Trading Notes for Today, May 8th

Notes for Thursday:

Crazy start to the trading day pushed the indexes lower, but they managed to rebound and close on the plus side for the day. Yellen got most of the credit, but the fact investors are nervous about stocks and all the bantering about the downside risk. We have to stay focused and let all this settle. The promise of a better tomorrow from the Fed isn’t going to erase all the facts of weaker economic picture. As we have stated several times of late… sometimes the best trade is no trade at all, cash is a sector. Let the outcome develop and follow the story the market is telling looking forward.

Russia shows a crack in the tough stance to this point and the global markets respond positive. RBL was up 4.8% and others posted better than 1% gains. This is becoming one of the more attractive sectors looking forward if the positive momentum continues.

Russell 2000 small cap index remained below the 200 DMA even with the bounce of the intraday low. 1085 is the level we are watching for the downside to accelerate if we break lower. TZA is the three times short ETF for the sector.

Growth remains a laggard, but maybe the test lower on Wednesday cleared the selling out of the way and the upside is back in play. Maybe! I am not counting on it, nor am I counting on more selling. I am watching for the direction to define itself versus the up and down chop of the last six weeks we have experienced.

Keep your eyes on the horizon and let the trend tell you what direction we are going… even if that is sideways for awhile. Consolidation is not a bad thing and if it is orderly all the better. Watch to see how today unfolds in response to the intraday reversal on Wednesday.

Outlook for the Week of May 5th (Weekend Update)

Sectors to Watch:

  1. Small Caps – Back below the 200 DMA and the talk of the financial media. Intraday test lower with a reversal back near the 200 day. Watching to see if the downside leadership continues or their is a bounce higher. Bias is to the downside. TZA is leveraged short play.
  2. REITs –¬†The¬†sector moved above the resistance at $68.40 and¬†has been¬†inching higher with some volatility of late. The follow through move on Wednesday as a positive for the sector. Hold and manage this position with a longer term time horizon. Scan the sector for individual opportunities and trades. Dividend is 3.8% currently. (DFT, FSP, DLR, WRE, LXP and WRI are a few of the REITs attempting to break from trading range or breaking out on Wednesday.)
  3. Emerging Markets РThe sector remains challenged by the geopolitical issues in Russia, but some calming with the news on Wednesday. After all the ups and downs last week we are left with a consolidation pattern to watch. Break on the upside needs to confirm today. Still have a 12-36 month outlook on the sector to move higher. Added as the EGG Model today.
  4. Precious Metals/Gold РHeld the $123 support and managed to bounce back to the top end of a newly defined range on Monday with gap to the $126.50 resistance. Filled the gap on Tuesday, but in position to break higher. That failed on Wednesday as the Yellen testimony took the winds out of that sail and gold dropped back to $124.17. Patience are wearing thin on the buy side.
  5. Commodities/ Energy РThe price of crude oil declined last week below the $100 mark. The downside was in play, but it reversing back to the upside this week as it moved back above the $100 level on Wednesday.  UGA fell to support at $59 Monday and is attempting to bounce on the bounce in crude. UNG testing, but bounced 2.3% on Tuesday, fell 1.2% on Wednesday and continues to consolidate. This defines the market of late up and down and consolidate.
  6. Commodities/Agriculture – DBA broke to new high above $28.85 last week and is testing currently that move. Manage the volatility of the parts and adjust stop to break-even at $28.50.
  7. Global markets have been tested on the news with Russia, but bounced on Wednesday’s news. The EAFE index (EFA) pushed to new¬†highs (above $68 barely). Some country ETFs worth tracking now as we are scanning and reviewing this opportunity. The longer term view of the asset class is still attractive and worth trading and potentially building positions¬†as the opportunity unfolds.¬†TUR, EPHE, EPI, THD, EWZ, EWP and EWL all trading positive direction with consolidation near the highs.
  8. Bond yields moved to new lows on the thirty year bond last week and currently at¬†3.4%. The ten-year hit 2.59% and is at the bottom of¬†the range it has been trading since January.¬†Watch for a break lower?¬†Rally in treasury¬†bond is the result, but I would still be cautious and treat this as a trade on the yield move and nothing more. Holding our bond positions, but aware that yields could rise short term… manage your stops and risk. Yellen wants lower rates.
  9. Energy (XLE) remains a leader, but it is looking tired and ready for a pause short term. Be cautious and adjust your stops according to your time horizon. Technically overbought, but watching and managing the stops. Wednesday broke from consolidation higher and carrying on the uptrend.
  10. Pharmaceuticals (XPH) attempting to break above the 50 DMA resistance point and reestablish the uptrend. Hit our original entry on the downtrend/bottom reversal at $93.75, stop $93.40. Worries are back, but manage your risk to see how it plays out. Biotech starting to bounce and establish a base worth watching going forward at the $235.50 level on IBB.
  11. Consumer Staples (XLP) broke higher with solid breakout above with a solid move above $43.70. The defensive sector is still in favor. Raise stop and manage the gains in the position. Small test of the break higher, but holding.

Models:

Sector Rotation Model (updated Р5/7/14)

ONLY ETF Model (updated Р5/7/14)

S&P 500 Index Model (Updated Р5/7/14)

ONE EGG Model¬†(New Scan Results Posted –¬†5/7/14) EEM posted for today.

Pattern Trading Setup:

Today’s opportunities:

  1. One big argument of late is that the markets are rigged. I am not going to take a side on this argument for lack of¬†facts. However, manipulation is alive and well. Yellen’s comments to Congress were focused on the markets well being. Throw in the Putin influence and you have Mrs. Clause (Yellen) and Santa Clause the movie (toy soldier takes over north pole). Patience as this all plays out.
  2. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit.
  3. TBT – entry $63.80. bottom reversal. Trade on interest rates being too low.
  4. SANM – entry $21. Flag. Technology sector. inside trading day look for break today.

Pattern Trade Tracking & Follow Up:

  1. SDS – entry $28.30. Bottom reversal. negative sentiment picked up on Tuesday. Stop $27.70.
  2. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.41.
  3. HAL – entry 64. Flag. Energy wants to move higher. Patience. Stop $62.10.
  4. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  5. FB –¬†sold to support at the $54.80 level held and working higher. The bounce has worked its way to $59.78 and looking to add 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
  6. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $7.30.
  7. FCX – entry $34.20. trading range breakout. Copper moving higher again. Volatile trade, but nice setup and follow through. Stop $33.35.
  8. WNR – entry $42.40. break from consolidation. Look for test on move and take the entry as the refineries move higher. Stop $42.
  9. 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.
  10. VLO – entry $56.10. Resistance breakout. Three attempts to break above $57.12. Sector leading. Stop $54.40.
  11. XLE – entry $89.90. Breakout test and bounce. Tested the $88.50 level and held, now looking for a follow through move on the upside. Egg Model as well with leveraged ETF. Stop $93.60.
  12. NEE – Entry $91 on the test of the breakout at $90. Stop $97.

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. (SEE NOTES ABOVE)