Trading Notes for Today, May 20th

Notes for Tuesday:

Solid upside post for the broad markets on Monday, but the volume was on the light side, and momentum seemed lackluster as well. Technology and small cap stocks took the lead with a bounce off the same support levels again. Why? The most oversold sectors tend to attract the most money on a positive trading day. Thus, I am not going to put any reason behind a move that doesn’t have any clarity or conviction at this point. If the upside gains momentum, and the buyers continue to believe in the outlook for growth, the trend will reflect opportunities soon enough.¬†It is decision to trade the bounce or wait for the trend continuation to confirm.

Cash levels are at a two year high. Is this a contrarian signal to buy? The bounce in the Russell 2000, SOX and NASDAQ 100 say yes, but the cautious side says maybe. As we have stated over and over, the lack of conviction from buyers keeps the buy interest in check. The story of the little boy who cried wolf comes to mind, as analyst keep staying this is the move higher, only to watch it move lower and test support again. Today we watch to see if it follows through or just another cry the upside is coming.

As we have discussed the current Story of the market boils down to uncertainty. The¬†current choppy markets are being pushed by the news of the day, see Monday’s trading with Mergers taking the lead. However, the underlying challenge is the economy, simply put, no growth. The buyers have a belief the economic improvements being prognosticated at 4% growth for the second quarter and are willing to put money to work. The sellers believe the economy is growing slower at maybe 1-1.5%, and are willing to sit on the sidelines. The buyers are winning based on¬†the uptrend that 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.

The issues we are tracking¬†are the same, interest rates (found some support and bounced), geopolitical issues with Russia (moving troop away from the border? again?), economic expansion or lack of (talk again of improving second quarter?), conviction from investors about owning stocks (started on Monday?), and some clarity overall in¬†direction (bounce from support is start). The day to day news driven market cycle isn’t likely to change as this¬†week, but we can hope… right. Remain patient and take what the market gives going forward.

Outlook for the Week of May 19th:

Sectors to Watch:

  1. Small Caps (IWM) Рbounced off the support levels on Friday and followed through on Monday with a 1% gain for the index. The close at $110.75 is near the 200 DMA and a move to $113 is not out of the question based on the activity Monday. The move hit stops on the EGG Model short trade on the sector. Watch and see how it plays out, the upside is not assured as the downtrend off the March high is still in play.
  2. REITs –¬†The¬†sector remains in a uptrend, but has spent the last six¬†trading days moving sideways with nice moves up and down. 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 РThe 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. Nice move back to the upside on Friday to resume the uptrend and should continue this trek higher. Hold and manage your risk as we traded flat on Monday.
  4. Bond yields moved to new lows on the thirty year bond last week and starts the week moving up to 3.38%, a gain of 4 basis points on the bond. The ten-year hit 2.53% with a move higher on Monday as well. This is not enough to change the sentiment towards yields, but it was enough to offer some push prices lower on the bond. Holding our bond positions as the worry about the rise in yields has all but disappeared.
  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 overbought, but watching and managing the stops. Crude is moving higher on worries again and could give some upside to the stocks as we start the trading week.
  6. Semiconductors broke from the wedge consolidation pattern to the downside last week and are now attempting to reverse back to the upside. This is just another example of the up and down movment we have discussed for weeks. Be patient for now and see how this unfolds.
  7. 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. The bounce off these levels put the upside back in question. Watching for follow through or bounce? Patience… Patience… patience.
  8. Utilities (XLU) Reversal in play and the break of support on Monday was a big negative. The downside is now in play and a short opportunity? If holds below the $41.80 level today looking for a short trade. SDP is the short ETF, but has little volume. Sept $42 puts on XLU offer the best opportunity. A short trade on XLU is one way to trade also.


Sector Rotation Model (updated Р5/19/14) Added Watch List

ONLY ETF Model (updated Р5/19/14) Added Watch List

S&P 500 Index Model (Updated Р5/19/14) Added Watch List

ONE EGG Model¬†(New Scan Results Posted –¬†5/19/14) Added QLD

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 it is easy to throw in the towel, but we have to remain disciplined with our strategy. Things tend to work when you least expect it. Bottom reversal attempt in play again. Nothing is ever a given… discipline is the key to trading.
  2. 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.
  3. 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.
  4. XLU – short entry $41.45. Break of support. Short trade on the downside setup in Utilities. $40 target. Stop is $42.30 on reversal.

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. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Stop $14.70.
  6. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  7. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  8. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  9. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $34.20.
  10. 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.