Trading Notes for Today, October 1st

Notes to Note: 

New quarter and new attitude… not really, but it is a new quarter. The fourth quarter outlook remains volatile due to the lack of clarity in reference to growth in the economic picture domestically and globally. The Chinese manufacturing data was weaker¬†Tuesday, protest in Hong Kong continue, Eurozone CPI posted the lowest level on record, and worries keep growing. This is the type of news and data environment that will eventually collapse under it’s own weight. Some good news needs to show up soon if the broad markets are going to have a chance to hold support and work higher from the current levels. Again we have to take it one day at a time, but even that is getting interesting from an intraday perspective.

I stated in the weekend update that there are¬†three primary trading strategies most investors follow… Long-term (passive investing), short to intermediate-term (active investing), and trading (micro to short-term). Most investors will participate in all three or a combination of the three. Very rarely do they only select one style of investing. This in itself many times is the problem. We confuse strategies and time frames which feeds emotions, leading us to react to market events versus being proactive to managing our portfolio based on a defined strategy. Throw in help from a “professional”, and it gets more confusing. Bottom line define what you want and then create a strategy to obtain it. Stay on course and when you take a detour, clean yourself off and get back on the road you laid out. This is a journey not a destination.

Some thoughts on news/events impacting investor psyche:

*  Tuesday adds to the China story with weak manufacturing data and the Eurozone shows little to no inflation. Monday brought new geopolitical risk in Hong Kong with protests. Watching to see how much impact this is in the global markets near term and the US markets in response.

* ¬†Pending home sales unsettles the projections about the housing markets… again. The home sales data released Tuesday show the slowing in prices in the large cities which previously had the fastest growth. This is creating more worries for stocks as ITB continued to stumble lower on the news.

*  Syria bombing was added to the list of worries as Obama call for the elimination of the Islamic State. The attacks are having an impact on oil prices and we have to watch going forward.

*  Tax inversion fight in Washington. While the immediate impact is of more interest to the tax implications, the longer term impact to mergers and acquisitions may have bad unintended consequences. I will not get into the issues stomping on the Constitution to enact this law. Three branches of government were created for balance, these decisions teeter on being a Monarchy or worse a Dictatorship. It will all be interesting to see how it unfolds, but at some point we have to return to a government of the people, by the people and for the people.

*  Trading environment is compressing holding periods on trading positions again. Thus, the choppy markets are in play and we have to respect that relative to trading. Now we are down to one day moves in direction with increased volatility. Throw in the bubble warnings from analyst and it makes for fun times.

* ¬†Interest rates moving higher, maybe, possibly, potentially, someday… This is still a worry for investors.

*  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.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level last Thursday and bounced back above that level on Friday… Monday tested the low early and bounced back to close at 1977, but Tuesday took the support out again closing at 1972 and below the 50 DMA. The downside potential remains the¬†1910 level near term, but there is always a slight chance of¬†a renewed attempt to move back toward the 2010 mark. The short trade is SDS which we added in the Pattern Model below. I will look to add to that position today if we confirm the downside opportunity.

Bonds (TLT & IEF) The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. The response to the Fed not moving on interest rates was a push lower in yields. TLT pushed to $116.93 on the long bond rally Monday, but settled at $116.27 on Tuesday. Watch to see how this volatility works out short term. TODAY: Watch to see which side gains the upper hand on yields short term.

Financials (XLF) $23 is the level to watch on the downside and the upside needs some help if it is going to recover. Earning will start soon for the third quarter reports and I don’t expect much at this point until those are released.¬†The¬†opportunity going forward is if rates rise. The outlook currently is rates will fall again on the fear in stocks. That puts financials on the defensive again and potentially moving lower. Watch and let the charts decide. TODAY:¬†hold support and work through the current worries.

Semiconductors (SOXX) follow the bounce on the upside with more indecision the last week plus. Big reversal last last week and held the 50 DMA as support again. Needed to move above $88.50 to show upside momentum and that has not materialized and is giving the sellers the upper hand for now. TODAY: Hold $86.20 support and let the short term volatility play out.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • S&P 500 Index (SDS) Made the break lower on Thursday and looking to add to the position is selling resumes. TODAY:¬†entry of $24.85 if we maintain a negative sentiment in the AM. If we move back below $24.45 we will wait. (SH on S&P 500 Model)
  • Consumer Services (XLY)¬†after a set up to break higher the sector broke support on the downside and the short term trade.¬†The $67.60 mark¬†was¬†the downside break and added¬†the short trade short term. Patience and let this unfold as the volatility plays out. (Pattern Trade Model) ¬†TODAY: Follow through on the downside? pushing our stop to $67.75.
  • Energy (XLE) the weakness in the sector is expected as crude oil prices have declined. There is some volatility in prices, but the downtrend is well confirmed in oil and now in the energy sector. Added the short side trade (Pattern Trade) and managing the risk.¬†The short trades with DUG on the stocks is¬†an opportunity. (ONLY ETF Model) Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid¬†that reverses the trend. Watch the issues in the Middle East as they will have an impact on oil prices if worry gains traction. TODAY:¬†Looking for any follow through on the downside selling in oil from Tuesday.
Watch List Opportunities:
  1. Holding steady as we start the week and look for some definition on the direction versus getting whipped in and out of positions.
  2. S&P 500 Model watch list added.

Pattern Trade Setups:

  1. FLIP — FLOP – Markets¬†remain uncertain even intraday! Bias is still on the downside and we have to manage the risk, but give some room for volatility.
  2. QID – entry $45.50. Add to position if the downside accelerates through support of 50 DMA.
  3. SDS – entry $24.85. Add to position if the downside continues.
  4. XLB – short entry $49.60. breaking down as weakness gains strength in broad markets.
  5. FAS – entry $105. Trade reversal test of the 50 DMA. Trade only on the upside on a reversal. High risk due to the volatility in play as could be 2-3 day positions for 3% move. Can cheat the entry if we open and hold above $104.05.

Pattern Trade Tracking:

  1. UNG – entry $22.15. trading range breakout. Good base on the commodity and a breakout would be a trade on the upside move. Willing to add to the position on a positive test look longer term than trade. Stop $20.65
  2. QID – entry $44.65. Break above resistance off five week base. Stop $44.40
  3. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK Thursday) Stop $23.60
  4. XLY РShort entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $67.75.
  5. XLE Рshort entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $95.50. Reversal candle sitting on the 200 DMA Рwatch to see if it confirms in the AM and manage the stop.
  6. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $15.40
  7. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
  8. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
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 $71.50. Nice slow upside drift in play for the stock. Still positive opportunity long term for the position.
  • 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¬†$45 for now on position and we will make adjustments as we extend the upside.