Trading Notes for Today, November 11th

Notes to Note: 

Another day of rotation, but it like a ping pong match going back and forth between sectors. The commodities gained some traction on Friday with money moving out of semiconductors and biotech. Today they commodities lose ground on comments from Saudi Arabia on oil supply and price. That sent money back to the biotech and semiconductors. Stop the madness. Throw in the dump in gold and gold miners and you have a perfect merry-go-round as traders look for where money will be treated the best.

S&P 500 index moved higher, but the volume continues to show lack of interest. The upside is still in play and we have to be aware of the surrounding currently. Small caps showed most promise on the day with a move through the current consolidation and decent volume. Need the growth sectors to pick up again and take on some leadership if the markets are going to take another leg higher.

We were looking at the following… but…

Biotech put investors on notice that the leader on the move off the October 15th low may be topping. Blame the election, blame overbought signals, blame whatever you want, just pay attention to the sector moving forward if the downside move follows through. Rallied back on Monday and now we look for directional conclusion before committing anything to the sector. 

Energy made a moved off the low thanks to oil prices showing some signs of life moving back towards the $80 level to end the week. XLE moved back above the $87 resistance level as a positive sign for the sector. Again you can blame the election results or a modest move higher in oil prices, but worth watching the outcome short term. Sank on oil prices falling relative to Saudi Arabia and the sector gave up the gains. Still need some conclusion on the direction. 

Commodities made a move off the lows the later part of the week and are on our list of potential trade opportunities with the life shown in gold, oil, natural gas, and base metals. Worth watching for any trades that develop like that in UNG and FCG to end the week. This is only a trade short term unless the dollar decides to decline going forward. Watch, trade and mange the risk of those trades. Moved back to support and looking for confirmation on the upside or downside? 

Homebuilders followed through on the break through resistance as well on some positive data in the sector. We will get more data this week to confirm or deny any strength in the sector last month. Continued higher and looking positive on the break towards resistance at the $25.10 mark. 

The broad markets as consolidating at the highs and looking for a catalyst to lead them higher as we march toward the year end. The sectors above are not going to be the ones to make a difference, but technology, financials, healthcare and the consumer stocks are, and that is where we will look for movement this week to confirm the continuation of the move off the October 15th low. Nothing changed on Monday. 

Remain patient and let the markets unfold where they intent to go.

Some thoughts on news/events impacting investor psyche:

* Oil prices remain at the center of attention for relative to the US outlook. They are double edged sword relative to helping the economy with lower costs and hurting the economy as it has been the sector with the most job growth. If that stalls it would hurt the economic picture. We have to watch how this unfolds and act accordingly. ADD supply to that worry list as the concern over Saudi Arabia is back on the table for price competition and willingness to get into a price war.

* The¬†momentum in the markets¬†called¬†global stimulus continues as the central banks around the world continue ease and add to their stimulus packages. The dollar has jumped higher, commodities have fallen and US stocks have run on the prospects. How long does it go? Use the US Federal Reserve as a benchmark… they were engage in the latest stimulus for two full years. That leaves plenty of time globally for this to all unfold.

* The Fed put some new things on the table¬†relative to their collective outlook for economic growth in the US. Is it valid and will investors buy into the outlook?¬†My initial reaction was no, however, the GDP revisions higher than expected at 3.5% growth in Q3 did lend some credibility to what the Fed stated. That in turn has pushed stocks higher. The bigger question is does the news have sustainability?¬†I know the truth doesn’t apply to an emotional market, but it is another reason to keep your stops in balance with the risk at hand.

* 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 this week:

Note the sectors outlined above as well for this week.

Energy (XLE) bounced back from selling lower and made a key move back above $87 (XLE) to end the week. Started the week with a move to $77.20 on crude and XlE fell to $87? Jury is still out and watching to see how it unfolds going forward.

Natural Gas (UNG)¬†made the move higher last week and broke through the $22.30 resistance level. Touched the 200 DMA on Friday and retreated to close at the $22.90 level on UNG. Fell back to $22.30 to test the breakout as support. Watching. The stocks finally moved on Friday as well with FCG gaining 5.8% to push back to the top end of the trading range and bottoming pattern. Monday FCG tested lower giving up 3.5%… still watching the outcome.¬†

Volatility Index (VIX) The index moved lower on the week and closed below 14 at 13.1 on the closing rally Friday. This puts the 12 level back in play and is showing no signs of worry as we make the turn towards the year end move. Got the move to 12.1 on Monday. SVXY is the short VIX ETF and may be the trade to hold going forward as volatility has been taken out of the market for now. Got the entry on the SVXY trade on Monday with nice bump higher as volatility is gone. 

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play, at least mentally. The drop in yields on Friday back to the 3.04% mark was a negative in my view for growth sectors. The buying of bonds corresponded with money rotating from the leaders like semiconductors, biotech and small caps. If this continues you could see another mini rally in long bond as a trading opportunity. Yields move up to 3.08% on Monday and TBT rose 1.8% on the shift. Stop still at $51.80 on the trade. 

Crude oil remains a big question mark relative to the price short term. Crude Oil (USO) is attempting to build a bottom reversal pattern the last week, but it has not produced a change worth the upside trade risk at this point. It could get peer pressured higher short term, but the demand is certainly not there for now. I like the short the rally trade more than trading the bottom. Exactly what played out Monday. Sooner than I thought, but the OPEC willingness for have a price war wins over speculation. 

Gold bounced 2.8% on Friday as dollar tested lower and the global outlook sparked some buyer to step into the oversold metal. Does it last? Not likely, but could be a trade opportunity as gold, silver, platinum, uranium, copper, steel and aluminum all had a nice day. Oops, didn’t last and the selling in gold didn’t help the commodities overall. Stronger dollar as well on Monday. GLL came back near hte previous high and watching to add back the selling continues.¬†

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. Added slightly on Monday, but it is still positive. 

We still need the large sectors to carry the load while the small discussion above provide some trading opportunities. The Financials are taking on some leadership along with basic materials, industrials, consumer staples and utilities. That is fine, but healthcare, technology, consumer services, biotech and small caps need to step back into the role of leadership if the broad markets indexes are going to break higher. Take what the market gives and measure risk relative to the current market events both short and long term.

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 follow through. We will look to add this position if trend gains more traction. Added to the S&P 500 Model. Consolidating near the high and looking for 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 from rotation Friday, but reversed on Monday. 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.
  • 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, but that is stalling currently.¬†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. How much gas is in the tank for the move higher?¬†For now… enough.¬†Manage your stops.
  • 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 to end the week… watching how it plays out.
  • 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.¬†Adjust your stops and 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 and¬†is setting the pace on the upside move. 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.¬†Note the topping pattern and volume on selling Friday. (moved up on Monday to start the week, but still need to manage the position if the speculation picks up again.)
Watch List Opportunities:
  1. S&P 500 Model РAdded to watch list РAdjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Long Term Opportunities –¬†Added puts.
  4. Sector Rotation – Updated stops.
  5. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Still consolidating on the move through the previous highs. Watching, looking and planning on a catalyst to drive the indexes higher or else the test lower could evolve near term.
  2. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum?
  3. HYG – entry $92.50. Break resistance and test. rally with stocks.
  4. CMI – entry $$147.50. Consolidation breakout. the sector has been leading as money rotates.
  5. OIH – entry $45.50. Energy is breaking from consolidation pattern and looking for bump higher as trade. Gapped higher, traded lower on oil prices declining again. Watch today.

Pattern Trade Tracking:

  1. 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.
  2. 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.
  3. 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 $114.75.
  4. 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 $140.50.
  5. TBT Рentry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.50 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  6. QLD Рentry $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 Рentry $125. (10/27) Stop $128.65.
  7. 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 $72 on all shares.
  8. 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 $120.35 on all.
  9. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $86. Break above resistance (82.30) good point to add to position. Added to position Рentry $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.)
  • 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) – (11/10 – Jan $40 puts buy 10 contracts @ $3.20, as downside looks to pick up momentum.)
  • 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.