Trading Notes for Today, October 24th

Notes to Note: 

Gap higher to start the day and traded higher until the Ebola announcement in the afternoon put water on the fire. The shift to positive again was driven by the earnings from the traditional industrial stocks like Caterpillar.In the end it was a good day for the broad indexes and the upside bounce remains in play.

On the Ebola issue, you can see the pressure this puts on the broad indexes, and if the issue in New York City does spread into more than officials are saying currently, look for the market to have a reaction itself. No way to plan for this and you have to be diligent with trading positions and stops.

New home sales out today and could help some in the housing sector if it reinforces what we heard earlier in the week from the existing home sales. ITB moved to resistance at the $24.12 mark and looking for a follow through breakout to move higher. This data could be the catalyst to the move higher.

The futures are pointing slightly lower as I post this… the Amazon / Microsoft impact looking neutral so far, but they are both worth watching going into the trading day. There influence on the index is important as is the response from investors on the stocks. Microsoft is in position to regain the previous uptrend and establish itself as a leader in the sector. Amazon will break from a long term consolidation pattern and confirm the long term downtrend in the stock. Watching to see what opportunities this presents.

It’s Friday and it promises to be interesting as usual. Looking for a quiet exit to the weekend, but there is always the news to deal with… manage your stops and look for the opportunities the market presents.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenge short term. Some testing on Wednesday kept the indexes honest relative to the resistance points on the chart, but move higher on Thursday to keep the upside in play.¬†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 has lost most of the control relative to the sentiment of investors. The indexes are making moves through the downtrend line micro-term and in position to reverse the micro-trend to higher. 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 next week.

* ¬†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:

Consumer Discretionary (XLY) moved through resistance at the $66.65 mark on Thursday and hit entry signal for the sector. We will look to add this position today if we can follow through on the positive move. entry $66.80 on S&P 500 model.

Preferred Stock Index (PFF) broke above the $39.50 level and holding. I was looking for a test to take an entry point, but that has not materialized. We will see if it holds tomorrow and add a longer term position with the dividend as the driver at 6.8%. Patience is required for this type of holding.

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. Earnings cut off the advance, but we will watch to see if it changes going forward.

Transports (IYT) hit resistance near the $152 mark and tested back on Wednesday only to break higher on Thursday. 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 back to the previous high or do we test and then rise. Target $156.

Energy (XLE) the sector pushed to resistance short term at the $86.50 level. If we can clear this on positive volume willing to add to our positions in the sector short term. The price of crude remain near the $80 support with a modest bounce in price on Thursday. Patience.

Downside:

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. The reversal off is in play with the move lower to $118 is test of near term support. Short trade is back? GLL entry $95 if the downside continues in the metal.

Volatility Index (VIX) VXX tested the $32.30 support level again today with the VIX falling to the 15.8 mark. Small bounce a move higher in the last hour of trading 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. TLT hit $119.40 support and held on Thursday. Added 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 mark relative to the price short term. The stronger dollar has pushed prices lower along with weaker demand. Closed at $82.02¬†up 1.8% bouncing back from Wednesday’s selling. 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 near $83 on crude if it fails to hold the move.

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:

  • Short Treasury Bonds (TBT) – TLT hit $119.40 support and held on Thursday. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold.
  • Russell 2000 index (IWM) tested lower leading the downside move on Wednesday. Led the upside move on Thursday and through the 1118 resistance. Down trendline is now it play as resistance. There is still work to do on the move off the low. Still looking for investors to take on risk in portfolios, but has not materialized yet. Take what the sector gives. own TNA in pattern trading model.
  • 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 on test¬†and confirmation of the move to add a position to the S&P 500 model. Holding steady and we maintain a positive outlook for the sector.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and closed at 1940 (50% fibanocci retracement) Tuesday. Attempted to move higher on Wednesday, but hit¬†resistance. Thursday added to the upside and looking to the next level of resistance at the 1970 level. ‘V’ bottom still in play on the upside. How much gas is in the tank for the move higher?¬†For now… enough.
  • 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 continues¬†as we push back near the previous highs.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, but it is still lagging as the earnings and outlook are still not attracting investors to any large degree. Clearing the $23 level is good point to add to position if you have not already done so.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and looking for the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation read on the chart. Attempted to buy CURE at the open of trading below, but missed the entry on the gap higher. Still like the upside move and the target on¬†the sector and we own XLV in the S&P 500 model.
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.
  4. Sector Rotation – Watch List Updated.
  5. ONLY ETF – Watch List Updated.

Pattern Trade Setups:

  1. Nice upside moves Thursday. Manage the positions and keep looking¬†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. Let it run and take what it offers. This is turning into more of a move upside than I thought initially, but that is why you always let the market decide and not your emotions.
  2. See note below for adding to positions and stop adjustments.
  3. BIB – entry $109 test or $111.45 max. Breakout. Be patient broke to new high on Thursday. If this confirms looking to add s short term trade on the leveraged ETF. need a test back of hold this level and move higher. Test is the preference for the trade entry.
  4. SCO – entry $37.85. Flag pattern on the uptrend of the ETF… if we break higher look for the trade entry on the move.
  5. DGAZ Рentry $5. Breakout from saucer or bowl pattern. Short trade set up for a second entry on the ETF. Cleared the July high of $5 and held on the close. Watch for this to confirm and add to the position as natural gas continues to struggle.

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. TODAY: Made nice follow through Thursday. If we test the move looking to add to our positions.
  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. TODAY: watch the AMZN / MSFT response and manage your stops.
  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. TODAY: could add to the position on move through resistance at $66.42.
  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 $81.10. TODAY: Break above resistance (82.30) good point to add to position.
  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. TODAY: Break above resistance at $81.06 is of interest to add to positions.
  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. Managing out the tail of the holding for now with stop as exit.
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.