Trading Notes for Today, October 21st

Notes to Note: 

Negative open turns higher and provides follow through to Friday’s bounce move. S&P 500 index moved above 1900, NASDAQ closed back above the 200 DMA and the Russell 2000 moved above the 1090 resistance. This is adding to the upside near term and starting to validate the bounce to last more than a day or two. Earnings remain the key from my perspective and today we are looking for the upside to remain on the news from Apple after-hours.

As we discussed in the weekend update earnings are the challenge facing the broad markets going forward. IBM showed the influence as the stock missed estimates and fell more than 8% to start the day. The impact on the DOW was obvious and the ripple effect became more muted as the day progressed, but we have to be aware of what is coming in relationship to earnings. Earning continue to be less than great and that keeps a lid on the upside from my perspective. We want to see something to turn the tide relative to the buy-side.

Apple announced after-hours on Monday and beat estimates as the iPhone 6 sales were strong. After-hours up only 1.2% on the news with a positive gain on the day prior to the announcement. Numbers were great, but of course now it is all about the future. Remember Wall Street makes up the rules as it goes along. This should be a positive for the tech sector heading into today.

Chipotle Mexican Grill announced better than expected numbers after-hours, but warned about weaker numbers in guidance for next year. Shares dropped 2.6% on the news.

Small caps resumed the buy-side after a test on Friday. 1090 resistance gave way today and as we stated over weekend this is one to watch in this weeks trading.

Semiconductors bounced from the oversold conditions as well, but could not get through the 580 resistance. Another shot on Monday, but not overly convincing on the push.

Biotech made solid moves higher last week and IBB made a follow through move on the day. 50 DMA in the way with some overhead resistance. That makes this a tough trade to take short term. Worth digging into the sector to find the leaders currently that we can trade.

Fed Fisher recommends to end QE now as planned. Must have not been believed by the bond traders as the yields moved lower showing the move to safety is still in motions.

Going with the bounce momentum for now with the confirmation of the move on Monday. How far do we go? It could end today based on the emotions swirling around the market, but we will follow the open today and take what the market produces.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenge short term. Fear subsided some Monday as the VIX index below¬†the 20 level and back towards the 17.5 support zone. The¬†sellers took their best shot¬†and over the last month produced what amounted to a ten percent push lower prior to the bounce that started last Thursday. The micro trend is still down¬†and in control of for now. Monitor the bounce and take what trades work for your strategies, but remember the objective is to manage risk as well as money.¬†Don’t let your emotions get the best of you and remain true to your investment strategy.

* 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 still in the process of unfolding as¬†we¬†move¬†towards the FOMC meeting the end of the month.

*  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¬†followed through on Friday’s 1.3% bounce move and gained 0.9% to add to the cause. More importantly we closed above the 1900 mark with the 200 DMA next task at hand. SPY hit the $189.70 entry point¬†as posted on the S&P 500 Model.

Volatility index fell back near the 17.5 level of support on Monday. We added the SVXY trade posted to the S&P 500 model as a short on the VIX. Nice move on Monday and we will manage our risk of the trade.

REITs (IYR) the break higher on Monday 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. Solid bounce in the sector and we will take it slow for now.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated below. The current view it that rates will remain low as the Fed atttempts to help everything from US income inequality, more jobs to global growth Europe. The mandate is far spread out and the effectiveness is equally as spread. Watching for the downside in bonds to materialize, but patient for now.

Treasury yields continued decline with the 10-year bond now yielding 2.18% and the 30-year bond at 2.95% currently. 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.

Crude oil remains a big question market relative to the price short term. The stronger dollar has pushed prices lower along with weaker demand. Closed at $82.93 and holding support with a modest bounce. The impact to the stocks are obvious as XLE has declined to support at the $78.90 level for now. Bounce in play and $83.60 is the level to clear short term. The leaders on the bounce are CHK, HP, WMB, EOG & TSO. Watch and scan for the leaders and the opportunities.

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 DAL, AAL, SKYW, JBLU & LUV which are the current leaders.¬†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. Transports (IYT) and Trucking stocks are worth attention as well (USAK, YRCW, ARCB, PTSI, & MRTN).

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:

  • Hit stops on the short trades last week and the long trades are getting populated now as the bounce follows through. See above for Monday’s¬†executions.
  • NOTE… this is a bounce trade until it validates to be more.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Added positions on Monday.
  2. Pattern Trading Model below updated. Added positions on Monday.
  3. Long Term Opportunities – added positions on Monday.

Pattern Trade Setups:

  1. Follow through bounce on Monday to push the argument the bounce is in play and the trades are developing. Patterns are setting up the continuation and confirmation of the move short term. My bias remains with the sellers as we have failed to produce a trend change to this point. That said, we will take the long side trades as they unfold and look for the break and confirmation of the trend if the upside pushes through.
  2. TNA – entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50.
  3. QLD – entry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade.

Pattern Trade Tracking:

  1. SSO Рentry $107.60. bottom reversal. Tested support at the $107 level and bounced, took entry on the trade. Stop $105.80.
  2. 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. Stop $77.
  3. ERX – entry $71.15. bottom reversal. Oversold bounce on Thursday. Followed through for entry and target of $84. Oil bounced as well off the lows. Stop $68.
  4. 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. SOLD 1/2 on pop $84 on Friday. raising stop to $77.10 on balance.
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. Earning are 10/28 and we will watch to see how we traded into that timeline.
  • Twitter (TWTR) –¬†Tested lower and wanted to add on a break from the trading pattern at $50. Took entry 10/20 for 1000 shares at $50 and stop at $46.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85. Banks are selling in the current push lower, watch and manage the position.¬†Want to add our long positions in stocks back near term if we hold support and make some progress relative to sentiment.