Trading Notes for Today, September 24th

Notes to Note: 

Who do we blame for Tuesday’s continued selling? Asia again? No, that honor goes to Washington DC for disrupting the apple cart. The US Treasury Department was vocal on changing the taxation of corporations in light of the ‘Inversion Play’. Nothing has been decided, but both sides of Congress voiced their collective opinions along with the White House. Nothing will happen next week, but the government is hell bent on collecting their share of taxes from companies. That raises questions on profitability and definitely creates more confusion for investors looking forward and the sellers used the talk as a catalyst to sell stocks. Bottom line… it adds one more thing to worry about for investors.

My opinion relative to all of this uncertainty is to let the speculation and hype die out and then look for the parts that are left standing. In other words be patient and take what the market gives one day at a time.

* Add Syria bombing to the list of worries. The attack on the Islamic State is under way and that pushed oil higher and gold bumped on the news as well. Something to watch as it all unfolds.

* 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 are taking short term control of direction. Challenging environment and patience is required as we approach key support levels once again. Some like small caps are breaking down and creating short trade opportunities.

* 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 and bond prices rise. The response to¬†the Fed not moving¬†on interest rates was a push lower in yields. TLT pushes to $115.50 resistance on the long bond. IEF is $103.40 resistance for now. Watch to see how this bounce plays out. A trade on a reversal lower would be of interest. ¬†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%. A hedge on a reversal in the bonds would be prudent as this unfolds.¬†TODAY:¬†Patience with the bond yields moving lower (prices higher)… this is a longer term hold on any short side trades.

Financials (XLF) We got the initial follow through on the upside and the banks led the way as expected. Now we are testing along with the broad markets. Tuesday was  negative from my view and it is now testing the $23.30 level of support. The opportunity going forward is if rates rise. (not happening currently and that is putting pressure on the financials) (ONLY ETF model and Pattern Trading) TODAY: Failed at the $23.50 mark now we have to deal with the downside risk and our stops.

Consumer Services (XLY) after a set up to break higher the sector broke support on the downside Monday 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. Got the trade entry on the confirmation Tuesday and established a short trade. (Pattern Trade Model)

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. Added the short side trade (Pattern Trade) and managing the risk. 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 manage the risk of the trades.

Semiconductors (SOXX) solid move short term back near the previous high, but has now reversed and the questions are starting. 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 and response to the trend reversal candle on Tuesday. Manage the stops.

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 РModel stops
  3. ONLY ETF Model РModel positions added.
  4. Pattern Trades – Added positions

Pattern Trade Setups:

  1. There is a shift to the sellers near term. The question, do we continue to build a downtrend or does the chop return with a move back to the upside? Today is one to watch to assist in the answer as we near key support levels on the major indexes.
  2. QID – Entry $44.70. break from base. Downside has gained momentum and follow through on the NASDAQ offers short trade opportunity.

Pattern Trade Tracking:

  1. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.10.
  2. 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 $67.75.
  3. 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. Reversal candle sitting on the 200 DMA Рwatch to see if it confirms in the AM and manage the stop.
  4. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $14.75.
  5. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $20.
  6. KBE – entry $32.90. cup breakout. Looking for follow through on the upside. Stop $32.50 HIT STOP
  7. KRE – entry $39.50. cup breakout. more upside potential if the sector gains momentum. Stop $38.65 HIT STOP
  8. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.80
  9. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
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.