Trading Notes for Today, October 29th

Notes to Note: 

Buyers showed up again on Tuesday to push the broad markets higher and through resistance.This is getting interesting relative to how fast we have climbed back to the previous highs following what amounted to a 10% drop top to bottom. The earnings reports were positive for the day, but that changed after-hours with Facebook. They posted great numbers, but stated costs would rise in 2015 and we cut 10% in minutes? We own it and will deal with the move just like Twitter. The long term outlook remains positive and adjustments will be made to deal with sell off. News and reactions are driving investor reactions more than research. Thus, watch for the volatility to return on any negative news in specific stocks or the market if the Fed doesn’t act according to beliefs.

Drivers for the move through resistance on Tuesday? Consumer confidence numbers jumping to 94.5 from 89 showing renewed belief in the economic picture and labor markets. This was a seven-year peak for the number. The bigger question is do you really believe the consumer is this upbeat about the outlook? Then why was the September sales report so bad? Speaking of bad, durable goods fell 1.3% in September and no one said  a word. That is a number that matters to the economic picture, but ignored? The data is not showing growth relative to the bounce we are getting in stocks. FOMC meeting is the real driver, my belief, and it will hold the key for investors today and going forward.

Today promises to be more fun than anyone can stand! First there is the GDP revisions for Q3 with expectations lowered to 3.1% from the 4.6% previous estimates. Then at 2 pm we get to hear from the Federal Reserve meeting on what to expect relative to interest rate hikes and quantitative easing. Not expecting much and maybe even a punt to the December meeting before we get any additional clarity near term. Too much rhetoric and the markets will react negatively to the delay. Watch and see, then we decide.

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenged short term. Some testing has¬†kept the indexes honest relative to the bounce,¬†but the move higher is attempting to put 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 downtrend has shift control to the buyers, but faces resistance levels that could derail the move. Monitor the bounce and take what trades work for your strategies, but remember the objective is to manage risk as well as making money.¬†Don’t let your emotions get the best of you and remain true to your investment strategy.

* FOMC¬†meeting is finally here and with all the bantering and ranting the biggest questions are¬†what the Fed will do relative QE and equally as important what do they do with interest rates? We have waited patiently to hear the direction they offer… if they are more aggressive than thought it will spark some selling. Investors are looking for the just right approach… whatever that is. All eyes will be fixed on 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.¬†So far it has passed the test and this week will tell how it comes out.

Sectors to Watch:

Consumer Discretionary (XLY) moved through resistance at the $66.65 mark and stalled. The 50 DMA is just overhead and the upside gained some ground through the $66.65 level on Tuesday. 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. Consumer confidence data should offer some help.

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. ADDED position to Sector Rotation Model.

Telecom (IYZ) hit¬†resistance at the $$29.50 level and moved through it on Tuesday’s push higher. Next¬†move to the $30.40 mark initially. Gaining some momentum from some of the laggards. Scanning the parts shows some positive moves from CBB breaking from a base and CNSL breaking to new high. Large caps are still lagging in the sector.

Transports (IYT) moved through the resistance at the $152 mark and hit new high on Tuesday. The boost from airlines and trucking sectors has helped lead the broad index higher. We hit the target of $156 on Tuesday as well. Worth scanning the parts to find some good pattern setups currently.

Energy (XLE) the sector pushed to resistance short term at the $86.50 level and tested lower on the concerns over crude oil prices. The argument is about the price bottoming or heading lower? The price of crude remain above the $80 support for now and worth our attention for direction in the sector going forward. This sector will require patience for this to unfold.

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. Watch the dollar direction for some help on where gold will go short term.

Natural Gas (UNG) continued the trek lower.¬†As we discussed in the weekend update you have to question how much lower natural gas can drop. The Farmers Almanac is predicting a colder winter and that would bode well for the commodity. Time will tell… take what the direction dictates and manage the risk. Bounce on Tuesday stalled the selling for the day, but watching now for a follow through on the upside.

Volatility Index (VIX)¬†The index made move back below 16 on Tuesday reflecting the willingness from buyers to put money to work short term. SVXY trade has been positive on the reversal of fear and more comfort building in the buying. Still watching to see if the anxiety returns as the bounce continues to play out as a ‘V’ bottom currently.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated. 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 too 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. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. FOMC meeting concludes today and it will have an impact on the bonds. Manage stop on TBT for meeting.

The speculation is for rates to rise in response to the Fed hiking rates next year… not happening as the Fed talks stalling the rise to late 2015. 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 the threat of higher interest rates¬†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. Trade the swings until the direction defines itself.

Crude oil remains a big question mark relative to the price short term. The outlook offered from Goldman Sachs is in line with our thoughts on the topic. The stronger dollar has pushed prices lower along with weaker demand globally. It continues to hold above the $80 level for now. Goldman pegged the price at $75.¬†I would look at this as a possible target and then a move higher in time. Don’t be surprised if we bounce first and then sell lower. Too much uncertainty for my trading taste.

Impact of Crude oil on other sectors however 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).¬†This is already heading higher with all of these sectors. Manage your positions and enjoy the ride. It help you pay for¬†you next airline ticket.

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 for now. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Tested and allowed to add to position if you wanted on Friday.
  • Russell 2000 index (IWM)¬†Led the move off the lows and has worked its way back to the $111 ish resistance. We have been looking for investors to take on risk in portfolios, but has not materialized yet. Tuesday was a start with the 2.4% gain in the sector on the move higher to the 200 DMA. Could test this move, but positive gains for the index.
  • Utilities (XLU) broke above the upper resistance at the $43.75 mark and confirmed the move higher. 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. Could test lower if rates rise… watch how it unfolds the balance of the week.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and closed at 1940 (50% fibanocci retracement). Continued to move higher last¬†week and is now in position to clear the next resistance at the $117.50 mark. (CHECK – did that on Tuesday, but needs to hold the move.) ‘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 with consolidation to end the week.
  • 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. This is a key resistance level to clear if upside is to continue.
  • 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, 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. First sector to recapture the September highs and could be indicator for the balance of the market.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Adjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Long Term Opportunities – Managing earnings issues.
  4. Sector Rotation – Updated.
  5. ONLY ETF – Updated.

Pattern Trade Setups:

  1. Nice upside moves last week establishing the move off the low to be more than a bounce for now. Manage the positions and keep looking forward. Looking for a test of the current move off the lows and the Fed could be the catalyst for such an event. Watching today for the reaction and effect looking forward.
  2. Today managing stops and looking to take some profits off as we move back to the September highs. If the Fed helps we go higher, if they disappoint we test lower. Facebook disappoints on outlook? Too many loose end for me and we have to manage our risk in light of the exposure.

Pattern Trade Tracking:

  1. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $137.
  2. SCO – entry $37.85. (10/24) Flag pattern on the uptrend of the ETF… if we break higher look for the trade entry on the move. Stop $37.
  3. BIB – entry $111. (10/24) 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. Stop $116. Nice move higher after entry manage the stop.
  4. TBT Рentry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.50 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  5. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday Рentry $125. (10/27) Stop $124.90.
  6. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50. Added¬†to the position on move through resistance at $66.42. Entry $66.45. (10/27) Stop $69.15 on all shares.
  7. SSO – entry $107.60. bottom reversal.¬†Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside –¬†entry $$117.10.(10/27) Stop $116 on all.
  8. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $83. Break above resistance (82.30) good point to add to position. Added to position Рentry $82.50 (added 2.5% 10/24) same stop on all.
  9. 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 $97.50. 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) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning¬†were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Watching today for it to bottom out and add to position as it since. Patience today as other news will impact later in the day with FOMC.
  • Twitter (TWTR) – $50 entry (10/20 1000 shares).¬†Removed stop with the gap lower pre-market of better than 12%. Added 500 shares at $42.80 (10/28) late morning as the dust settled. This is a long term holding and we trade around our position now and look at some option trades on this move.
  • 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 (10/21). Stop is $15.