Trading Notes for Today, November 19th

Notes to Note: 

The buyers were willing to put their money to work again as the S&P 500 index breaks to new high on positive gains Tuesday. After five days of falling to sleep during the trading day the upside was a welcome move for most traders. The challenge from my perspective remains the low volume buying. I know it will all work out, but it is one of those things that is always a warning sign for me on this type of move. The upside leadership was the familiar biotech and semiconductors. I am not going to knock the upside move I am only going to take what the market gives and adjust my stops according to how I want to measure my risk exposure short term. With the VIX index back below the 14 level buying a hedge is relatively cheap especially on days like today.

VIX index moved back near 13 at the open today and closed at 13.6 and well off the lows on the day. There is still no real volatility to speak of in the overall market. The certainty from investors has been reinforced by some data points and rattled by others. In the end it is all about clarity and confidence from investors and for now they remain fairly confident about the upside for stocks.

Oil tested below the $75 level again and pushed the energy sector around on the day. In the end the sector remained near the $86 level and holding tough for now. Worth watching as the downside in crude remains in play despite the bounce off the lows last week.

We have now pushed some of the consolidation to the side and leave ourselves with the task following through on the buying from Tuesday. How much is enough? Currently every little bit helps as long as the trend remains on the upside and everyone is happy. We continue to take this one day at a time… one trade at a time.

What is unfolding this week…

Doji central… the Japanese candlestick formation that many point to for directional signals are everywhere. As you are aware this candle tends to show up when the market direction becomes uncertain. I would have to say the data, charts and volume all confirm a lack of direction and/or conviction. Two interest for me first, BABA and if it will pullback and test the move higher. Second, S&P 500 index showing a string of doji candles as it tops. Buyers were the result on Tuesday and we now look for the follow through to the signal. 

Commodities… crude oil bounced off the intraday lows on Thursday and managed to close the week on a positive note. Watch to see if it follows through and offers any trading opportunities. Gold bounced and worth watching for GLD to clear the $114.50 level and possible trading opportunity. (GOT THE MOVE ON TUESDAY) This is more likely going to be up to the dollar versus any other event (DOLLAR DECLINED ON TUESDAY TO HELP THE MOVE). UNG found support at $20.75 as natural gas tested lower, but got a big jump on the upside on Monday gaining more than 5%. This remains a supply and demand story for natural gas. Watching for the cold winter to impact the prices going forward.

Change in the Chinese stock market allowing the Hong Kong and Shanghai exchanges to trade mainland stocks. This opens the way for non-Chinese retail investors to trade on the mainland exchanges. The action didn’t really have much effect, but the economic data did. The downside is in play again with FXP.

Banks? KBE is under pressure again from the fall-out of the fines from the foreign-exchange manipulation. Throw in the higher capital requirements and the ETF fell following the news last week. Watching to see if it can hold $33.25 support on the week. Thus far that has been true with a nice bounce higher on Wednesday. Managing the risk of the positions in the sector currently.

Treasury bonds still remain a concern as rates have settled with the thirty-year bond still at the 3.04% mark. The chart of TLT has flat lined and is the least amount of movement in the bond in a long time. There is still plenty of speculation about the future of the bond, but for now boring dividend generator is all I can say.

Some thoughts on news/events and statistics impacting investor psyche:

* Volatility has disappeared as VIX dipped below 13 last week and close at 13.9 on Tuesday. Despite analyst and the media stating their is uncertainty looking forward the VIX is not showing any short term. Something to watch as this all unfolds.

* Topping patterns with the major indexes as they look for a catalyst on the upside. Tuesday produce a breakout move higher, as discussed above, but we still need to follow through on the upside.

* The Fed is still in the background pulling the strings of the bond market and interest rates. Not much is expected until the December FOMC meeting, but they are speaking and pontification about the economic picture as well as their intent towards rates and stimulus.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward.

Sectors to Watch Now: 

MOO, Market Vectors Agribusiness ETF has been running nicely off the lows, but that is the industrial stocks like John Deere, Toro, Tractor Supply and Agrium moving higher. Made a nice break from mini-consolidation Tuesday and has amassed a solid 12.5% upside off the low in October . Still work to do, but still looks positive short term.

Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.) Hit the entry point on Tuesday with nice bounce in the sector. Need follow through today. 

Miners (XME) – entry $35.80. Consolidation pattern in need of volume move higher. (GDX, SIL are options as well with both adding solid moves higher on Tuesday’s gains in the metals)

Russell 2000 Small Caps (IWM) – short entry $115.40. topping off the ‘V’ pattern completion. Watch carefully how this unfolds. Bounced Tuesday, but still looks like the downside trade is alive and well… watching TZA with entry at $13.80? Patience.

Emerging Markest (EDZ) – short entry $35.55. weakness in the sector is showing up and the consolidation pattern breakout would be the entry point for the trade.

Europe (IEV) entry $44.25. Yes the close was above this price as the gap higher on Tuesday broke from the established range. Look for a test of the move and follow through on the upside. If not test $44.50 as confirmation of the move higher. Expect volatility in the position as the news from Europe is always an adventure.

Internet (FDN) – entry $61.50. continuation of uptrend. The test back to $60 held and making move towards the September high. I like this sector going forward for growth. Scanning the ETF for movers has produced some interesting pattern breakouts and setups.

VIX (VXX) looking for some volatility to emerge from the sideways movement. Tuesday’s push higher lack volume conviction for me and this has me watching the index for noise to occur short term for trade. $28.60 entry point.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • Volatility Index (VIX) The index moved slightly higher on the week, but is still well below the 15 level. Tested above the 14 mark again on Monday and we will watch for any opportunities as they present themselves. Oil is creating some uncertainty in the markets relative to speculation on the impact of cheap oil on the jobs and economic picture. $28.20 was entry posted for VXX last week to add. Need to be patient with this trade and we will add to the position going forward.
  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through. We will look to add this position if trend gains more traction. Added to the S&P 500 Model. Retail move higher on earnings and is now driving the follow through on the upside. (posted to the Sector Rotation Watch List)
  • Preferred Stock Index (PFF) broke above the $39.50 level and holding. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Model.
  • Short Treasury Bonds (TBT) – TLT bounced on buying Fridayy. We will take our exit if the stops are hit this week, but be patient and watch how this plays out.  Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Raise stop to break even trade at $51.80 on renewed worries. NEED TO BREAK ABOVE RESISTANCE at $53.55!
  • Russell 2000 index (IWM) Led the move off the lows and cleared the 115 ish resistance and stalled with consolidation near the highs. We have been looking for investors to take on risk in portfolios and the sector may be showing signs of just that short term.. Adjust your stop accordingly.
  • Utilities (XLU) broke above the upper resistance at the $43.75 mark and confirmed the move higher. A reverse head and shoulder pattern was the breakout move and on test and confirmation of the move to add a position to the S&P 500 model. Holding and letting it run for now. S&P 500 Model. Watch the volatility as it has picked up, but the upside remains the trend.
  • S&P 500 index (SSO) followed through on upside bounce move and cleared the $116.50 resistance. Continued to move higher tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. Manage your stops. Tuesday produced a solid move to the upside and breakout. Watch and adjust your stop accordingly.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Interest rates will play havoc with the sector, but for now content. Some topping signs continued this week… watching how it plays out with $74.75 as support currently.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was lagging as the earnings and outlook were not attractive to investors. That changed following the FOMC meeting and now testing the highs? Stops at the $23.70  ish level to manage the risk.
  • Healthcare (XLV)  moved through resistance at the $63.40 level and got the upside follow through. A test of the $63 mark and move higher was a good confirmation on the chart. Still like the upside move and the target on the sector and we own XLV in the S&P 500 model. First sector to recapture the September highs, but has stalled in a tight range near the high. One question mark is the election… will the republicans attempt to overturn Obamacare or parts of it? The attempt could rattle and impact these stocks in turn. Tuesday produced a solid gain on the upside for the sector and the sub-sectors as well.
  • Retail (XRT) we are looking to the sector to take on some leadership into year and earnings were the catalyst thus far. Break above the $90 level was the entry point for the sector ETF, but take time to scan the holding and you will see some great pattern breakouts last week. Sales data out on Friday for October better than expected. Test lower on Monday of interest… manage your stops. Not out of the woods on this yet.
  • Homebuilders (ITB) followed through on the break through resistance as well on some positive data in the sector. The sector continued higher and looks positive following the break higher with some resistance at the $25.10 mark. We hit the entry point and stops should be brought to break-even at $24.40. Testing the move higher? Watch and manage your risk.
Watch List Opportunities:
  1. S&P 500 Model – Adjusted Watch List.
  2. Sector Rotation – Updated Watch List.
  3. ONLY ETF – Updated Watch List.
  4. Pattern Trade Model – Updated below.

Pattern Trade Setups:

  1. Tuesday provided a breakout move on the S&P 500 index. It produced some solid moves in sectors across the board and now comes the task of the follow through and establishment of solid leaders? IBB and SOXX led the way… any one else?
  2. WFM – entry $48.20. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below.
  3. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. (PSX added on Tuesday)
  4. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector.
  5. TZA – entry $13.80. bottom reversal. Negative move for the small caps watch for follow through and test.

Pattern Trade Tracking:

  1. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here. Stop $111.
  2. MCHP – entry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap. Added position and Stop is $42.50.
  3. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54. Stop $49.50
  4. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce. Stop $72.80.
  5. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $66.80.
  6. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  7. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive. Stop $22.75.
  8. TBT – entry $52.85. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position. Stop $51.80.
  9. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $116.
  10. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $141.20.
  11. TBT – entry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.80 Added to position – entry $52.20 (2.5% add 10/24). Stop same on all of the position.
  12. QLD – entry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday – entry $125. (10/27) Stop $132.75.
  13. TNA – entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50. Added to the position on move through resistance at $66.42. Entry $66.45. (10/27) Stop $74 on all shares. HIT STOP.
  14. SSO – entry $107.60. bottom reversal. Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside – entry $$117.10.(10/27) Stop $122.90 on all.
  15. SOXX – entry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $88.20. Break above resistance (82.30) good point to add to position. Added to position – entry $82.50 (added 2.5% 10/24) same stop on all.
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.
Long Term Opportunities: 
Twitter is showing signs of breaking lower and need to manage the position relative protection. Facebook is acting better, but still worries around the stocks short term. Building some downside protection into our positions.
Bank of America is doing well on the move higher and we continue to manage the position accordingly. If the upside stalls we will lock in some profit on the options added and let the balance play out going forward.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Watching today for it to bottom out and add to position as it since. Patience today as other news will impact later in the day with FOMC. Flat lined after open… still like the upside and will be patient. Add Dec $75 puts @ $3.50 – 10 contracts. (watching the Jan $75 puts to add if we break support.) – Nice bounce in the sector SOCL. 
  • Twitter (TWTR) – $50 entry (10/20 – 1000 shares). Removed stop with the gap lower pre-market of better than 12%. Added 500 shares at $42.80 (10/28). This is a long term holding and we trade around our position as the downside is back. (11/5 – Added Dec $40 puts at $2.50 – 10 contracts — HIT Stop $1.75 on contracts) – (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)
  • NEWS: Twitter announced they were adding a video service to launch in early 2015 and investors liked the idea. Stock jumped 8% on the day as a result. 11/13 – stock tumbles as investors decide they don’t like the news? Watching the tug-o-war and consolidation near the low. Nice bounce in sector SOCL.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks are finally gaining some ground and I like our position currently. We add our long positions in stocks back as held support and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15.
  • NEWS: Forex fines of $250 million from OCC – hit the price on the day. They also stated they would not lower their standards for high risk mortgages. (makes sense) Wall Street didn’t like the news as they want more earnings…. bank wants to avoid defaults.