an attempt to take control short term. Watching to see if today follows through or the buyers step back into the picture. Until there is good reason to put money at risk we are willing to sit on the sidelines and let it all unfold one day at a time.

Outlook for the Week of May 12th:

Sectors to Watch:

  1. Small Caps (IWM) – closed down again on Thursday break $108 support and testing down to the $107.50 level. The late day bounce off the lows was  a positive, but the selling still got plenty of attention. The downtrend is firmly in place and this now becomes a wait and see… confirm a move lower and the short trade with TZA comes into play. Bounce and move back above $111 the upside is worth looking at for a short term trade. This is not what I expected when the week began.
  2. REITs – The sector remains in a uptrend, but has spent the last five trading days moving sideways and Thursday broke below the 10 DMA. Still interested in holding and managing this position with a longer term time horizon, but the time has come for the worry to step in. Set your stops according to the risk you are willing to accept as this unfolds. Hold positions and set your stops.
  3. Emerging Markets – The sector broke above the April high, but tested that move on Thursday. Testing the move and holding the upside mover for now. Still have a 12-36 month outlook on the sector to move higher. EGG Model hit the stop at $42.25. EAFE index is trading in conjunction with the US markets again and testing the move higher currently. Not willing to own on the market link.
  4. Bond yields moved to new lows on the thirty year bond and currently at 3.33% with reversal on the downside teh last three days. So much for the rise in yields that started last week. That is now erased and heading towards a new low. The ten-year hit 2.5% with a move below the bottom end of the current trading range. Holding our bond positions as the worry about the rise in yields from last week has all but disappeared.
  5. One analyst stated to be aware of the short covering in treasury bonds. This is something to watch as the yield on the bond continues to drop the volume and speed of the moves have accelerated. The short interest relative to the bonds are a result of many believing that yields would rise as the Fed removed stimulus and the economy rebounded further. Needless to say that has not occurred and here we are with plenty of hedge positions against the yield rising… and they are falling. This has to be the single biggest surprise in the 2014 financial markets. If you are short treasury bonds be aware of your your surroundings.
  6. Energy (XLE) remains a leader, but it is looking tired and has paused short term in the consolidation period. Be cautious and adjust your stops according to your time horizon. Technically overbought, but watching and managing the stops. Started the week on the upside, but met some selling on Thursday and testing the current move higher.
  7. Semiconductors broke from the wedge consolidation pattern. This sets up the downside short term with support at the 560 level on the SOX index. Break that level and the short side potentially accelerates. Aug 44 Puts at $1.10 or better should we break low would be one way to play the move. SSG is the short ETF, but lacks volume to trade it easily.
  8. Major indexes cracking following the new highs. Dow and the S&P 500 both retreated to the 50 DMA. A break of this level puts the indexes on the downside path. Watching today for follow through or bounce? Volume spiked in the short ETFs DXD and SDS. Watch to see if they continue to accelerate today.


Sector Rotation Model (updated – 5/15/14)

ONLY ETF Model (updated – 5/15/14)

S&P 500 Index Model (Updated – 5/15/14)

ONE EGG Model (New Scan Results Posted – 5/15/14) TZA posted

Pattern Trading Setup:

Today’s opportunities:

  1. Market remains challenged relative to clarity and confidence. Remain disciplined in your approach and manage the risk of the current market environment. Pattern trades get very choppy in this type of environment and we will make less trades as a result. Be patient and let this all unfold in the coming days and weeks.
  2. SDS – entry $28.35. Negative sentiment returns. bottom reversal. Patient and don’t chase if gaps open in the morning.
  3. DXD – entry $$27.25. Negative sentiment. bottom reversal. Patient with entry don’t chase.

Pattern Trade Tracking & Follow Up:

  1. ERUS – entry $$18.75. ascending triangle breakout. Russia has moved off the lows on positive comments from Putin. Move above $18.64 would be breakout point for the ETF. Stop $18.20.
  2. VIPS – entry $147. trading range bounce off low. Trade back to the topside of the range. Stop $157.10.
  3. AMGN – entry$112.75. Bottom reversal and break from consolidation. Stop $110.70 HIT STOP
  4. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $580.20.
  5. SANM – entry $21. Flag. Technology sector. inside trading day look for break today and follow through. Stop $20.20. HIT STOP
  6. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Stop $14.70.
  7. S – entry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.41.
  8. HAL – entry 64. Flag. Energy wants to move higher. Patience. Stop $63. HIT STOP
  9. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  10. RAD – entry $7.45. Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  11. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $34.20.
  12. 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)

  • 4/17 – Still looking for some positive action in the stock to warrant going long. Opened lower fought back to positive, but never showed any conviction and closed on a doji. Watch to see how it does in trading today. We could see another test of $56 before gaining any momentum on a bounce off support. Earnings are Wednesday and that isn’t a great thing to get in front of with a new position.
  • 4/23 – It is all about earnings today. Ad revenue good stock runs higher. The option trade we discussed last week has played out nicely on the move Tuesday. Take some profit on half and carry half into earnings would be the suggested play. I will be interested to read the earning report and determine how we want to deal with the position moving forward.
  • 4/24 – Sold lower by 2% into earnings. Earnings were positive and stock gains the 2% back after-hours. Watching the open today. Need to hold the move above $63 and willing to add a longer term position back in the stock with 1000 shares. Attempted to make the move higher, but traded lower on the day. Plenty of opinions on the stock currently keeping it in check and a bottoming trading range. Patience as it all plays out.
  • 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.