Trading Notes for Today, May 29th

Notes for Thursday:

Some interesting developments on Wednesday with treasury bond yields dropping to short term lows, oil prices dropping, gold continuing on the downside and the dollar moving higher again. Not all of this goes together and it continues to raise warning flags for investors. I am not inclined to ramble on about what worries we should focus on, but simply put, saying manage your risk and let it play out accordingly. Pontificating on things we cannot predict is a waste of our time, but being aware of our surroundings is important. Today is another day and we start the day with this all firmly in mind.

Market Story & Outlook:

Current Story of the market boils down to the simple issue of uncertainty. Despite the move off the recent lows last week, we still have not resolved anything. Like the bridge to nowhere in Alaska, this move was based on no specific reason and could be building a bridge to nowhere. As we have discussed the markets underlying challenge is the economy. The ‘buyers’ believe the economic improvements currently being prognosticated at 4% growth for the second quarter. Better data reports this week were part of the reason behind the move higher. The believe of the buyers got some validation (not four percent worth, but some) and they put money to work in stocks. The ‘sellers’, on the other hand, believe the economy is growing slower at a rate of maybe 1-1.5%, and the truth may be somewhere between. The buyers are winning as the uptrend resumed short term with the S&P 500 index hitting a new closing high. Clarity will be the key to how this ultimately plays out. In the meantime we have to be cautious, take the trades we are comfortable with and keep looking forward.

The second phase of the story line is, bond yields were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields to start the year on the thirty-year bond were 3.94%, currently they are 3.28% (down twelve basis point for the week) or they have declined 66 basis points pushing the long bond up nearly 13% for the year. That is not what was prognosticated and the story line has not helped the current lack of direction in the markets. The bonds are telling us something different than the Fed and economist. The above issues of growth in the economy are showing up in the bond prices as investors push money in that direction. The big move lower in yield on Wednesday only adds to this worry.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data has not been good overall. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. Running scans using the PEG ratio shows clearly the challenges arising in this indicator. Just another pieces of the story we have to monitor to determine our outlook and belief.

This all adds up to stocks losing value if the economic growth going forward is weaker than expected. As we have been saying for more than a year, fundamentals don’t matter, until they matter. Activity in the markets short term is starting to act like they matter, and do not let the push to the upside fool you short term. I think this is a key indicator to watch going forward and the reality unfolds. Then we will have clarity as to which sectors and asset classes offer the best opportunity, even if that is on the short side of the trade.

Outlook for the Week of May 26th:

Sectors to Watch:

  1. Small Caps (IWM) – They added to the upside again on Tuesday clearing the $113 resistance and opportunity to add to the exiting position. Clearing resistance at the 1120 level was the basis for the upside position. Moved just below the 50 DMA, but still hung in there on the day. Watch to see how this plays short term and manage your stops accordingly. Entry hit at the $111 mark.
  2. REITs – The sector remains in a uptrend, but has spent the last two weeks moving sideways. Tuesday the move through the $71.36 mark on IYR was a new high. Small give back on test Wednesday, but still interested in holding and managing this position with a longer term time horizon. The worry present the last two weeks may be giving way to optimism. Set your stops according to the risk you are willing to accept as this unfolds. Hold positions and keep moving forward.
  3. Emerging Markets – Uptrend is in play, uncertainty of the markets is still a concern, and the global markets are gaining some momentum again, but we did experience some selling on Tuesday. Set your stops accordingly and focus on the horizon as we still have a 12-36 month outlook on the sector to move higher. Entry $43 on EEM hit last week. Stop $41.76. EDC ONLY ETF model.
  4. Bond yields moved to new lows again Wednesday on the thirty year bond and closed at 3.28%, down eight basis points to push the price to a new high on the bond. It was not trend changing or dramatic, but it shows the buyers are still interested in bonds. The ten-year hit 2.43% and hit a new one year low. The sentiment on yields is lower short term, but I would not be overly aggressive with that stance.
  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 in a trading range, and we are managing the stops. Crude moved lower on Wednesday in reference to inventory worries. This is something watch short term along with any impact.
  6. Semiconductors broke from the wedge consolidation pattern to the upside Friday. This is the move we have been looking for in the sector and we did follow through on Tuesday adding a position to our model (SOXX @ $80.35 entry). I like the upside if the technology stocks can recover some of the lost momentum. XLK moved back to the current highs at $36.90 and broke above $37 (added position)… now managing the risk of the trade going forward.
  7. S&P 500 index hit the 1900 level and new high for the index. What does it mean now? Watching for upside break through the 1900 level to hold and move higher with some volume and conviction. Thus far we are not getting the volume commitment on the upside, but we remain patient for now.
  8. NASDAQ 100 index has been the bounce back index after selling lower the last nine weeks. The close above 3675 a point for adding to the position we established last week. Large cap leading the way for the broad markets currently. QLD hit entry At $100.70. and has moved up nicely on this break higher. Closed above $106 on Tuesday and we raised our stops on the current move.
  9. Natural Gas – UNG is testing support again at $24 and holding. Double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry on Wednesday). FCG is attempting to reverse from recent selling as well (hit entry at $22.16 on Wednesday). Positive move reversing the short term downtrends. Watch and set your stops accordingly.
  10. Gold – moved below support on the metal at $1278. GLD broke $123. Short trade opportunity in both the metal and the miners as a result of the setup. GLL moved above $90.10 and worth watching for a test and entry point if the negative sentiment towards the metal continues. No test only added to the upside, didn’t add a position on the move. DUST broke above the $26 level and running. If tests look for the opportunity to add a position as trade. No test either, passed on adding a position for now. Silver is trading on downside as well with the metals (ZSL) is short ETF.
  11. Healthcare – Biotech (IBB, BIB) broke above the resistance point and completed a bottom reversal pattern. We added the sector in the models. This will be a key indicator if investors are willing to return to the risk trades. Tested modestly on Wednesday, but still looking positive for now. CURE, XLV broke to the upside showing strength short term in the broad sector. Pharms stocks PJP, XPH moved to the upside as money rotates back into the sector. All tested on Wednesday.
  12. Global – Europe (IEV) broke to new high led by Germany (EWG) which gapped open, but closed at new high above all the sideways trading. (Small test on Wednesday) EAFE (EFA) hit new high and the upside is back in play. Global markets have been improving since February and continue to show positive outlook longer term. (Small test in the sector on Wednesday)


Sector Rotation Model (updated – 5/28/14)

ONLY ETF Model (updated – 5/28/14)

S&P 500 Index Model (Updated – 5/28/14)

ONE EGG Model (New Scan Results Posted – 5/28/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly. Still not believing this is a sustainable trend. Small test on Wednesday, but the upside bias remains… focus.
  2. UNG – entry $24.25 test of the double bottom breakout. Run to $27 and decision time for the commodity. Trade and exit if outlook doesn’t improve in commodities.

Pattern Trade Tracking & Follow Up:

  1. AMZN – Added Option. Bottom reversal. Tested move on Tuesday. Upside challenged by margins and other fundamentals from last earnings report. Could move to $338 on this bounce. $310 $17.65 entry (Wednesday), Stop $15.65.
  2. TAN – entry $40.38. Bottom reversal. Previous leader, but in the growth sector side. Looking for the reversal to validate on the upside. Tested to $0.25 and bounced adding the trade short term. Stop $40.
  3. FDN – entry $56.60. Bottom reversal breakout and test. Looking for test of the move. This is another growth leader previously. Only want entry on test and hold. Tested the move and held adding the position. Stop $55.
  4. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $45
  5. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $19.80
  6. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.50
  7. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $233.
  8. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $80.
  9. BIDU – entry $164.50. Trading range. Following the large cap NASDAQ stocks. Made the move higher and letting it play out. Stop $162.85.
  10. YELP – entry $58.15. Base and bottom reversal. Technology bounce and upside. Stop $57.39.
  11. DDD – entry $51.70. Base and bottom reversal. Technology bounce and upside. Gapped open and move higher from there. I like the move. Stop $51.20.
  12. 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. Stop $105.10.
  13. XLU – short entry $41.45. Break of support. Short trade on the downside setup in Utilities. $40 target. Stop is $42.30 on reversal.
  14. 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 $88.65.
  15. 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 $19.40.
  16. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $610.
  17. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Holding with the upside momentum on our side. Stop $17 which was the target worst case scenario.
  18. S – entry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  19. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  20. RAD – entry $7.45. Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  21. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $34.20. HIT STOP break even.
  22. 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.
  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.50 follow through today.