Trading Notes for Today, October 14th

Notes to Note: 

Late day selling accelerated the downside move for the broad indexes. We break the 200 DMA on the S&P 500 index as it joins the rest of the party. The climax sell off has not completed yet, but today was the start. The follow through on the downside was expected coming into the week and we could get one more burst on the downside before the buyers step in short term. Without getting into speculating on the selling we will leave it at the case of the doubters finally validating what many have expected… the over valued markets would sell off as the valuation didn’t line up with the future growth outlook. No Fed to the rescue, and no amount of jawboning by analyst will take the sting out of the worries that are front and center. These worries are keeping investors nervous and¬†wanting to¬†sell¬†the risk of the broad markets. Until the sentiment shifts the downside remains the trade.

There was a Ebola scare in the afternoon on Monday with a plane that got some of the blame for the selling into the close. While not like the cause it did act as a catalyst for the fact there was still more selling to be taken care of. Selling requires patience, more so, than the upside moves and it is difficult to process emotionally and mentally for investors. We want to sell as uptrend mature and we want to buy as the downside accelerates. Both require patience in order maintain and capitalize on the opportunities.

As we stated in the weekend update, there are no guarantees on where the indexes go from here and the key will be to remain disciplined and avoid unnecessary risk. Take what the market gives one day at a time.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment¬†has now escalated into the fear zone and the sellers are in control. How long? How much? Those are questions for the media… we need to be focused on managing our money relative our strategies and beliefs. This is not a time to follow the herd, but to stop, evaluate, adjust and move forward with extreme caution. Don’t let your emotions get the best of you and remain true to what you do, now is not the time to change or adapt a new strategy simply in response to what the market has done.¬†Emotions are running the micro trend let them play out and then make moves accordingly.

* FOMC minutes¬†where the catalyst to the current string of events playing out. The rally relative to a dovish Fed was shown to be worthless if the global economies are faltering. In other words, investors believe the global slowdown is of more danger than the Fed’s willingness to delay the hike in interest rates. This story is just starting to unfold as we head towards the FOMC meeting the end of the month.

*¬†It’s October! enough said. The month know for volatility and corrections is at again. That will only add fuel to the fire of the sellers. Watching to see how emotional this gets short term.

*  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.

* ¬†Please note above… Cash is King! That is not a mindless comment it is a simple truth. When you hold cash as we do now… your emotions are not running wild. You are not losing money and that keeps you in place of calm. You are able to look at the movement and outcome of this event with the eye of opportunity not crying and weeping about losing money. Stay focused and remain true to what you believe.

Sectors to Watch:

S&P 500 index broke the 200 DMA¬†broke below the target of the 1900 level to close at 1874. This does not make me smart, only and observer of charts. The next level is 1864 and then 1810. The party is still going and the loud music from the media is giving everyone a headache. Stay focused, keep your cash and let this play out. The short trades are still working… manage the risk.¬†Today:¬†More selling or buying?¬†Seller showed up late on Monday, how doe we respond to start the day?

Consumer Staples (XLP) moved back to the 50 DMA and is testing. There are only two left and this one of those that have held support. Watch for indications of what is going on in the broader markets relative to risk. The towel throwing would take the index to the 200 DMA and the next level of support.

Utilities (XLU) attempting to trade back above the $42.60 mark short term. Like the consumer staples this is a defensive sector and in the initial stages of the correction offers some safety for traders. Patience is the key overall, but expect volatility in the sector if you own it near term.

Bonds (TLT & IEF) The uncertainty towards the Fed should have cleared up some of the issues with the minutes, but if anything is cleared of the Fed’s view of what is going on globally that will impact the US. Fear rallied bonds with TLT hitting $120.78 on Monday and a new near term high.¬†The FOMC meeting this month will likely put and end to the QE program, but money is moving into bonds, and¬†the yield movement remains on the downside. Today:¬†Riding out the bonds and seeing how this ends going forward. Thirty-year bond held at the 3.03% yield level.

Bonds historically have been and indicator to watch relative to stocks and growth. They tend to forecast the belief about the economic picture with a high degree of accuracy. The challenge is it takes time for stock investors to agree with bonds. This year you can see rates have fallen from near the 4% mark on the thirty-year bond to 3.03% Friday. After nine plus months of this forecast by bonds, investors are starting to believe? Watch and see it is a story that is still unfolding.

Running the scans shows little on the positive side other than fixed income and the dollar, and the dollar showed some weakness on Monday. Watching for clues and opportunities, but willing to be patient and let this all play out. The downside trades are in control for now, but they tend to burnout quickly as the buyers want to take advantage of the sales opportunities. The initial bounce is generally just that a bounce. Unless something changes or there is a key catalyst they are good selling opportunities or establishing short positions. Watch how it unfolds.

Two sectors to watch from my earlier notes:

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 the last meeting, the Fed is worried about the stronger dollar… the impact of higher US rates to the global economies and low unemployment rates in the US. 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. Don’t let the short term fear factors driving rates lower be a distraction from the longer term outcome for the sector.

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:

  • Basic Materials (XLB) added the short entry on the downside break in materials and they continued test lower. $46 support and target is near 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.
  • Short trades on the NASDAQ and the S&P 500 index were added last¬†Friday and we need to manage them accordingly. As stated above the downside is in play, but the bigger question is how traders and investors will react in the coming weeks.
Watch List Opportunities:
  1. S&P 500 Model – updated model table
  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? My bias remains with the sellers after yesterday’s display.
  2. All scans have shifted to the downside trades. I want to see how we react to Monday. The futures are pointing higher. If we bounce could set up short trade entries with better opportunities. The bias remains on the downside and a bounce at his point is just a bounce. Trade according to the trend not what you think. Trend short term is down and a bounce would have to take that trend out in order to convince me. Thus, trade the bounce, but look for short positions as swing trades within the bounce for primary trade opportunity.
  3. IWN – entry $91.20. bounce trade reversal. Looking for the oversold sector to bounce similar to Monday, except hold the move for several days. $94.25 target on the move and then $95.50. We will take profit as the targets are hit on the trade.

Pattern Trade Tracking:

  1. 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. Stop $25.90.
  2. 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. Stop $47.
  3. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $46.
  4. 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. HIT STOP ON Positions
  • 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. Watching after big drop on Friday. HIT STOP ON positions
  • 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. We will hold options is the stop is hit on the stock positions.