Trading Notes for Today, October 17th

Notes to Note: 

Another big move lower at the open on Thursday as the sellers again attempt to push the broad indexes lower on the day. Just like Wednesday the move higher started almost instantly, tested the low again and then made a move into positive territory as the day progressed. There is still no conviction in the buying and the VIX index shows concern still exist from the buyers as the short VIX ETF is lagging when the S&P 500 index bounces intraday. Until that shifts we still have to be concerned about the overall sentiment towards the broad market. For now we will continue to look for a bounce in the index short term.

NetFlix weighed on the NASDAQ all day with the NASDAQ 100 falling nearly 15 points or 0.4%. The lower than projected subscription rate pushed the stock down nearly 20% on the day. Several analyst reaffirmed buy ratings on the stock. Interesting and worth watching going forward.

Small Cap index bounced again on Thursday and added 1.2% on the day pushing back near the 1090 level. This was one of the most oversold indexes and would be expected to lead any bounce off the lows. Hit entry on IWM at $107 on the day.

Semiconductors bounced again as well gaining 1.5% on the day. Still plenty of work to do to fix the selling trend in play, but the bounce is well worth trading if the indexes continue to bounce. SOXX hit the entry point today as well at $77.50.

Biotech bounced as well intraday gaining 1.7% and following through on the intraday reversal on Wednesday and entry at $257.85.

S&P 500 index fought back to even on the day after off to 1835 at the open and closed flat at 1862.

Fed speculates on QE returning ‘now’ versus yesterday’s hint at next year if the deflation issue shows up in the economic data. That helped stocks rally along with the global indexes off their lows. The rate hike is being pushed to September of 2015 versus March. Bonds rallied on Wednesday and sold some on Thursday… jury is out, but the Fed meeting is coming soon and the should clarify some of this issue.

As we stated in the weekend update, there are no guarantees on where the indexes go from here. Thursdays was another merry-go-round that ended flat.  I am content to hold cash with some trading as we take what the market gives one day at a time up or down.

Some thoughts on news/events impacting investor psyche:

*  Trading environment escalated into the fear zone and the sellers took their best shot again on Thursday with another intraday reversal posted on the chart. Need to get through these levels of resistance and push higher if the bounce is going to amount to anything other than an intraday move. The downside is still in control of the trend and this would be just a bounce within that trend. The downside questions still remain… How long? How much? Those are questions for the speculators as we focus on managing our money relative our strategies and beliefs. This is no 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 or more QE. This story is just starting to unfold as we head towards the FOMC meeting the end of the month. TODAY: More bantering from the Fed on the willingness to keep the free money flow going? If so, the bounce will get help from the Fed. If not we trade of the 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 a place 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 again the first half of the day and then bounced back to close flat on Thursday. This was similar to Wednesday but less volatility. 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 the downtrend line is broken 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 again on Thursday, bounced and closed down 0.7%. Sold our position, but now we watch to see how it unfolds,. This was the ninth of the ten sector to break lower, only utilities (XLU) remains. Long term uptrend is still intact for XLP.

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 $124.13 at the open and closing at $121.75 down 0.6%. 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, some 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 2.96% yield level. This is getting interesting.

Running the scans shows little on the positive. Biotech showed up Thrusday with a bounce of 3%. VIX held the negative sentiment from the open throughout the day despite the rally off the lows. Dollar curbed the weakness from Wednesday, but still plenty of speculation 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 with a close today at $82.70 with nice bounce on Thursday as part of the rally. Watch the dollar relative to this story as stated above, a weaker dollar on speculation towards the Fed actions, would push oil higher potentially (Thursday) 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 2.15% and the 30-year bond at 2.93% as of Thursday. 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 is near short term. Be patient and manage the risk of the trade. See stop below.
  • 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 is some quiet singing from large women on the PA system. Bounce? More Selling? My bias remains with the sellers after the last two days have failed to produce any real buying. Got the dump lower and intraday buying off the lows, but not enough conviction yet to push the indexes higher. Still looking for the bounce within the downtrend and then more selling.
  2. Scans the last two days are showing a test of support and some nice moves in semiconductors and small caps. If they follow through the bounce off the lows could get some much needed momentum.
  3. Sold 1/2 positions at the target on short trades with the intraday bounce the last two days. Tightened stops on the remaining portions.
  4. SSO – entry $105.60. bottom reversal. Setting up for bounce attempted two days, third is the charm? Stop $101.
  5. SOXX – entry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move.
  6. ERX – entry $71.15. bottom reversal. Oversold bounce on Thursday. Follow through for entry and target of $84. Oil bounced as well off the lows.

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 $75.
  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 $27. Sold 1/2 at $28. (target)
  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 $50. Sold 1/2 at $51.50 (target)
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 if the stop is hit on the stock positions.