Trading Notes for Today, October 14th

Notes to Note: 

Markets start higher and test the move intraday.

Jobless claims climbed 12,000 to 290,000. The four month average remains near the 285,000 mark. An interesting stat in the report was the number of Americans who cannot find full-time work being 18.2 million. The report stated that was an unusually high number to be 5 years into a recovery and wages are barely rising faster than the rate of inflation, which by the way, is at one of the lowest levels in history. Regulations are at the root of the cause… I am not going to get into all the issues around it, but let it be said, too much prevents growth. Some say wage hikes and higher paying jobs are coming soon… we are 5 plus years into this economic recovery that started in March of 2009. How much longer?

We were looking at the following this week, 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. Well… that failed to happen with the bounce higher, but it continues to build a consolidation pattern, but has not concluded which direction the sector would like to take on near term.¬†We still need the leadership the sector provides and thus we continue to monitor the outlook and chart.¬†

Energy made a moved off the low thanks to oil prices showing some signs of life moving back towards the $80 level last week. However, that has not lasted and oil is testing the $75 mark and XLE moved back below the $87 support level. We can thank OPEC for their willingness to keep supply going and weighing in on the threat of a price war with the US. How much lower can the sector drop? That depends on how much oil drops short term. Watching the downside risk now with ERY. 

Commodities made a move off the lows the later part of last¬†week and were¬†on our list of potential trade opportunities with the life shown in gold, oil, natural gas, and base metals. While we stated this would be a short term trade… 2-3 days was shorter than we expected. Oil moved lower as did the other energy commodities. Gold has stalled and this leaves us looking at the short side more than the upside. Patience as it all gets resolved. Too much risk for too little reward.¬†

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 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. This should create an opportunity in the energy sector as stocks get oversold on speculation… being that the reality is never as bad as the speculation.¬†

* 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.¬†This is offering some impact to the global ETFs as the upside is showing in the charts. Some of that is the leadership of the US markets and some is the stimulus. The risk remains high and I would take this as a trading opportunity only at this point, and let it evolve into more going forward.¬†

* The Fed is still in the background pulling the strings of the bond market and interest rates. 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.

* 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.

* Utilities are moving in response to higher interest rates worries and valuations fundamentally. This should off an opportunity to add positions if the selling gets too aggressive. Remember speculation is rarely anywhere near the truth.

Sectors to Watch Now:

Volatility Index (VIX) The index moved lower on the week, but has been make small moves back to the upside of late. Tested above the 14 mark on Thursday and could be time to a VXX trade going forward. Oil is creating some uncertainty in the markets relative to speculation on the impact of cheap oil on the jobs and economic picture. $28.20 was entry posted for VXX trade. Hit again on Thursday to add.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play, at least mentally. The drop in yields on Thursday to 3.07% is keeping traders on their toes. 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. Still own our position in TBT, stop still at $51.80 on the trade. Letting this play out for now.  

Crude oil setting up short trade. Break of $29 on USO was the entry point for the short. Or SCO at $41.30 for short ETF entry.

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. Big plus on Tuesday on breakout with stronger relative strength on the move and held on Wednesday after small test. 

The rotation is still underway as the market digests the move off the October 15th low. This is setting up as a sideways test versus selling as a test. Patience is key as this all moves forward.

Interesting Move In…¬†

Utilities moved lower forfeiting 1.9% on Wednesday. Why the sudden change in sentiment? Dividend has dropped to 3.3% due to the rise in price of nearly 20% this year. Throw in some fundamentals like Price to forward earnings of 17.4, nearly ten year high, and you have an overbought situation fundamentally? Interest rates rising impact the sector has well, albeit we don’t see much on that front, but as we head to 2015 it does become an issue. Support is $45.50 currently and move below that could test the $43.75 mark. Made the move lower on Thursday and exits were hit for the sector.

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. Retail move higher on earnings is now driving the 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. NEED TO BREAK ABOVE RESISTANCE at $53.55!
  • 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¬†and the sector may be showing signs of just that short term..¬†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 continue this¬†week… watching how it plays out with $74.75 as support currently.
  • 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? 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 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 this week.
  • 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 on Wednesday. Those are worth tracking for the follow through… especially on a test. Sales data out on Friday for October.
  • 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 break-even at $24.40. Testing the move higher? Watch and manage your risk.
Watch List Opportunities:
  1. S&P 500 Model РAdded to watch list РAdjusted Stops.
  2. Sector Rotation – Updated stops.
  3. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Slowing and topping? Two keys today… first, Russell 2000 index which dropped nearly 1% on Thursday to reverse the break higher. Needs to hold the 10 DMA and regain the upside move. Second, SOX index which is testing the 10 DMA and moving sideways. If the two team up to move lower could be beginning of test for broader indexes. If a bounce and go… look for more upside short term. It’s Friday and plenty of data out today as well. As always act with disciplined habits and remain focused.
  2. TZA – entry $13.80. bottom reversal. Negative move for the small caps on Thursday could be start of test.
  3. MCHP – entry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap.
  4. MXWL – entry $11.37. bottom reversal consolidation. technology sector. it has been a leader and benefiting from improved earnings.
  5. CRAY – entry $34.70. Flag. Technology stock has run higher, but remains a leader in sector. resurgence in sector if NASDAQ moving higher.
  6. Breakout test from Wednesday from nice patterns. I am posting a couple of stocks in sectors with nice moves on the breakouts. If they test and give us a chance to buy them we will if not, don’t chase them. Three to watch: JD – 26.70 breakout point and $27 ish test of interest. This is in the internet content (FDN) which broke higher as well. RH – 80.60 breakout point and $81.30 ish test of interest. Retail space is picking up momentum. STX – $62 reversal entry point. Flag pattern and reversal is of interest on data storage company. needs to hold $61.50 on test and go.

Pattern Trade Tracking:

  1. 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.
  2. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  3. HYG – entry $92.50. Break resistance and test. rally with stocks. Stop $91.95. HIT STOP
  4. 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.
  5. 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.
  6. 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.
  7. 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 $141.20.
  8. 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 $51.80 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  9. 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 $132.75.
  10. 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 $74 on all shares.
  11. 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 $122.90 on all.
  12. 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 $88.20. 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 — HIT Stop $1.75 on contracts) – (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)
  • 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 – stock tumbles as investors decide they don’t like the news? Watching buy back the puts on the 10 contracts that hit stop.
  • 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.
  • NEWS: Forex fines of $250 million from OCC – hit the price on the day. They also stated they would not lower their standards for high risk mortgages. (makes sense) Wall Street didn’t like the news as they want more earnings…. bank wants to avoid defaults.