Trading Notes for Today, October 7th

Notes to Note: 

Monday intraday trading was a perfect example of what is happening currently in the broad markets. The positive open faded to test lower and then end the day essentially flat on the day. Small caps led the downside again with the Russell 2000 index closing at 1094 and testing the 1090 level again. No big changes in direction and as we stated in the weekend update we are likely to consolidate and trade sideways with some volatility day to day into the start of earnings. The key is to remain patient and take what the market gives as this plays out. The bias remains with the seller short term from our perspective.

The long term trend lines are holding currently and a break would solidify the negative tone.

Some thoughts on news/events impacting investor psyche:

* ¬†Economic data remains on the flat to negative side from last week. The global economic data isn’t much better. This week will need some validation of optimism for growth or at least hope of growth going forward to reverse the negative reactions generated the last two weeks.

*  Trading environment is compressing holding periods on trading positions. Thus, the choppy markets are in play and we have to respect that relative to trading. The swing lower broke key support levels last week, but Friday was enough to let this unfold to start the week. If the volatility returns it is wait and see. If the downside resumes it could accelerate quicker this time around. Patience and trade with stops in place to protect against the unforeseen.

*  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.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level (now resistance) and tested support at the 1926 mark Thursday. Intraday reversal on Thursday and follow through on Friday bounced to 1967.  Hit the 1978 resistance Monday and working through the negative sentiment closing near the 1963 mark. My downside target remains the 1910 level near term. The short trade is SDS which we added in the Pattern Model below. Today: will the upside gain any momentum? 1978 is level to watch short term.

Consumer Staples (XLP) bounced off the 50 DMA and is pushing back near the top of the current range. A move to $40.75 would be interesting for adding a position going forward.

Financials (XLF) bounce above the $23.30 level is point of entry potentially for the index. Held the trendline and back above the 50 DMA.

Utilities (XLU) attempting to trade back above the $42.60 mark short term and trade the upside move. Interest sensitive assets are rebounding as the yield on bond hold steady. IYR, real estate ETF is in the same boat on the consolidation and bounce with the $69.70 level to hold above.

Bonds (TLT & IEF) The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. Fear rallied bonds with TLT hitting $118.42 and continues to test near that level currently. The FOMC meeting this month will likely put and end to the QE program and then all eyes will shift to Fed and interest rates. TODAY: Money is trading in and out of bonds, but the yield movement is is the key to the outcome in pricing. Watch to see how the minutes Wednesday from the last FOMC meeting impact the price of bonds.

Small Caps (IWM) they were down over last four weeks and technically oversold. They produced bounce intraday on Thursday and followed through on Friday. The 1110 level is the next to clear if the bounce is going to amount to any more than just a bounce. On balance volume has dropped, relative strength remains ugly and continues below the 50 and 200 DMA. Short has been the position to own, but watch closely and manage your stops. Today: Watching how it responds to the drop lower on Monday following a doji close on Friday.

Midcap 400 index broke the 200 DMA and support at the 1365 level, but recovered that level barely on Friday. Bounce is what we watch and if it fails to hold we add a short trade on the move. Today: need to move back above the 1371 mark on upside.

Model Position Notes: 

Below are some notes on positions in models and what we are watching looking forward:

  • S&P 500 Index (SDS) Made the break lower and looking to add to the position is selling resumes. Took¬†entry of $24.85 on¬†negative sentiment last week. (SH in S&P 500 Model) TODAY: Watch and manage the risk of the trades and watch how the trendline fares in the current move with the bounce from Friday in play. Stop $24.57
  • Consumer Services (XLY)¬†after a set up to break higher the sector broke support on the downside and the short term trade.¬†The $67.60 mark¬†was¬†the downside break and added¬†the short trade. (Pattern Trade Model) ¬†Got the downside follow through and¬†HIT Stops on position Friday and watching to see if the upside creates another short trade opportunity in the rally.
  • Energy (XLE) the sector struggles are a result of the¬†drop in crude and hasn’t helped the current downside with a target for oil¬†at¬†$85.77. If that happens the short trade in XLE will benefit further. Added the short side trade (Pattern Trade) and managing the risk.¬†The short trades with DUG added as well. (ONLY ETF Model) Short side played out well and holding. TODAY:¬†Looking for any follow through on the downside selling in crude. Adjust stop to $88.80. (held position as the gap up didn’t hold the gains early.)
Watch List Opportunities:
  1. S&P 500 Model – updated watch list
  2. ONLY ETF Model – updated model table.
  3. Pattern Trading Model below.

Pattern Trade Setups:

  1. SPY – entry $196.75. bottom reversal. Trade back to 2000 on the index. Stop $195 on entry. Monday gapped open and retreated on the day, if the upside finds upside momentum still looking for the trade.
  2. JPM – entry $60.50. bottom reversal. Trade back to recent highs. Stop$59.75 on entry. Monday gapped open and retreated… if the upside gains traction we will still take the upside trade.
  3. CRM – entry $58.50. bottom reversal. Trade back to the recent hights. Stop $57.50 on entry. Monday gapped above the entry and then retreated lower on the day. Still looking for upside trade if the momentum resumes.
  4. GOOG – entry $577. bottom reversal. Trade back to the top of current range. Stop $570 on entry. Monday gapped higher and the entry is still worthwhile if the upside resumes.
  5. SDS – entry $24.85. bottom reversal test. This is the same level we took the second part of our trade on the short trade. Opportunity to add to the position if we hold the upside move in the short of the S&P 500 index.

Pattern Trade Tracking:

  1. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $49.80
  2. UNG – entry $22.15. trading range breakout. Good base on the commodity and a breakout would be a trade on the upside move. Willing to add to the position on a positive test look longer term than trade. Stop $20.65
  3. SDS РEntry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK after stop had it too tight) Stop $24.57 (held Friday)
  4. SDS –¬†entry $24.85. Add to position if the downside continues. Stop $24.57¬†(held Friday)
  5. XLY РShort entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $66.25.
  6. XLE Рshort entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $88.80. Reversal candle sitting on the 200 DMA Рwatch to see if it confirms in the AM and manage the stop.
  7. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $16.50 ( Held Friday)
  8. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
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. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $73.80. Joined the distribution process. However, still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to¬†$47.25 for now on position and we will make adjustments as we go forward.
  • Bank of America (BAC) entry $16.30 2500¬†shares added on 8/25. This has been a long term recommended stock for the last three years and we continue to own the stock as a core holding in portfolios. We will start tracking here for our long term components to follow and trade against the positions. (we also own the Jan 2016 $17 Calls at $1.85)