Trading Notes for Today, October 9th

Notes to Note: 

Just turn the clock back two days and nothing happened except a lot of shares traded hands¬†with little to show for the trading other than anxiety. We closed at 1964 on Monday and Wednesday at 1968? This morning we tested the 1926 mark again as we did last week with the same result… a bounce off the support and move back on the upside. Volatility at its best is all I have to say. I would like to say manage your positions, but at this point you probably don’t have any and feel better in cash. The lack of ability to follow through on the downside is evidence enough the buyers are willing to step in at whatever point they feel the value is fair. However, this time they get a big assist from the Fed. We all know that Fed driven events have elasticity. The indexes held the trendline and we move to today’s trading¬†with less hair and a slightly elevated blood pressure level. A second intraday reversal that sets the market up to make another run at the 1985 level near term.

If yesterday was about fear and warnings relative to Europe, Asia and the emerging markets… what was today about? The end of the worry and all is well with those countries overnight? No today was about the FOMC minutes having a dovish approach to interest rates laid out by the Fed officials. Well of course they know what they are doing and the worries evaporated and the buyers surfaced. Albeit some of those buyers were covering short trades. As I stated yesterday the reasons pontificated by the media is never reality only an explanation that sounds plausible for the day. Stay focused and don’t out think the current events. Let it settle and then take what is offered as an opportunity. We have to respect the fact this move is Fed driven, even if the Fed doesn’t have a clue what to do currently.

The long term trend lines were challenged again on the downside and the bounced again at support leaves us looking for direction and understanding relative to the activity in the broad markets. Patience is the only word that comes to mind.

Some thoughts on news/events impacting investor psyche:

* FOMC minutes put traders in a better mood and the rally sparked intraday puts an end to the oversold conditions and we will see how the sentiment looks to start the trading day today. At this post the future are up 0.5% which will push quickly to the resistance points.

* Economic data remains on the flat to negative side from last week. The global economic data isn’t much better as seen on Tuesday. 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…. OR positive comments and input from the FOMC.

* ¬†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 the bounce off 1926 twice has been¬†enough to the trendlines in play on the upside. If the volatility returns it is wait and see.Patience and trade with stops in place to protect against the unforeseen (Wednesday’s FOMC minutes).

*  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. Cash remains king for now.

Sectors to Watch:

S&P 500 index gave up the rally and tested lower on Tuesday, started lower on Wednesday and then bounced to hold support at the 1926 mark again. This was an event (FOMC Minutes) driven bounce and one that could last a couple of days heading into earnings. My downside target¬†was the¬†1910 level near term. We didn’t hit that level, but now we watch to see if we make it back to the 1985 mark. The short trade is SDS which we added in the Pattern Model below¬†hit¬†the stops. Today:¬†Does the bounce have legs? I am of the opinion this will have more than the last bounce based on the catalyst being the Fed.

Dow Jones Industrials (DIA) 16,600 level to watch for support. Held and bounced back near 17,000? 150 more or 250 points more? Like the odds on the upside on this bounce. NASDAQ (QQQ) 4325 and the 200 DMA are candidates for support. Held them and moved back to the 4470 level. 4550 target on the bounce if the positive continues.

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. Did just that and hit the entry at $45.75 on Wednesday. Watch and manage your risk.

Financials (XLF) Testing lower on selling Tuesday and now look for the trendline to hold or it could get ugly short term. Financials held the trendline and moved back above the 50 DMA for a positive bounce on Wednesday. Look for $23.70 on the bounce.

Utilities (XLU) attempting to trade back above the $42.60 mark short term, but failed on Tuesday. Succeeded on Wednesday with the entry at the $42.60 level hit. (S&P 500 Model) 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. Hit the entry at $69.75 on Wednesday as well and moved higher.

Semiconductors (SOX) moved below last weeks low and testing the August low at 599. Bounced off support again and move back near the $84.50 entry point on a bottom reversal. Take this as a trade and nothing more.

Bonds (TLT & IEF) The choppy issues in stocks are showing up in bonds. The uncertainty towards the Fed should have cleared up some today, but the downside in bonds relative to higher interest rates never played out today as the yield was flat on the day after an initial move higher and some selling in the bonds. Fear rallied bonds with TLT hitting $119.30 and is back at the August highs as fear continues  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. Money is trading in bonds, but the yield movement is is the key to the outcome in pricing. The minutes from the last FOMC meeting had no impact as buyers saw the Fed as dovish on interest rates and bonds. Today: Still looking for yields to rise at least modestly.

Small Caps (IWM) they were down over last four weeks and technically oversold. They produced bounce intraday again on Wednesday adding 20 points and closing at 1097 and putting the 1110 back in play. We got the recovery to avoid the excessive selling in the sector. Short has been the position to own, but it hit stops on Wednesday on the reversal. Today: Watching how it responds to the move higher. More selling or continue the bounce?

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 bounce off support again at 1926. Took exits on our short trades as the short covering was Fed driven. (SH in S&P 500 Model) TODAY:¬†Watching the 1085 level and what works from here.
  • 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. hit target and took exit on part, took off rest on the reversal in the FOMC effect.¬†Exit at $86 on the reversal on the short trades. (Pattern Trade) The short trades with DUG exited¬†as well. (ONLY ETF Model)
  • 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. Tested the bottom of the trading range. Held position, but will exit today if we sell lower.
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¬†stops were hit and exited on the second intraday reversal. FOMC minutes catalyst is trumps¬†worry over Europe. Watching to see if the bounce has legs in today’s trading.
  2. AGIO – entry $64.70 flag. biotech still shows upside strength and has held up well during the selling. Trade opportunity on good setup.

Pattern Trade Tracking:

  1. XLB – short entry $49.40. breaking down as weakness gains strength in broad markets. Stop $48.40
  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 (HELD Wednesday)
  3. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $25. STOP HIT
  4. SDS –¬†entry $24.85. Add to position if the downside continues. Stop $25 STOP HIT
  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 $25 same as above. STOP HIT
  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 $66.50. STOP HIT
  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 $86. Reversal candle sitting on the 200 DMA Рwatch to see if it confirms in the AM and manage the stop. SOLD ON TARGET HIT
  8. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $17 РSTOP HIT
  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)