Trading Notes for Today, October 23rd

Notes to Note: 

Positive open for the broad markets and then some selling or test of the move higher in the afternoon. Some media made more of the selling than was reality, but then they are in the business of sensationalism. The futures this morning are already recovering the losses from Wednesday. If that was the test it was not much of one, but recovery moves tend to be just as quick as the sell off. Watch for today to resume the upside move.

NASDAQ 100 index cleared $96 resistance and tested on Wednesday. Downtrend micro-term still in play and need to respect the move as this unfolds. DIA pushed to the 200 DMA and reversed lower Wednesday on the test of the resistance. Russell 2000 Index attempted to get through the 1110 level and tested as well. Just a day of testing all around and now we see if it can find the buyers necessary to carry the indexes higher.

Consumer price index (CPI) was in line with expectations and confirms Ballard’s comments on no inflation and that gives Fed room to extend the QE program through December or beyond. Great, procrastinate the inevitable.

So much for the move higher in crude oil as if fell 2.4% on Wednesday and put some stress back on the energy stocks. The commodity remains volatile and the downside trend is still in play. USO in position to test $30.35 support. A break would bring SCO back into play.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenge short term. Testing on Wednesday kept the indexes honest relative to the resistance points on the chart.¬†The¬†sellers took their best shot¬†and over the last month produced what amounted to a ten percent push lower prior to current¬†bounce in play. The micro trend is still down, but losing some control relative to the sentiment of investors and gaining on the downtrend line micro-term. 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¬†meeting is coming… plenty of bantering about what the Fed will say, do or not do. The Presidents are making comments all over the board to appease the markets and the global community. I am willing to wait and see how they handle the meeting and the outcome.

* ¬†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. We are in the process of building a second ‘V’ bottom potentially off the October 15th low. This would be a much deeper ‘V’ than the one in August if it completes the process. Not a likely event, but one to watch as the market attempts to gain some clarity moving forward.

Sectors to Watch:

Utilities (XLU) broke above the upper resistance at the $43.75 mark and gained better than 1% on Wednesday. A reverse head and shoulder pattern was the breakout move and now we look for test and confirmation of the move to add a position to the S&P 500 model.

Healthcare (XLV) hitting resistance at the $63.40 level and looking for the upside follow through. A test of the $63 mark and move higher would be a good confirmation read on the chart.

Telecom (IYZ) hitting resistance at the $$29.50 level and looking for the catalyst to break through and move to the $30.40 mark initially.

Transports (IYT) hit resistance near the $152 mark and tested back to the 50 DMA. The boost from airlines and trucking sectors has helped lead the broad index higher. Watch to see if it can gain enough momentum to move higher or do we test and then rise. Still looking for upside confirmation short term.

Russell 2000 index (IWM) tested lower leading the downside move on Wednesday. There is still plenty of work to do on the move off the low, but for now profit taking was leading the sentiment. Still look for investors to take on risk in portfolios, but has not materialized yet.

Gold (GLD) hit resistance at the 50 DMA and $120.25 mark. Bottom reversal in play and watch how this trades from here. Short opportunity in gold setting up.

Volatility Index (VIX) VXX tested the $32.30 support level and reversed on the day gaining 6.6% as the VIX moved back to the 18.4 mark. Move higher and the sellers may show up again. Watch to see how this plays out today.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated below. The current view is that rates will remain low as the Fed attempts to help everything from US income inequality to more jobs for global growth in Europe. The mandate has become to spread out and the effectiveness is equally as spread out. Watching for the downside in bonds to materialize, but patient for now. Closed near the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold.

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. If Humpty-Dumpty (treasury bonds) falls as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. 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 $80.52 down 2.4% and back at the low support levels again. How low does oil fall before finding the lows? The figure of $70 is being tossed around as if it is fact of late. This is creating a downtrend in the stocks with some volatility of late as the sector attempts to bounce. Short side still looks attractive on the bounce.

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:

  • Volatility index (VIX) fell back near the 16.3 level on Tuesday¬†and rose to 17.7 on Wednesday as some selling or profit taking was in play.¬†We hit our stops on¬†SVXY trade posted to the S&P 500 model. Got what we wanted from the trade and will continue to monitor the volatility for future opportunities.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and closed at 1940 (50% fibanocci retracement). Atempted to move higher on Wednesday, but this proved to be resistance for now. Held¬†above the 1900 mark and¬†the 200 DMA. 50 DMA. How much gas is in the tank for the move higher?¬†Watch to see how this unfolds… need to tighten stops on trades.
  • 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 continued on Tuesday and we will push the stop back near the break-even point on the day.
  • NOTE… this is a bounce trade until it validates to be more.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Adjusted positions.
  2. Pattern Trading Model below updated. Adjusted positions.
  3. Long Term Opportunities – added positions on Monday.

Pattern Trade Setups:

  1. Tested on Wednesday. Manage the positions and keep going forward. Looking for a test of the current move, but don’t see much in terms of the sellers willing to retest the lows currently. Patience and let it run. This is turning into more of a move upside than I thought initially, why you always let the market decide.
  2. CURE – entry $101. bottom reversal test. Resuming leadership in the sector short term. Target $108.

Pattern Trade Tracking:

  1. TBT – entry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.
  2. QLD – entry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. Stop $118.80. $121 target for trade.
  3. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Stop $62.50. Target $66.50.
  4. SSO Рentry $107.60. bottom reversal. Tested support at the $107 level and bounced, took entry on the trade. Stop $112.20.
  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. Stop $80.35.
  6. 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 $75.80.
  7. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. SOLD 1/2 on pop $84 Friday. Sold 1/4 at $93.70 Wednesday. Stop on balance $87.40.
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. Added 2500 shares today at the $16.35 mark. Stop is $15.