Trading Notes for Today, October 10th

Notes to Note: 

“This is more fun than I can stand. The good news is we are predominately in cash. The bad news is I got stopped out of most short positions on Wednesday! I love when the anxiety and stupidity start to drive the activity. Worries about the global markets drove the indexes lower on Wednesday by 1.6%, FOMC minutes sparked a rally of 1.8% and Thursdays worries about earnings and the global markets return to drop the market 2% on the day. So much for the influence or elasticity of the FOMC minutes on the markets. Maybe the Fed has lost their influence on markets and direction. I can hardly wait for Friday. Below is the intraday 5 minute chart of the S&P 500 to show the swings and anxiety traders have produced over the last week. The question still remains on direction and the trading range has developed it is just twice as wide as I thought when I stated in my notes last Sunday of 1945-1970. How about 1978-1926! Those are the type of swings that will make seasick.” My post from last nights notes.

I wanted to start with those comments because that is where we are… 80+ percent in cash. Very limited short positions left. Frustrated like you and willing to watch and see how this starts to unfold. Do we continue the downside today? Do we get another 1-2 percent upside swing today? I will say we have not seen this type of day to day trading swings going back to 2008-2010. It is important to know your trading environment and respect what is taking place. 1900-1910 is still the sport level to watch and if a short trade sets up heading to that level we will take it, but it has to set up according to a disciplined strategy not just guess work or emotions of jumping on the sinking boat. Patience is the goal today.

Some thoughts on news/events impacting investor psyche:

*  Trading environment is back to compressing holding periods on trading positions to one day. Thus, the choppy markets are again in play and we have to respect that relative to trading. The swing lower broke key support levels last week, but the bounce off 1926 twice has been enough to the trendlines in play on the upside. The volatility has returned and it is wait and see for now. Patience, trade with stops in place to protect against the unforeseen, and be disciplined or stay out of trades.

* FOMC minutes put traders in a better mood and the rally sparked intraday puts an end to the oversold conditions and we will see how the sentiment looks to start the trading day today. At this post the future are up 0.5% which will push quickly to the resistance points.

* Economic data remains on the flat to negative side from last week. The global economic data isn’t much better as seen on Tuesday. This week will need some validation of optimism for growth or at least hope of growth going forward to reverse the negative reactions generated the last two weeks…. OR positive comments and input from the FOMC.

*  Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. You either hold through the chop with a longer term focus or you sit on the sidelines and await clarity to develop. The latter allows me to maintain my sanity and is my preference relative to short term holdings. Cash remains king for now.

Sectors to Watch:

S&P 500 index gave up the rally and tested lower on Tuesday, started lower on Wednesday and then bounced to hold support at the 1926 mark again. This was an event (FOMC Minutes) driven bounce and one that could last a couple of days heading into earnings. DID NOT happen. My downside target is still 1900-1910 level near term. We didn’t hit that level, but now we watch to see if we make it back. Today:¬†More selling or buying? Watch the futures for some clues to start the day.

Consumer Staples (XLP) bounced off the 50 DMA and made a move above $45.75. Looked for follow through on Thursday, but failed. Still holding up well and still willing to take the upside trade if we head higher near term. Looking for the sector to hold up as a defensive stance to the selling. Watch and manage your risk.

Financials (XLF) Testing lower on selling Tuesday and now look for the trendline to hold or it could get ugly short term.¬†Still attempting to hold the trendline, but it is ugly based on Thursday’s close.

Utilities (XLU) attempting to trade back above the $42.60 mark short term. Succeeded on Wednesday with the entry at the $42.60 level hit. (S&P 500 Model) Interest sensitive assets are rebounding as the yield on bonds are moving lower again on fear. Erased the gains on Thursday and now push stop to $42.60 to protect the downside risk. TODAY: take the exit if stop hit and watch how it moves from here.

Bonds (TLT & IEF) The choppy issues in stocks are showing up in bonds. The uncertainty towards the Fed should have cleared up some, but the downside in bonds relative to higher interest rates never played out. Fear rallied bonds with TLT hitting $119.30 and is back at the August highs as fear continues pushing money towards safety. The FOMC meeting this month will likely put and end to the QE program. Money is trading in bonds, but the yield movement is is the key to the outcome in pricing. The minutes from the last FOMC meeting had no impact as buyers saw the Fed as dovish on interest rates and bonds. Today: Still looking for yields to rise at least modestly.

Small Caps (IWM) they were down over last four weeks and technically oversold. They produced bounce intraday again on Wednesday adding 20 points and closing at 1097. The selling was back on Thursday and the downside is in play. Short has been the position to own, but it hit stops on Wednesday on the reversal. Today: Watching how it responds to the move lower. Willing to add the short position back short term.

Two sectors to watch from my notes last night:

Impact of Crude oil on other sectors is important to watch. While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like Delta and Southwest. You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward.

Treasury yields continue decline with the 10-year bond now yielding 2.33% and the 30-year bond at 3.06%. They are both sitting on support and the speculation is for rates to rise in response to the Fed hiking rates next year. If we remember the FOMC minutes from yesterday, the Fed is worried about the stronger dollar… the impact of higher rates globally and low unemployment rate. In other words the Fed wants rates to remain low longer to help the world economies. I believe this is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. The downside trade is TBF which is the non-leveraged short for the 20+ year Treasury bond. If Humpty-Dumpty (treasury bonds) fall as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. This is most definitely a sector to watch going forward.

We will track to see how this unfolds going forward and what trades or investments materialize.

Model Position Notes: 

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

  • Energy (XLE) the sector struggles are a result of the¬†drop in crude and hasn’t helped the current downside with a target for oil¬†at¬†$85.77. hit target and took exit on part, took off rest on the reversal in the FOMC effect.¬†Exit at $86 on the reversal on the short trades. (Pattern Trade) The short trades with DUG exited¬†as well. (ONLY ETF Model)
  • Basic Materials (XLB) added the short entry on the downside break in materials and they continued test lower. $47.60 support in play, but the target is near the $46 mark short term. Be patient and manage the risk of the trade. See stop below.
  • Natural Gas (UNG) still in trading range and bounced off support to keep position in play for now. Watching the upside move and follow through may add to our position with some positive confirmation. Tested the bottom of the trading range. Held position, but will exit today if we sell lower.
Watch List Opportunities:
  1. S&P 500 Model – updated watch list
  2. ONLY ETF Model – updated model table.
  3. Pattern Trading Model below.

Pattern Trade Setups:

  1. The¬†downside returned and we have to see how this unfolds today. Bounce? More Selling? Flip-a-Coin! My bias remains with the sellers after yesterday’s display.
  2. SDS – Entry $25.90. Next level resistance follow through on upside trend (micro term). Don’t chase on a gap higher and watch to see how it unfolds on the day.
  3. QID – Entry $46.30. Next level of resistance to follow through on the upside trend (micro term). Don’t chase on gap and watch to see how it unfolds on the day.

Pattern Trade Tracking:

  1. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $48.40
  2. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
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: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $73.80. Joined the selling modestly, but watch is the selling accelerates in the broad market indexes. However, still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to¬†$49.25 for now on position and we will make adjustments as we go forward. Broad market selling is challenge short term.
  • Bank of America (BAC) entry $16.30 2500¬†shares added on 8/25. This has been a long term recommended stock for the last three years and we continue to own the stock as a core holding in portfolios. We will start tracking here for our long term components to follow and trade against the positions. (we also own the Jan 2016 $17 Calls at $1.85) Banks are selling in the current push lower, watch and manage the position.