Trading Notes for Today, October 8th

Notes to Note: 

Welcome back to the volatility and fear about the future outlook. The rationale for the selling was concerns over Europe’s economic picture. This is not a new worry, just one being fed by the data as it is released validating what many already knew. The strengthening dollar, weakness and overhang from the sanctions with Russia and slowing growth in China. It all adds up to a slowdown in the European economic picture. You and I both know that the market needs a reason assigned to any abnormal events¬†on any given day. The bounce on Friday has been forgotten and the focus now is on the downside risk of the current markets relative to future growth and the current earnings not living up to expectations based on the outside events currently in play.

The day was about fear and warnings Tuesday. AGCO warned about earnings, downgrades from Wall Street anaylst in industrial and tech stocks, TCS missed top line number and warned forward, Samsung warned profits may drop 60%, continued weakness in European data, weakness in Chinese data, and the list goes on. It all added up to selling in the US on fear the weakness would spread here. That would be an accurate assessment and one that has been building. Watching how this emotional issue impacts the short term market direction, and downside is winning for now.

The long term trend lines are being challenged again on the downside and the lack of conviction about the outlook near term would give more validity to a break lower. Patience as this unfolds.

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 gave up the rally and tested lower on Tuesday. This was follow through to what started last week and the downside remains in play.¬†My downside target¬†remains the¬†1910 level near term. The short trade is SDS which we added in the Pattern Model below. Today:¬†Finding support is the next objective for the index 1925? 1900-1910? Downside in play until the support level is established… plain and simple.

Dow Jones Industrials (DIA) 16,600 level to watch for support. NASDAQ (QQQ) 4325 and the 200 DMA are candidates for support. The major indexes are being challenged on the downside similar to March-May move.

Consumer Staples (XLP) bounced off the 50 DMA and is pushing back near the top of the current range. A move to $45.75 would be interesting for adding a position going forward. Looking for the sector to hold up as a defensive stance to the selling.

Financials (XLF) Testing lower on selling Tuesday and now look for the trendline to hold or it could get ugly short term. Hold the trendline and move back above the 50 DMA.

Utilities (XLU) attempting to trade back above the $42.60 mark short term, but failed on Tuesday. Interest sensitive assets are rebounding as the yield on bonds are moving lower again on fear. IYR, real estate ETF is in the same boat on the consolidation and bounce with the $69.70 level to hold above.

Semiconductors (SOX) moved below last weeks low and testing the August low at 599. Break and the uptrend breaks. This is a negative to technology sector and the NASDAQ.

Bonds (TLT & IEF) The choppy issues in stocks are showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. Fear rallied bonds with TLT hitting $119.30 and is back at the August highs as fear is pushing money towards safety. 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. Tracking the run higher on fear and we will hedge our positions if the yields start to tick higher short term. TODAY: Money is trading in bonds, but the yield movement is is the key to the outcome in pricing. Watch to see how the minutes today from the last FOMC meeting impact the price of bonds. Anything unexpected and it could get ugly quick.

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 brought resistance and the index has reversed back below the 1085 level of support again and creating a new low. If it does not recover on a bounce today or shortly the downside gets uglier with 1038 a possible move. 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 and Tuesday. More selling or bounce?

Midcap 400 index broke the 200 DMA and support at the 1352 level¬†again and the downside looks to be accelerating.¬†Plenty of negative sentiment in the air currently.¬†Today:¬†Damage control or more selling… volatility in play.

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. Got the reversal selling and took another entry of $25 on¬†negative sentiment today. (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 — downside in play on negative bias.
  • 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.)
  • Basic Materials (XLB) added the short entry on the downside break in materials and they continued test lower. $47.60 support in play, but the target is near the $46 mark short term. Be patient and manage the risk of the trade. See stop below.
  • Natural Gas (UNG) still in trading range and bounced off support to keep position in play for now. Watching the upside move and follow through may add to our position with some positive confirmation.
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. The Egg Model scan came up with 9 sectors on the initial scans for upside plays. Five were inverse ETFs and four were bond ETFs. Summarizes well what is taking place near term.
  2. QID – entry test of the $45.40 level. No test, not willing to chase the entry. We got stopped out of the position on Friday. Watch and see how it unfolds today.
  3. GLD – entry $117.40. bouncing on the dollar dropping near term. The bottom reversal is a possible trade opportunity. Gold minders would be the bigger bounce if this follows through with NUGT or GDX ($21.25).

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. 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. $25 entry and stop is $24.57 same as above.
  6. 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.
  7. 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.
  8. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $16.50 ( Held Friday)
  9. 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)