Trading Notes for Today, September 23rd

Notes to Note: 

Asia was the new worry on Monday, well it isn’t new, but it was renewed as economic growth is a challenge. I stated on the webinar last night that the markets look to be setting up for a 3-5% pullback near term. Commodity prices continue to fall, the dollar is holding near the highs and worries are testing stock prices. Nothing is certain, but the lack of clarity looking forward is causing the sideways motion to continue and volatility picked up again on Monday. We are still watching for the setups to directional calls and this is taking longer than some of us like, but patience is the key short term. Forcing your beliefs or thoughts on the market isn’t going to make it happen or true. Focus and remain disciplined.

* 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.

* No ability to mount or sustain a move to the upside short term as the sellers remain in control. Challenging environment and patience is required as we approach key support levels once again.  A break lower does open the short opportunities as trades.

* 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 the preference.

Sectors to Watch:

Bonds (TLT & IEF) as stocks retreat so do rates on bonds. The response to¬†the Fed not moving¬†on interest rates was a push lower in yields. 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:¬†Patience with the bond yields moving lower… this is a longer term hold on the short trade.

Financials (XLF) We got the initial follow through on the upside and the banks led the way as expected. Both regional (KRE) and large banks (KBE) are in play on the pattern list and managed to have to make a move higher, but is in the process of testing the move. The opportunity going forward is if rates rise. (ONLY ETF model and Pattern Trading) TODAY: continued bounce following test in the sector and some upside follow through.

Consumer Services (XLY) after a set up to break higher the sector broke support on the downside today and the short term trade is setting up. The $67.60 mark is the downside break and now looking at the short trade setup if the sector turns negative short term. Patience and let this unfold short term.

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. TODAY: Watch for reaction to the break of support and move lower. Let it unfold and validate the move below $93 to break support.

Semiconductors (SOXX) solid move short term back near the previous high. Was one of the few sectors showing positive attribute. Big reversal on Friday and the response following options expiration Friday was negative setting up the downside short term. Needed move above $88.50 to hold and that failed to materialize. Watching for how the downside play today.

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. Nice¬†follow through on the upside as we establish new highs. (S&P 500 Model) TODAY:¬†Sold off and landed near the stop.
  • Financials (XLF) made the move¬†higher, but reversed¬†to test the breakout on Monday.¬†Watching for upside follow through or we take the exits.
  • downside¬†bias attempting to establish itself for the broad markets and work through the challenges in place currently.
Watch List Opportunities:
  1. Sector Rotation Model – Watch List
  2. S&P 500 Model – Model adjustments
  3. ONLY ETF Model – Model stops

Pattern Trade Setups:

  1. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade.
  2. XLY – Short Entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position.
  3. TBT – Entry $59.75. consolidation break and continuation of uptrend. Downside of bonds is the longer term view going forward and adding a position on the move higher is start.

Pattern Trade Tracking:

  1. XLE Рshort entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $95.50.
  2. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $14.75.
  3. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $20.
  4. TAN – entry $44.40. uptrend continuation on test. If growth recovers this will go higher. Patience. Stop $43.50 HIT STOP
  5. KBE – entry $32.90. cup breakout. Looking for follow through on the upside. Stop $32.50
  6. KRE – entry $39.50. cup breakout. more upside potential if the sector gains momentum. Stop $38.65
  7. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $15.95
  8. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
  9. YHOO – entry $36.50. trading range break. Internet sector moving higher. Stop $41.25 HIT STOP.
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.