Trading Notes for Today, October 16th

Notes to Note: 

Earning from the financial sector continue to set the tone for the open on Wednesday which gapped lower and then tested new current lows and then bounced to show an intraday reversal. Looking at the results from earnings they were not bad, they just weren’t what investors wanted in a negative sentiment market environment and the banks sold lower with some down as much as 6% on the day and others attempting to find support and rally off their respective lows on the day. XLF broke the 200 DMA and didn’t offer any reasons to add on the day. I like the longer term outlook for banks, but the short term is going to remain volatile based on Wednesday. Next up for the sector are the regional bank earnings and I am still expecting positives from that side of the sector.

Small Cap index bounced off the low and finished up 1% on the day as the most oversold conditions produced the best moves off the intraday low. Still looking for bottom reversal in the small caps and this is one of the sector to watch moving forward.

Semiconductors bounced as well intraday and ended the day in positive territory as well. The bounce trade is a possibility if this follows through.

Biotech bounced as well intraday gaining 3% off the intraday low and lining itself up to take advantage of the move is the index.

VIX index ran to 31 on the early selling and moved back to the 26.5 mark on the close. If the bounce continues look for this to test back to the 21.5 level of support.

Fed speculates on QE returning next year if the deflation issue shows up in the economic data. That helped bonds rally along with the global fear of negative GDP and recessions globally. The rate hike is being pushed to September of 2015 now and again that is fueling bonds with the yield on the thirty-year bond falling below the 3% mark again. TMF rallied or spiked higher on the open with all this data creating almost panic trading. They gave up most of the gain as the day moved forward. Bonds are still the hot sector to making money currently.

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 focused¬†and avoid unnecessary risk.¬†Take what the market gives one day at a time. So far it isn’t giving much, but could offer a bounce going forward.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment escalated into the fear zone and the sellers took their best shot on Wednesday with an intraday reversal posted on the chart. Now we look for the intraday bounce and see if it holds. The downside is still in control of the trend and this is just a bounce within that trend. The downside questions still remain… 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. TODAY: Williams from the Fed stated today that they may need to add to QE versus ending it???? What are these people doing. Watch for bonds to rally on this news.

*¬†It’s October! enough said. The month know for volatility and corrections is at again and is living up to expectations. 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 a of calmness. 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 fell 3% the first half of the day and then bounced back to close down 0.8% on Wednesday. It remains below the 200 DMA and is in a¬†downtrend short term. The test near the¬†1810 level of support was nothing short of fearful for traders. Stay focused, keep your cash and let this play out. The short trades are still working… just manage the risk. My plan… manage the stops on the short trades, look to trade the bounce and sell into the resulting rally unless teh downtrend line is broke on the rally. Today: follow through on the bounce… if so, manage the stops and look for the upside trades.

Consumer Staples (XLP) was that a towel thrown by the holders of the sector? Tested the 200 DMA intraday, bounced and closed down 1.2%. Hit our stops and now we watch to see how it unfolds, but this was the ninth of the ten sector to break lower, only utilities (XLU) remains. Long term uptrend is still intact.

Bonds (TLT & IEF) The uncertainty towards the Fed should have cleared up some of the issues with the FOMC minutes, but it only validated the Fed isn’t willing to take the necessary actions to deal with the money surplus based on the global picture now. Fear rallied bonds with TLT hitting $127.65 at the open and closing at $122.53¬†and a another new near term high.¬†The FOMC meeting this month was believed to be the¬†end of the QE program, but bond yields are acting as if that may be put on hold. Or, money believes yields will not rise until the second half of 2015, much later than talked about just one month ago. Today:¬†Riding out the bonds and seeing how this ends going forward. Thirty-year bond held at the 2.87% yield level. This is getting interesting.

Running the scans shows little on the positive side other than fixed income and the dollar, and the dollar showed some weakness on Monday and Wednesday broke lower testing the next level of support. Why the shift in sentiment relative to the buck? Simply put, the waffeling comments from the Fed. If they are considering more QE and delaying a rate hike the reason for the stronger dollar starts to evaporate. This is something to watch going forward. This could unwind some of the benefits from the stronger dollar in stocks… reversing¬†pressure in commodities and other sectors.¬†The downside trades are in control, but they tend to burnout quickly as the buyers want to take advantage of¬†what they believe are¬†sales opportunities. A¬†bounce at this point would be¬†just that a bounce. Unless something changes or there is a key catalyst with a sustainable move higher, they are good selling opportunities for 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.

Oil is testing the $80 level and holding for now. Watch the dollar relative to this story as stated above, a weaker dollar on speculation towards the Fed actions, would push oil higher potentially short term. That would unwind some of the benefits to stocks in other sectors. Watch, let it validate, and then act accordingly.

Treasury yields continue decline with the 10-year bond now yielding 2.09% and the 30-year bond at 2.87% as of Wednesday. That broke support¬†and the speculation is for rates to rise in response to the Fed hiking rates next year… not happening as fear wins. 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 rates start to rise again. 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, but in the same vein we have to let the speculation and fear play out. Trade the upside of the bond and then short the bond as the yields start to rise.

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 short term.¬†Target was hit and the washout test lower on Wednesday was for taking money off the table. Sold half and adjusted stop on the balance.
  • 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.
  • 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. Raised stop (SP 500 Model).
Watch List Opportunities:
  1. S&P 500 Model – updated model table
  2. Pattern Trading Model below updated.

Pattern Trade Setups:

  1. The¬†downside isn’t over… there was singing from large women on the PA system. Bounce? in play, but we have to watch the impact of NFLX on the open.¬†My bias remains with the sellers and the trend, but every trend has a bounce. I got the one more big dump lower and a bounce to start… added some long positions and now looking to see if they play out
  2. Some education around point number one. If you are short the market with the belief there is more downside on the horizon you can do one of two things at this point. First, hold your short positions and ride through the bounce. If it hits your stops you exit those short positions and look for the next trend. Second, hedge those short positions with some long side trades and play the bounce off the lows, sell the long positions when the bounce concludes near term and then add to your short positions as the downside resumes. Either is effect, the second is proactive money management the first is passive active money management. No right or wrong just different strategies for managing the trade process. 
  3. The scans still show downside trades as the markets despite the intraday bounce closed lower. Small caps were up on the day and showed the most promise heading into the trading day. We still have to be patient and focused in our short term views as the longer term trend plays out going forward.
  4. TNA – entry $56.50 test of the bounce on Wednesday. Bottom bounce trade. High risk when you trade the bounce, but the setup was presented with the move on Wednesday off the lows. The key is to not get greedy and take the money off as the targets are hit. Target $62.50. Stop $55.40.

Pattern Trade Tracking:

  1. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. Target $87. Stop $71.60. This is a volatile moving ETF give some room for the moves relative to the leverage on the ETF.
  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. Stop $26.30. Sold half at $28.10 and managing the stop at the open today.
  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. Stop $48.25. Sold half at $51.80 and managing the stop at the open today.
  4. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $46. Sold half at $44.75 (bounce off the low) Raised stop on the balance.
  5. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30. HIT STOP
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¬†lower and attempting to hold the $71.70 support. (last trade of $73.15 entry point added¬†1000 shares on the long term outlook. 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. HIT STOP ON Positions)
  • Twitter (TWTR) – Nice bounce off the 200 DMA and if we hold he move we will look for a entry point to add trade back on the longer term outlook. Patience for now, but I like the set up on the position. Last Trade – entry $45.50 1000 shares. 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. Broad market selling is challenge short term. HIT STOP ON positions.
  • Bank of America (BAC) – Selling on earnings in the sector currently creating emotions on the downside. I still like the upside and we will add to the position back as this settles down. (Last Trade: 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 sold on earnings and were aided by the¬†current push lower. We will held options and¬†HIT STOP on Stock $16.20)