Trading Notes for Today, September 17th

Notes to Note: 

Last night I outlined seven things to watch in this market going forward and then we released a video on each and how they interrelate to the story the market is telling currently. If you haven’t read or watched the notes they will help looking forward.

Today is an important day as the FOMC meeting concludes and expectations are high for insight into the Fed’s thinking relative to interest rates and a time line on when they will start to raise rates. I hope that investors are not disappointed when they don’t get as much information as they would like. The Fed is not likely to disclose as much as the current sentiment would like to receive and that may create a reaction. Either way be aware of the potential issues at 2 pm. The real reaction will be on Thursday as everyone has had time to digest the comments.

Don’t over think the topic and let this unfold then look for the resulting opportunities.

* 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. Monday created some selling and Tuesday a bounce back that only expands the choppy market.

* NASDAQ breaks support only to rally back on Tuesday? Frustration validated on short term basis and why it is best to stand clear. When traders want to sell they find a reason… and the same is true when they want ot buy. Patience as this unfolds.

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 yields fell as a result. But, the January benchmark of yields is a good target for rates as they should 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 day, but they didn’t like the idea of no hike in rates as the catalyst. They continue to hold up well in the face of selling. I like the opportunity going forward is 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 forward. XRT is direct play on the move in retail sector. (Sector Rotation Model)

Solar (TAN) Sold with the rest of the growth sectors and $43 is support to watch for opportunity if we hold and bounce. Not much in terms of the bounce on Tuesday and we will see today how this unfolds, but stop in place if the upside does not unfold. (Sector Rotation Model) TODAY: Follow through on the upside move and hold support.

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. Tuesday bounce delayed any short side trade, but still watching how this plays out near term as the fundamental data has not changed. The short trades with DUG on the stocks are still an opportunity. (ONLY ETF Model) Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid (Tuesday?). The weakness in the Natural gas commodity is only adding to the downside pressure (bounced on Tuesday as well). TODAY: Watch for reaction to the bounce in price on Tuesday and let it unfold and validate in either direction. Our outlook is to play the downside as it remains the underlying bias.

Model Position Notes: 

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

  • Volatility Index – Hit the short term stop on VXX. Longer term we held the position, but the volatility evaporated in the rally on Tuesday. Watch how this unfold prior to and following the FOMC announcement today.
  • S&P 500 Index (SPY) Choppy week of trading but held support on Tuesday. 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 the bounce? Looking for upside follow through.
Watch List Opportunities:
  1. Sector Rotation Model – Watch List
  2. S&P 500 Model – Updates to positions (stops) & Watch List
  3. ONLY ETF Model – Updates to Watch List

Pattern Trade Setups:

  1. Patience is the key today as the Fed talk will be at an all time high. Willing to watch into the meeting announcement and get some clarity on what Fed we are dealing with short term.

Pattern Trade Tracking:

  1. QID – entry $44.55. bottom reversal on the short fund. Trade on negative sentiment building towards the cuts in Fed stimulus. Stop. $43.60. Not a good day on Tuesday… watch how to today unfolds.
  2. KBE – entry $32.90. cup breakout. Looking for follow through on the upside. Stop $32.50
  3. KRE – entry $39.50. cup breakout. more upside potential if the sector gains momentum. Stop $38.65
  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
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 $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.