Trading Notes for Today, September 18th

Notes to Note: 

I don’t want to jump on the Yellen bandwagon, but can someone please help the Fed understand their role? The need to explain what you wrote stopped in high school English… right? Evidently not as the press conference following the release of the FOMC statement was a boring rendition to explain the comments. We can just summarize by saying they are working on it.

That left the market with “good” news? One would assume that the investor got what they wanted a fully engaged Fed ready to keep rates at zero for a considerable time.¬†Small rally to new high on the S&P which evaporated into the close and we move on to today’s trading with futures pointed higher at least for now. That unfortunately is the way it is working over the last four weeks… uncertainty rules direction. The result is up and down without much progress. Sort of like the FOMC meeting.

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. Wednesday created more confusion to the direction and sideways remains the challenge.

* Need clarity relative to the outlook if we want the direction to solidify and establish itself. Otherwise it remains partly cloudy with a chance of rain.

Sectors to Watch:

Bonds (TLT & IEF) the move higher in yields is 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) TODAY: not help from the Fed on Wednesday, but we watch to see if rate start rising without the Fed.

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. The¬†opportunity going forward is if rates rise. (ONLY ETF model and Pattern Trading) TODAY: bounced¬†on the FOMC news, but faded into to the close with modest gain. Need some upside follow through today.

Consumer Services (XLY) I like the sector taking a longer term view as the retail sales reports have consolidated for the last three months, but August showed positive upturn again. Good news right? The consumer sentiment moved higher and spending remains steady. The Fed has a positive outlook for GDP and that should result in a positive run for the consumer, right? The short term volatility around interest rates is noise. Focus on the fundamental drivers for this sector 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) TODAY: upside confirmation of the current trend in play.

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, better on Wednesday and we will see today how this unfolds, but our stop is 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. The modest 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 that reverses the trend. The weakness in the Natural gas commodity is only adding to the downside pressure (bounced off current lows as well). TODAY: Watch for reaction to the bounce in price and let it unfold and validate in either direction. Our outlook is to play the downside as it remains the underlying bias.

Semiconductors (SOXX) solid move short term back near the previous high. One of the few sectors showing positive attribute currently. Watching to see if the upside remains in play and offers a trading opportunity. Need move above $88.50 start.

Model Position Notes: 

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

  • 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.
  • Financials (XLF) still not running higher, but steady as we go. If the EGG scans were producing a better alternative for the risk we would move the money. Still in play for now.
  • Shorts are cut off on rally prompted by the Fed’s inaction. This keeps the uncertainty in play and we will take what unfolds short term.
Watch List Opportunities:
  1. Sector Rotation Model – Watch List
  2. S&P 500 Model РUpdates to positions (stops) & Watch List
  3. ONLY ETF Model РUpdates to Watch List

Pattern Trade Setups:

  1. USO – entry $35.40. bottom reversal and break of downtrend line. Trade only on the quick change and $36.50 target.
  2. TAN – entry $44.40. uptrend continuation on test. If growth recovers this will go higher. Patience.
  3. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector.

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… 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.