Trading Notes for Today, September 15th

Notes to Note: 

The headline reads, “only two words will matter” for the FOMC meeting that ends on Wednesday this week. Following the reaction in interest rates on Friday, you would have to say that is a correct statement. What are the two words in the article? “considerable time”! That is the phrase the Fed has been using to address when they would start to hike interest rates from the current zero percent they are currently. If they remove the language relative to the when, without a specific time, the speculation will run rampant and impact stocks and more so bonds. I am not stating all of this to say run for cover, just simply to point out what the story line is that is developing short term which will impact the future market direction. Speculation as we all know is short lived and what really matters will take time surface and ultimately drive market direction. But, in the short term we have to manage the volatility currently and then the reality or outcome as it plays out. It is during these periods of uncertainty portfolio success is determined. Focused discipline is the goal.

* Trading environment is compressing holding periods on trading positions again. Thus, the choppy markets are in play and we have to respect that relative to trading.

* Topping patterns are building and downside pressure is gaining momentum. Friday left plenty of questions as we fact this weeks trading. The direction is being driven by uncertainty which is allowing speculation to get a foot in the door. Trading news is a dangerous game.

* If tops fail, define the next support levels. If they hold, the should result in short term trading opportunity. Patience as nothing is confirmed or certain.

Sectors to Watch:

Bonds (TLT & IEF) the move higher in yields are impacting bonds on the downside. How much will this expand going forward? In January the belief was the Fed would start moving rates towards the 1% level this year. That has not materialized and yield fell as a result. But, the January benchmark of yields is a good target for rates will move in anticipation of the Fed rate hikes over the next 6-12 months. Thus, the thirty-year bond target yield would be 4% and the ten-year bond would be 3%. Thus, a hedge or trade on the short side with a longer term outlook is prudent at this point. TBT or TBF (Sector Rotation Model & ONLY ETF Model)

Financials (XLF) at key point on the upside trek. Need follow through on the upside and the banks are the sector to watch. Both regional (KRE) and large banks (KBE) are in play on the pattern list and managed to have a solid move on Thursday. They continue to hold up well in the face of selling. I like the opportunity going forward if rates rise. (ONLY ETF model and Pattern Trading) TODAY: bounced back from the selling on Tuesday. Continuation of positive tone for trading.

Consumer Services (XLY) I like the sector taking a longer term view as the retail sales reports consolidated for three months, but August showed positive upturn again. The consumer sentiment was higher and spending remains steady. The Fed has a positive outlook for GDP and that should result in a positive run for the consumer. The short term volatility around interest rates is noise. Focus on the fundamental drivers and use the volatility to add a position near term and build on it going forwards. XRT is direct play on the move in retail sector. (Sector Rotation Model)

Solar (TAN) broke above the $45 high from June and is in position to move higher and potentially test the $51 high from February. Building consolidation pattern at resistance and needs a catalyst on the upside to continue the move higher. (Sector Rotation Model) TODAY: Follow through on the upside move and hold the 10 DMA.

Energy (XLE) the weakness in the sector is expected as crude oil prices have declined. There is some volatility in prices, but the downtrend is well confirmed in oil and now in the energy sector. Short trades with DUG on the stocks (ONLY ETF Model) has hit an entry point and I would expect some volatility as the trend unfolds. Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid. The weakness in the Natural gas commodity is only adding to the downside pressure as well to the stocks overall.

Model Position Notes: 

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

  • Volatility Index – It has to go without saying that volatility is in play currently as the uncertainty is in play. The FOMC meeting this week will add to the speculation. VXX trade did well last week and the VIX index is in position to spike higher if the nerves over yields continues to rise.
  • S&P 500 Index (SPY) Choppy week of trading but holding support at the $199 mark. Still need to follow through on the upside or we take the exit on stops. A rounding top or sideways consolidation in play. (S&P 500 Model) TODAY: Got another test and bounce day and still looking for follow through on direction with a positive bias.
  • Small Caps (IWM) Hit stops and tested again on Friday towards support. Watching to see what opportunities result in the sector as this unfolds and plays out. If we break the $115 mark on IWM a short trade could be in order and we will watch to see how that unfolds to start the week.
Watch List Opportunities:
  1. Sector Rotation Model – Updates to Watch List (see above)
  2. S&P 500 Model – Updates to positions (stops) & Watch List
  3. ONLY ETF Model – Updates to Watch List

Pattern Trade Setups:

  1. QID – entry $44.55. bottom reversal on the short fund. Trade on negative sentiment building towards the cuts in Fed stimulus.

Pattern Trade Tracking:

  1. KBE – entry $32.90. cup breakout. Looking for follow through on the upside. Stop $32.50
  2. KRE – entry $39.50. cup breakout. more upside potential if the sector gains momentum. Stop $38.65
  3. NFLX – entry $477.50. Test of upside in play and holding $470 support. Stop $469.
  4. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $15.95
  5. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
  6. YHOO – entry $36.50. trading range break. Internet sector moving higher. Stop $40.50
  7. SOCL – entry $20.15. Cup and Handle breakout. Upside back in play. Stop $20.10
  8. FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week. Stop $61.75.
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:

  • 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 $71.50. Nice slow upside drift in play for the stock. 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 $45 for now on position and we will make adjustments as we extend the upside.