Trading Notes for Today, November 7th

Notes to Note: 

The market spent most of the day trading in place. The economic data remains a non-event this week as the jobless claims, productivity and labor cost were steady. Today we have the jobless claims prior to the open and I don’t expect much in terms of news to change the direction short term. We will end the week with solid gains and new highs on the S&P 500 index potentially as investors digest all that is and look toward what may be. Very philosophical today.

Industrial stocks are continuing their break higher as they take on a leadership role. Airline stocks have been the strength of the sector, but construction and equipment companies are making a move higher. Scanning the sector on Thursday showed positive pattern setups for trend reversals. Take some time to look at this sector with JOY, DE and MAS all looking positive.

The energy sector is still on the lips of most traders as it determines direction in relationship to crude oil prices. The uncertainty about oil prices going forward has both sides debating the outcome. I do like parts of the sector as refineries and conglomerates remain attractive long term. Worth watching the technical setups with consolidation patterns showing some opportunities.

That one looming question I stated yesterday is still in my mind… is this rally or push higher a set up for a correction going forward? Climax runs tend to end poorly, and unless there is a rabbit in the economic hat as we hear more, at some time we have to balance the price of stocks with growth. I am still invested, still managing my risk, but paying very close attention to the signs of the data as it unfolds. Proceed with caution and manage the downside risk.

Some thoughts on news/events impacting investor psyche:

* Economic data providing a spark as hoped and we continue to watch as the data is reported… like watching paint dry. Not exciting, but hoping it will change the look of the house. So far is looking uneventful, thus take it as it goes one day at a time.

* Saudi Arabia announcement to cut crude oil prices to the US and in so doing create a price war in the production of¬†crude oil. This could disrupt the sector and overall markets in other ways as well. More will develop over this issue moving forward. On Wednesday it was if someone said… forget about it! Crude oil rose 2.3% and the sector rallied with it.

* New event building momentum in the markets… global stimulus. The dollar has jumped higher, commodities have fallen and US stocks are running. How long does it go? Use the US Federal Reserve as a benchmark… they were engage in the latest stimulus for two full years. That leaves plenty of time globally for this to all unfold.

* FOMC¬†meeting¬†put some new things on the table, but will they add anything to what investors expect? My initial reaction to this was no, however, we did see the GDP revisions higher than expected at 3.5% growth and it did lend some credibility to the Fed. That in turn pushed stocks higher. There may be more benefit from the Fed comments as the October economic data is released.¬†One reality check in the GDP data… government spending rose and accounted for 0.82% of the growth. That leaves 2.7% real growth. I know the truth doesn’t apply to an emotional market, but it is just another reason to keep your stops in check.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward.

Sectors to Watch:

Energy (XLE) is still reacting to oil as prices on the commodity climbed back above the $77 mark on Wednesday and we watch to see what the future holds for the commodity. Oil is off the newly minted low from Tuesday and the future of pricing has not gained any near term clarity only speculation on consumption, demand and outlook.

Natural Gas (UNG) was on the downside trek.¬†As we discussed in the updates¬†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. We finally got a nice bounce off the lows¬†last¬†week and heading to the next¬†resistance level on UNG at $22.30 (hit on Thursday).¬†¬†Positive move for the commodity will eventually translate into upside for¬†FCG as the stock ETF in a bottom consolidation pattern.

Downside:

Volatility Index (VIX) The index moved lower on the week and tested below the 14 mark over the last week. The challenge is now back on the sellers as to how they will approach the found optimism about the markets overall. For now watch the volatility and see if it provides any clues on direction near term. Move above 15.5 would favor the sellers and below 14 the buyers.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated, but bonds rallied following the FOMC announcement. 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. TLT hit $119.40 support, held, but tested lower this week? Added the entry at $51.80 on TBT. Trade is failing to accelerate and we will raise our stop and see how the bonds trade short term. No progress in the yields moving higher this week and the speculation has all but died. Watching with tight stops for now.

Crude oil remains a big question mark relative to the price short term. Crude Oil (USO) Рmoved lower and broke lower from the consolidation pattern and is attempting to hold this newly printed low and produce a bounce. Thus far that has not materialized.  This keeps the downtrend in play as stronger dollar and weaker demand outlook keeps the pressure on the price of oil. Downside holds the bias for now.

Precious Metals are struggling to gain any upside momentum. Gold is at new lows, Silver is at new lows along with Platinum and Palladium. Not looking good as each continues to find new lows.

Model Position Notes: 

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

  • Energy (XLE) the sector pushed to resistance short term at the $86.50 level and attempted to break higher this week, but stalled on the concerns over crude oil prices¬†and worked lower.¬†The price of crude is still testing lower and causing grief to the sector.¬†This sector will require patience for the answers to unfold. Willing to add small allocation on break above the $87 mark if that takes place. Added (Sector Rotation Model). Manage our risk short term. Small bounce and breathing room on Wednesday for the stocks.
  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through on Friday. We will look to add this position if we can follow through on the positive move. Added to the S&P 500 Model.¬†Wednesday produced an inside trading day and looking to see how that unfolds today. (posted to the Sector Rotation Watch List)
  • Gold (GLL) hit resistance at the 50 DMA and $120.25 mark. The move lower offers downside risk to the metal.¬†Short opportunity in gold set up. The reversal is in play with the move lower 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. ¬†Move stop to $105 on the trade. Added ONLY ETF Model
  • Preferred Stock Index (PFF) broke above the $39.50 level and holding. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Model.
  • Short Treasury Bonds (TBT) – TLT hit $119.40 support and held again 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. Raise stop to break even trade at $51.80 on renewed worries with FOMC meeting.
  • Russell 2000 index (IWM)¬†Led the move off the lows and cleared¬†the 115¬†ish resistance on gap higher last week. We have been looking for investors to take on risk in portfolios and this week the stepped out.¬†Taking on some new leadership… adjust your stop accordingly.
  • 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.¬†Big move higher as rates settle and buyers were engaged. Holding and letting it run for now. S&P 500 Model. (Watch any move higher in interest rates to impact the sector short term.)
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. Continued to move higher¬†tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. How much gas is in the tank for the move higher?¬†For now… enough. Now at new high.
  • REITs (IYR) the break higher 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 right up to the FOMC meeting and tested lower¬†and bounced back to end the week. (Watch interest rates as a move higher will impact the sector.)
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was¬†lagging as the earnings and outlook were not attractive to investors. That changed following the FOMC meeting and now testing the highs.¬†Adjust your stops and manage the risk.
  • 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. 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¬†is setting the pace on the upside move. Lead by example. One question mark is the election… will the republicans attempt to overturn Obamacare or parts of it? Could impact these stocks. IHI rallied on belief they would cut the tax assessed to these products.
Watch List Opportunities:
  1. S&P 500 Model РAdded to watch list РAdjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Long Term Opportunities –¬†Added puts.
  4. Sector Rotation – Updated stops.
  5. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Still consolidating on the move through the previous highs. Watching, looking and planning on a catalyst to drive the indexes higher or else the test lower could evolve near term.
  2. DE – entry $86.50. ascending triangle. broke higher and looking for test and move higher today. Not willing to chase.
  3. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive.
  4. CMI – entry $147.50. flag consolidation. Look for follow through on the upside move. volume would be good on the break as well.
  5. SDS – entry $23.40. bottom reversal. The top is looking more like it is in short term. look for volume to spike on a move in the ETF.
  6. FCG – entry $14.75 (adjusted based on UNG move higher). Double bottom and reversal on natural gas. Commodity made bounce off the lows and looking for the upside trade short term on stocks in response. Natural gas moved higher and energy stocks holding up… patience to see if this plays out.

Pattern Trade Tracking:

  1. VXX – entry $30.90. Support test and reversal. Some activity on Monday… if follows through trade to hedge positions below would be prudent. Stop is $30.
  2. SDS – entry $23.55. Bottom reversal. Overbought technically on the index and a test would not be out of the question relative to the move. Hedge to our positions below as well. Stop at $23.
  3. TBT – entry $52.85. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position. Stop $51.80.
  4. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $110.
  5. 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 $140.50.
  6. 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.
  7. 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 $128.65.
  8. 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 $72 on all shares.
  9. 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 $120.35 on all.
  10. 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 $86. 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.
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. Flat lined after open… still like the upside and will be patient. Add Dec $75 puts @ $3.50 – 10 contracts.
  • 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. Add Dec $40 puts at $2.50 – 10 contracts
  • 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 at the $16.35 mark (10/21). Stop is $15. Added to our Jan 16 calls same price.