Trading Notes for Today, October 3rd

The Watch List and Play List have been updated for today. Review and execute according to your risk and investment objectives. If you have specific questions on any posts please forward them directly to Jim@JimsNotes.com.

Sectors to Watch:

  1. Still no budget and the headlines remain telling us how to trade the shutdown. The volatility of the markets (choppy or directionless better description) which is a result of a lack of clarity. This is not the kind of market you want jump blindly into with any assumptions in either direction. The market has now spent three days determining what the options are relative to the budget and now the debt ceiling is approaching. Until there is some kind of resolution and clarity I would expect more of the same from this market short term. The real crap to hit the fan is about to begin with earnings. Since I like fundamental data, some statistics to think about heading into earnings… Earnings growth in Q2 was 3.8%, estimates for Q3 is 3.2% as published by FactSet data. Prices tend to follow earnings and this could prove to be an even bigger challenge going forward. The current forward valuations are 14.4 times earnings. The five year average is 12.9 times and the ten year average is 14 times. All food for thought going forward and you may want to consider that this means more to investors than the budget issues currently dominating the headlines.
  2. Solar (TAN) continues to move higher adding better than 7% this week. First the move above $31.10 and then the follow through on the upside as stocks in the sector look good. Not overbought yet, but time to consider how to manage the gains.
  3. Small Cap (IWM) is where we continue to look for some direction on the upside. The sector tested $105.25 bounced and held the 10 DMA. There is continued resistance at the $107.50 ish mark. Looking for some leadership from the sector if the upside is to remain in play. Got it on Tuesday with a move above the $107.50 level for entry and held the gains on Wednesday despite the selling.
  4. Real Estate (IYR) The opposite of the small caps as real estate is struggling to hold support at $63.80. Fear of the government shut down impacting lending in the housing sector, the economy weakening and just good old uncertainty are adding to the downside pressure in the sector. Solid bounce on Tuesday to push back towards $65 and a move higher or break above resistance is what we continue to look for short term. (S&P 500 Model Watch List)
  5. Homebuilders (XHB) is consolidating the solid move higher. $30.20 is support and I still like the upside short term. Look for a move back towards the $31 level short term and the add to positions with a $31.05 entry point.
  6. NASDAQ 100 index (QQQ) bounced back above the 10 DMA for the second day. The move lower has been methodical. This is an index worth our attention going forward… short or long. $78 support held on Monday, but on the downside $77 is the key support should the sellers push lower for now. Nice move on Tuesday to the upside and $79.70 entry opportunity on move higher and follow through.
  7. Dow Jones Industrial Average is leading the downside as it confirmed the move below the 50 DMA and testing support. The index gets the award for short term volatility. 15,450 is the level to watch on the upside and 14,750 on the downside. The 15,100 level is current support and if the downside is to accelerate it will need to break below that level short term. DIA comes into play at $151.80 confirm on the upside move.
  8. Healthcare (XLV) retreated back to the 50 DMA and held for now. This has been one of the leading sectors with Biotech and others pushing the broad index higher.  Some downside pressure from the healthcare providers (IHF) as the media over hypes the Healthcare Act and the potential impact on the sector and the economy. IHF found support at $87.30 and bounced. IBB is back and pushing towards the high. XPH still holding an uptrend and the 50 DMA.
  9. Technology broke support at $32.10 after testing that level for several days, only to reverse on Tuesday. The longer term uptrend remains in play, but the caution comes with the short term selling. The semiconductors (SOXX) tested support ($65.95) and held up well in this environment… looking for a upside bounce opportunity and follow through. Internet (FDN) at a new high and positive trend. The internet space has been a leader in the move. Software (IGV) sold lower and in consolidating near the high (reversed off support). The networking (IGN) sector sold lower breaking support at 50 DMA, but the buyers stepped in and reversed short term. Watch tech for some short term leadership.
  10. Financials (XLF) broke the $20 level support, but has somehow managed to hold on for now. Banks (KBE) remain the challenge and with no clarity it will keep the sector neutral at best as the downtrend remains in play. SKF is short financial ETF, $21.05 was our entry and we have to manage against the downside reversal. Patience as this all plays out.
  11. Utilities (XLU) is settling $37.20 support. I still like the sector longer term outlook for the patient investment. 4% dividend and long term growth work well.
  12. Added Telecom (IYZ) to the S&P 500 Model Watch List. Looking to break higher from the consolidation range above $28.
  13. The futures are moving up and down pre-market in reaction to the “no-negotiation” meeting on Wednesday evening at the White House. As Johnny Depp said in ‘Pirates of the Caribbean’,  “But why the rum?” Makes no sense, but then what does in Washington these days. Watch to see if the sellers get control today or if it is more of the same intraday reversals.

The models are stalled as the current trading environment introduces too much risk for too little reward or, at best, banging your head against the wall. The resulting uncertainty in direction has presented a lack of clarity for the broad markets. Throw in the fight about the budget and you get the potential pullback or test of the uptrend (as seen on Monday) or the upside euphoria (as seen on Tuesday). The market is in the midst of a test, but we have to be cautious as the uncertainty has created a choppy market. They are bad for trading as you get whipped in and out of positions. Thus, we remain patient and let this unfold. Earnings are around the corner with plenty of economic data to add to the mix and the budget wars continue with the debt ceiling on the horizon. Look for the opportunities in the over reaction to the news as it all unfolds.

Pattern Setups For Today: We continue to manage the risk of the market and make our adjustments as necessary. Choppy markets lack clarity and we have to be patient as the trades and leadership establish themselves.

  1. More noise today
  2. PSX – Base trading range. Entry $59.50. Series of higher lows off the August lows. Ready for move to $64?
  3. Follow up on previous trades or posts:
  4. SUNE – Ascending Triangle – Break above the $8.35 mark. Entry $8.37 (not hit still watching). Semiconductor sector still in good shape.
  5. XRT – cup & handle. Break above $82.90 new high and entry (Not hit still watching). Consumer still consuming.
  6. COF – cup & handle. Break above $69.80 new high and entry (Not hit still watching). Consumer credit.
  7. FSLR – saucer. Break above $41.62 entry. look for test and max entry $42.30. Entry $42. TAN is running higher showing strength.
  8. AMCC – trading range BO. Entry $12.95 on break higher. Positive sector on upside move. Didn’t get the move higher, watching today for the follow through.
  9. SFUN – pennant. Attempting to resume the upside move. In the internet sector which is one of the leaders. Entry test of $51 level. Took entry on the test $51.30. Stop $49.40.
  10. BXP – Trend Test. The spike higher from the FOMC news has fully tested back to the trendline. Held above the 50 DMA and ready to bounce higher. Entry $107.30. Added and looking for the upside follow through. Stop $105.50.
  11. JASO – trading range – moved back to the top of the range. entry $9.60. Added and watching the upside? Stop $10.17. Sector remains positive.
  12. STX – Cup. Break above $41.90 on volume is the entry. Entry $42.  Stop $43.80. Look for sector momentum to continue to boost the upside. Nice bounce higher, but watching the outcome.
  13. TRIP – Consolidation on gap higher. Entry $75.50. In leading internet sector. Stop $76. Nice follow through on upside finally.
  14. XNPT – Pennant. Entry $5.80. In leading sector. Added on Tuesday @ $5.80. Stop $5.60.
  15. DIA – reversal and support break. This has set up a downside play worth watching. entry DXD $32.60. Stop $33.10. Watch and manage today as news is driving direction. Take exit if stops are hit today.
  16. IWM – base breakout and trendline. $102.50 entry. Stop $105.50. Let the open move through and held the position on the recovery on Monday. Nice break high on Tuesday. Watching to see if follows through.
  17. KOG – ascending triangle breakout – cleared $10.30 for the entry and made move higher. Entry $10.40. Stop $12. Getting extended on the upside and looking to lock in some gains on half of the position today. Watch to manage the exit. Doji on the close Wednesday?
  18. SBUX – Test of support $70. Move above $71.30 for the entry. Added trade $71.30. Stop $75 both positions. Add to the position on confirmation of move above $72.50. Back to the top end of the range. Manage the profit as we hit against resistance.

Facebook (FB) Update:

  • Facebook – The sentiment towards the stock has shifted as it found support at the $22.80 level and moved to the top of the trading range before breaking higher and adding positions. The move above $24.50 was entry for position.
  • Added position at $24.75 (1000 shares). Stop is $22.75 for now. A move back above the 200 day moving average and we will add to the position. (Added 1000 shares at $25.65 on break) Sentiment towards the stock short term is gaining. Consolidating at the current levels and holding. Still like the upside near term as it is gaining positive comments from analyst.
  • Earning beat expectations on Wednesday and the stock jumped 29%. Here is where greed versus objective comes into play. This is a long term play and if the gains hold up today in trading the upside gain on the position is tempting. We will now have to design a way of protecting or realizing part of the gain short term. Be patient with the position on the upside as you are on the downside. Interesting link on earnings for facebook
  • 8/13 – The stock broke lower from the pennant. Watch and manage your risk. As stated yesterday we are going to establish a hedge to protect the downside risk. Add a December $37 Put on FB @ $3.35.
  • 9/2 – Nice bounce to $41.34 and new high. Tuesday reversed the move higher as markets react to speculation. Watching for any trading opportunities off the pullback test and then a move higher. Test of $39.30 level is the key to hold. If reverses back to the upside looking to buy 1000 shares as trade back to $42. 8/28 – Added 1000 shares at $39.95 for trade. Stop on that trade is $39.95 or break even now. If we hit the target at $42 sell half of the 1000 shares. Sold 1/2 ($42) on 8/30 for nice gain. Sold balance at $43 – 9/16.
  • 9/16 – Broke higher to continue the move, but it was a result of rumors relative to China allowing Facebook to operate within the country. They currently do not, and this would be a big opportunity. Based on the research behind this rumor there is no substantial evidence to any of the reports. Thus, I would expect the run to soften as the reality takes place on no deal in China.  Sold position on the selling on Monday in opposition to the market. Booked the profit and now watching to see how this news unfolds going forward. I never like a 4% decline in a stock…
  • 9/20 – love the way things work out sometimes. 6% bounce and back to the top and resistance and followed through to new high. Got the last of the sellers out of the way? Watching to see how it acts here. The addition to the NASDAQ 100 index added the initial upside move. Got big follow through on Friday with options expiration and the index rebalanced.  We will hold our long term position and look for the opportunity short term. Patience.
  • 9/27 – upgrade by Citigroup. Cleared the $50 level on Thursday. Watching to see how this holds up as the quarter ends and earnings are around the corner — Oct 21st. Still holding the uptrend and dealing with the current volatility of the markets overall.

NOTE: The pattern trades above are setups that I see for a potential swing trade or 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. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.