Trading Notes for Today, May 21st

Notes for Wednesday:

Just as we stated on Monday… “we need a¬†follow through trading day¬†(Tuesday)¬†if the buyers are going to gain control of the market direction going forward. That didn’t happen thanks to the mouth of Mr. Fischer (nominee to vice-chair of the Federal Reserve) stating interest rates would need to be raised faster if the economy heats up. Plosser made similar comments about the need to withdraw QE faster by raising rates. The worry about inflation talk mixed in for special effects didn’t help either. Other Fed Presidents were of differing opinions, but the damage was done. Thus, back to the drawing board on the market direction as we continue to chop around looking for¬†clarity.

The Fed can’t get all the blame, but they make themselves an easy¬†target. The economy is the root of the blame as the earnings¬†data show further weakness as some key companies miss earnings. The hard facts are consumers are spending less money. The blame went to the brick-and-mortar businesses and that could be something to watch for further implications going forward. Not matter how you slice the data it did not paint a pretty picture. The economic news continues to show weakness, despite all the talk of growth reaching 4% in the second quarter. Those numbers are starting to be adjusted. To me this is a bigger undercurrent for the market than the Fed comments… news (comments) versus catalyst (economy).

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 Tuesday’s trading with the Federal Reserve leaders hawking inflation and interest rate increases. 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?) and now Thailand, economic expansion or lack of (talk again of improving second quarter?), conviction from investors about owning stocks (compare Monday and Tuesday’s trading), and some clarity overall in¬†direction (again see Monday and Tuesday’s trading). The day to day news driven market cycle isn’t likely to change as this¬†week progresses, 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) – The bounce on Monday took us out of our short trade in the sector and Tuesday sells back near the entry point for the shorts. STOP the madness. The whipping around of the markets is obvious and the lack of clarity remains a major issue to trading. Watch and see again how this play out today? Up would be my logical guess on direction, at least based on the current up and down decision making on news events.
  2. REITs –¬†The¬†sector remains in a uptrend, but has spent the last two weeks¬†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 is in the process of testing that move. Uptrend is in play, but the uncertainty of the markets is building momentum. Set your stops accordingly and focus on the horizon as we still have a 12-36 month outlook on the sector to move higher.
  4. Bond yields moved to new lows on the thirty year bond last week and starts the week moving up to 3.37%, nothing dramatic, but it stems the buying in bonds. The ten-year hit 2.51% and is holding steady for now. The sentiment on yields is lower short term, but I would not be overly aggressive that stance. The potential bounce in yields is more likely that a push lower, baring any fear factors evolving short term in the markets.
  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 has been moving higher on worries again and could give some upside to the stocks, but still needs some validation.
  6. Semiconductors broke from the wedge consolidation pattern to the downside last week, but then promptly reversed with some upside movement.. Still consolidating in the range and we just have to be patient as we have discussed about the broad market indexes.
  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. So far we are trying a little of both, this requires,¬†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 as well. Tuesday XLU hit the short entry point… manage this position.
  9. The negative news across the board in retail earnings only reflects what we have seen in the sales reports. All the worries about stagnant wages, higher taxes, higher gasoline prices, etc. are showing up in the spending at retail stores. This is not an across the board issue, but it is big enough to impact the sector if these issues persist. Looking at XRT on the downside is worth our attention. The downtrend in play off the December high continues and a break of support at the $81 level is where a short trade may come into play.


Sector Rotation Model (updated Р5/20/14)

ONLY ETF Model (updated Р5/20/14)

S&P 500 Index Model (Updated Р5/20/14)

ONE EGG Model¬†(New Scan Results Posted –¬†5/20/14)

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 without clarity¬†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. Nothing is ever a given… discipline is the key to trading.
  2. 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.

Pattern Trade Tracking & Follow Up:

  1. XLU – short entry $41.45. Break of support. Short trade on the downside setup in Utilities. $40 target. Stop is $42.30 on reversal.
  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. Stop $82.70.
  3. 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.
  4. VIPS – entry $147. trading range bounce off low. Trade back to the topside of the range. Stop $157.10.
  5. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $580.20.
  6. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Stop $14.70.
  7. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  8. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  9. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  10. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $34.20.
  11. 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.