Trading Notes for Today, November 25th

Notes to Note: 

Small Caps step into the leadership role again. The have been missing in action the last couple of weeks and Monday they played catch up. The Russell 2000 index moved to 1187 and this is the upper resistance level the index needs to move through and then we face the 1212 highs from May and June.  Plenty of work to do in the sector, but the move was positive to start the week.

The NASDAQ composite index made a follow through move to Friday’s break above the 4700 level. The semiconductors and biotech stocks continue to provide the key leadership for the index to move higher.

The S&P 500 index was the laggard along with the Dow on Monday. Large caps have provided the leadership to this point and now some move in the growth indexes is a good sign short term for the markets to make progress on the upside.

There is plenty of talk still circling about the downside risk in the current market based on valuations, technical overbought signals, earnings forecast, etc. Each has a valid point, but the buyers are still willing to step in and own stocks at each selling point. Last week we saw some very modest selling bring the buyers back to push stocks back to their previous highs and we continue to add buying to push the indexes higher. All I can say is be patient, honor the trend and manage your stops.

Patience, focus, discipline and one day at a time… that is all we can do for now. Remember this is Thanksgiving week and volume will be on the light side. Take some time and relax don’t worry about the markets the fun will resume next week.

What to watch this week…

Global markets get aide from Central Banks. China cutting interest rates, Europe authorizes asset buys (QE) and Japan voting to delay beginning of sales tax. All forms of stimulus globally to get the economies going again. The US rallied on the news last week and followed through in both the global and US markets. We are interested in the global markets on the break through resistance, but we will tiptoe in and accumulate positions near term.

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

* Volatility has disappeared as VIX dipped below 13 and close 12.6 on Monday. 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 are starting to break higher to confirm a continuation of the upside for now. The catalyst for the move… speculation about more stimulus globally and the US economy improving on the decline in energy prices. All is good… that’s when we have to worry the most and manage the risk of the market.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes released last week. 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. The discussion on interest rate hikes is on the table, but no definitive timeline currently.

* 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. Big spike higher to end the week. Take a moment and look at the month chart of the Dollar Index (DXY) not the eleven plus year consolidation wedge breakout and the topping near resistance currently. The dollar could be on a multi-year rally as the global markets deal with stimulus efforts and devaluation of currency. China, Russia and Europe have all forfeited considerable ground to the buck and we are going to see more before it is over.

* Worries still lurking in the background… Russia and the crazy stunts towards Ukraine. Amnesty for Immigrants in the US without Congress? Economic data is stagnating and that is a long term concern. Wages and economic impact along with the estimated 100 million non-workers in US. FOMC notes stated Fed was focused on US economy… glad to hear it, now do something… anything.

Sectors to Watch Now: 

Global markets are back! Sounds like the theme to the movie Poltergeist. China is going to cut rates and FXI rallies. Europe is going to use asset purchases similar to the Fed QE program, Europe rallies. Emerging markets are happy to be alive and rallied on Friday, but gave some back to start the week. One day at a time is all we can do.

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. Made the move to $45 resistance and watching for more upside.

Emerging Markets (EEM) moved above resistance and flirting with the 200 DMA. Will this hold and continue on the upside? $43.30 would be the target for the next resistance and that is 2% on the upside? Looking for a test and confirmation of the move on the upside before willing to risk the capital.

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. Maybe it is a precursor to the gains moving higher? OR doji left on Friday offers a test lower or reversal off the high. That is what we got on Monday and we will see how this unfolds now.

Russell 2000 Small Caps (IWM) – Can the index push higher or not? Friday was a negative relative to the move higher giving up the gains and leaving a bigger question relative to a reversal and move lower again. Watch and determine how this setup on the week. Got the move higher on Monday and held the move. Now watching for the follow through on the upside. 

Internet (FDN) – entry $61.50. continuation of uptrend. The test back to $60 held and making move towards the September high, but still testing and no clear follow through yet on the upside move. I like this sector going forward for growth. Scanning the ETF for movers has produced some interesting pattern breakouts and setups. Tested lower again with exit point at $60.75. Gap lower on the open… take stops off prior to the open. Moved back above the stop and watching how this does moving forward. Restore stops at the same level or $60.45 just below the low Wednesday. 

Model Position Notes: 

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

  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and followed through. Added to the S&P 500 Strategy Retail move higher on earnings and is now driving the follow through on the upside. (posted to the Sector Rotation Watch List) Added XRT as well below for the move in sector.
  • 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. TODAY: Nice break higher as the index confirms the move from Friday.
  • 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. (S&P 500 Strategy) 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 Strategy First sector to recapture the September highs, but has stalled in a tight range near the high. TODAY: looking for upside follow through or we tighten the stops.
  • 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 for October better than expected. Tested lower and held, but … manage your stops. Give some room for volatility, but manage your risk. Nice upside follow through on Monday.
  • 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, tested on Wednesday and back to the highs on Thursday… and followed through on Friday! Upside now in play with a new high and… watching how it unfolds this week. TODAY: Nice follow through on Monday to the upside break.
  • 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 $25.50. TODAY: Nice move on Monday to the upside.
  • 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 last week… watching how it plays out with $74.75 as support currently. TODAY: held the move from Friday towards top of the current range and slightly higher…
  • 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 Strategy. TODAY: hold above the $39.85 mark and collect the dividend.
Watch List Opportunities:
  1. S&P 500 Model – Adjusted Stops and Watch List.
  2. Sector Rotation – Updated Watch List.
  3. ONLY ETF – Updated Watch List.
  4. Pattern Trade Model – Updated below.

Pattern Trade Setups:

  1. Making the moves higher and we have to watch the follow through and manage our risk.
  2. CREE – entry $36.50. Bottom range breakout. Semiconductor sector.
  3. C – entry $54. Test cup and handle breakout. Banks still creeping higher and looking for leadership.
  4. MRVL – entry $14.05. triangle breakout on gap higher. testing as semiconductors break high and own a leadership role.
  5. AMZN – entry $337.20. V-bottom reversal breakout. Broke down trendline off January high. Looking for follow through move higher and $362 target.

Pattern Trade Tracking:

  1. MU – entry $34.70 (bought higher than posted). Trading range breakout. ready to establish a new high. Breakout is positive for the sector and the stock. Stop $33.10
  2. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.20
  3. JNPR – entry $22. Triangle. downtrend will be broken as well on a breakout and follow through. Leading the network sector higher currently. Stop $21.30
  4. EXAS – entry $24.25. descending triangle. Biotech is leader and this was from the scan of the sector. Looking for follow through on upside. Stop $24.
  5. LULU – entry $46. Cup. bounced back and at resistance. If test back near the $43.50 level and bounces we will shift the entry. Retail sector and improving sales. Stop $45.20
  6. NLY – entry $11.50. Trading range breakout. The REIT is mortgage related. Dividend and growth trade. Looking for move back to $12 plus the dividend. 10% dividend currently. Stop $11
  7. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.20
  8. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $83.10.
  9. TZA – entry $13.80. bottom reversal. Negative move for the small caps watch for follow through and test. Stop $13.40
  10. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $72.60
  11. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here. Stop $114.
  12. 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.
  13. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54. Stop $49.50
  14. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce. Stop $72.80.
  15. 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.
  16. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  17. 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.
  18. 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.
  19. 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.
  20. 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 $142.00.
  21. 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.
  22. 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.
  23. 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 $124.50 on all.
  24. 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. Still trading sideways as investors sort out the facts and fiction. Added Dec $75 puts @ $3.50 – 10 contracts. (watching the Jan $75 puts to add if we break support.) 
  • Twitter (TWTR) – $50 entry (10/20 – 1000 shares). Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.) Hanging onto support by a fingernail. 
  • 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 – News is temporary.
  • 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.
  • Whole Foods Market (WFM) 11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position.