Trading Notes for Today, November 8th

The major indexes experienced some selling on Thursday, leaving the question, how low does this go? After one day of selling we are thinking of how much selling will result? That is how much media influence is in the market relative to the current rally. We need to be patient and see if the downside accelerates or the buyers return as they have previously. The jobs report will be important today as it is viewed through the stimulus goggles. Be patient and look for the next movement up or down? If you have specific questions on any posts please forward them directly to Jim@JimsNotes.com.

Sectors to Watch:

  1. The rotation we discussed yesterday is playing out, but now we have to add bonds as a destination. Fear picked up with the VIX index moving higher and stocks pushing lower. This is still a short term test or pullback for the broad markets or that is the assumption. It will have to validate first and then we look from there.
  2. Europe gave up the gains from Wednesday and then some. That put an end to our brief departure from following the US markets. Europe was higher on the ECB rate cuts, but the selling in the US markets reversed that move to the downside. Country specific ETFs were off 1-4% on the day. Watching to see how we can play this as a trade short term.
  3. Small caps broke the first stage of support and puts the downside in play as a trade potentially. Watching to see if the selling accelerates on Friday. Need to practice some patience as this unfolds and the trades present themselves.
  4. VIX – the index bounced off the lows and moved back near the 14 mark on the day. This is the first sign of a move to the upside in a couple of weeks and now we look to take a trade in VXX if the volatility gains momentum. Watch the open in the morning, but don’t chase this trade.
  5. Dollar (UUP) made a move higher above the $21.75 resistance currently. The ECB rate cut Thursday pushed the euro lower and the dollar higher. Watching to see how much impact the news has in conjunction with the potential stimulus cuts in the US.
  6. Interest rates and volatility? Do we reverse the current move higher in yields as a result of selling picking up in stocks and a flight to safety? That is another thing to watch as this unfolds.
  7. Gold closed below the $126.50 support level on GLD. The shift lower came as a result of the ECB statement on stimulus and inflation not being existent. The move below the 50 DMA was  negative, and now the $126.50 level broken leads to $122.50. GLL is the short ETF for the metal.
  8. Energy is acting as if the run higher is over. Technically the charts are showing signs of breaking down. XOP, XLE, IEZ and others are moving lower. Watch and see… we will post the trades as they set up.
  9. Financials (XLF) – Watch $20.45 support on XLF short term… oops there it goes closing at $20.39. This has been a tough sector to own of late and the downside risk is in play. SKF may be the best play on the sector going forward.
  10. Real Estate (IYR) The sector moved through resistance, however the FOMC speculation of cutting stimulus in December hasn’t helped the upside move. We have a short trade (micro term) with SRS, the short ETF for the REITs, as a trade opportunity. Patience and risk management for any positions.

The models still face the challenge of dealing with the buyers versus the sellers. The sellers made a move on Thursday, but will it follow through? The AAII sentiment report shows the bulls at excessive levels. The market has every reason to adjust, test, pullback, sell off, or whatever downside phrase you like, but it hasn’t manage to do so to this point. Thus, you have be careful not to assume one day of selling is the apocalypse. We are still adding 1/2 position sizes with the entries hit as the risk remains elevated. Will the speculation with the FOMC comments continue or is the worst of it over? Is Europe the next downside catalyst? Is it really recovering? The ECB is following the US activity with stimulus despite the speeches they are handling things differently. Jobs report is the focus today. The challenge will be if the number is stronger than expected. That leans towards stimulus cuts. God forbid the economy would manage to operate without the government. Manage your risk on trades more aggressively and monitor your longer term holdings.

Pattern Setups For Today: We continue to manage the risk of the market and make our adjustments as necessary. Manage your stops on positions and stay alert to the response to the Fed statement again today.

  1. Hit stops and took our exits on plenty of trades on Thursday. Today is setting up to bounce early, but that could be effected by the 8:30 am jobs report. Not adding any new trades to the list today as I would like to see how this unfolds as the day progresses. The VXX trade on the S&P 500 Watch List if we see more downside pressure on stocks. This promises to be another interesting day in the world of stocks.
  2. Follow up on previous trades or posts:
  3. AMT – entry $79.45. consolidation breakout. Telecom remains one of the leading sectors. Moved higher early and tested the balance of the day. Stop $78.30
  4. PM – double bottom – $90.50 entry. break above the 200 DMA key to the move higher. Stop $89.25.
  5. SRS – Bottom reversal. Real estate breaking down on interest rate fears. Short trade on the move above resistance. Entry $20.25. Stop $20.04.
  6. TRP – Trading Range Breakout. The move above $45 is key. Entry $45.20. Stop $44.70.
  7. SKF – Break of support. Entry $19.60. The reversal of another attempt to break higher on XLF is in play. The failure is the inverse play with SKF. Stop $19.60.
  8. COH – bottom reversal – Entry $51. Gap lower on news and reversal to gap point. The fundamental side of the stock is rebuilding. The play is to fill the gap back to $53 on the turnaround story. Stop $50.19.
  9. GE – Flag. continuation of the upside on break. Entry $26.40. Moved higher and tested. Stop $26.
  10. CAG – bottom reversal. Cleared the 50 DMA and completing a cup pattern off the bottom. Entry $31.90. Stop $31.90.
  11. T – Double Bottom. Entry$35 on test. If no test 35.60 entry on break above the 200 DMA. Patience with the entry. Dividend plus growth play. At the 200 DMA and looking for the follow through on the upside. Entry 35.70. Stop $35.

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:

  • 10/23 – At issues is earnings and a topping market short term. From the longer term outlook we go into earnings positive. However, the stock has moved a long way and that creates the problem of the data being good enough to justify the price, according to analyst. That is generally a losing battle. Short term support is $51.26 and I want to see how the stock acts today with what looks to be a negative open. (Held support on Wednesday and Thursday… watch for now.)
  • 10/24 – Small bounce held the 10 DMA and watching. Puts are still an attractive trade short term.
  • 10/28 – Earnings … this could get interesting on the results. Add Dec 52.50 Puts for $5.85 or better for earnings announcement.
  • 10/30 – Earnings were great, but too much said by the CFO and erased all the gains after-hours. My concern into earnings, they would not be good enough to please everyone. I was wrong on that account, but the conversation on the earnings call became an issue when the teen usage and not ramping up newsfeed ads. Both are issues, and examples of how when the stock price moves higher in a short period every little detail is scrutinized. Watching how this plays out today? Pre-market showing a small gain. Manage your puts against the stocks activity and be patient.
  • 11/2 – If the price closes above the $51.50 level close out your put contracts. We used our profit on the trade of stock to buy the puts and we will give up some profits for the protection we added. The news around the stock is still creating volatility be patient here as this plays out short term. No need to panic in either direction. Add Stop on 1/2 of position at $48.80. (hit stop on half of position) We still hold the balance plus the puts.
  • 11/5 – small bounce as we test support short term. There is plenty of media hype about the issues with teens leaving FB for other social media. That is all a challenge, but the reality is in the earnings and the outlook for growth. Thus far that has not changed and we will continue to manage the position moving forward. Tested on Wednesday — still watching.
  • 11/7 – Closed below the 50 DMA and on support. A break lower would be a negative with $45 the next support level to watch. This is where long term positions get to be a challenge for investors… having the patience to let the challenges work out. We are long 1000 shares, but own 20 put contracts. We sold half our position to allow half of the puts to add profit on the downside move. So far we have managed the risk accordingly and we are still in a good position going forward. Be patient and let this all unfold short term.