Trading Notes for Today, September 25th

Notes to Note: 

An early¬†intraday reversal for the broad markets on Wednesday holds support. ¬†The buyers stepped in to buy the dip at support of the 1978 low on the S&P 500 index. Seven trading days to move to new high and then test the previous low… sounds like a choppy market to me. The thirty point swing on the index isn’t even two percent, but it seems like ten the way it has played out.

Should we assume the worries over global growth, fighting in the Middle East and interest rates are done? No of course not, but the stronger-than-expected report on new home sales did give the market a boost. Remember what we discussed about choppy markets? They are driven on news and sentiment of the day, not facts. The lack of clarity puts news in the drivers seat and that is exactly what we are experiencing currently.

Healthcare, consumer staples, basic materials and consumer discretionary were the all up more than one percent on the day and the leaders. Nothing changed on the move except we managed to hold support again. The term trends remained in play and the worst performing sector, small caps, posted a gain of 0.9%. That helped the NASDAQ to eclipse the one percent gain level.

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.

* Positive news on home sales helps the upside bounce off support. Positive mixed with negative equals sideways move on negative overall sentiment currently.

* Syria bombing was added to the list of worries Tuesday. The attack on the Islamic State is under way and that pushed traders to more reactions on the negative side.

* 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 (watch for follow through today on the buying), the sellers had short term control of direction, but that shifted somewhat on Wednesday. Challenging environment and patience is required as we bounce off the key support levels once again.

* 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 did rates on bonds and bond prices rise. Stocks rebound and bonds fall with rising yields. The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds choppy like stocks. 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. Watch to see how this bounce plays out. A trade on a reversal lower would be of interest and that transpired on Wednesday.

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 up and down in response to stocks.

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. Wednesday we bounced back and the chop is now in the financials. The opportunity going forward is if rates rise. (stalled currently and that is putting pressure on the financials) (ONLY ETF model and Pattern Trading) TODAY: Moving back toward the $23.50 mark now we have to deal with the 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) Bounced back to the entry point on Wednesday, but we will watch to see how this unfolds moving forward. Make sure your stops are in place. TODAY: Follow through on the upside move.

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:¬†Bounced back from early selling on Wednesday… at the 200 DMA and we are watching how it responds short term.

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. TODAY: Watching for how the plays today as follow through and keeping our stops in place.

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 on Tuesday, bounced on Wednesday and … looking for some answers relative to the trading range and a catalyst in either direction.
  • Financials (XLF) made the move¬†higher, but reversed¬†to test the breakout on Monday.¬†Watching for upside follow through or we take the exits.
  • Buyers are still at work, but the downside bias has gotten more attention. Patience is the key as the outcome will define the trading.
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. Buy side follow through today?¬†Looking for 2-3 day upside follow through and test of resistance. If it doesn’t make move tight stops on positions. Some solid moves or rebounds in CELG, GOOG, SWKS and IBB which were leaders that tested lower the last few days. Financials (XLF) JPM, BAC, GS. Biotech, Semiconductors, Basic Materials and Healthcare all produced solid moves on the upside. Let this bounce play out and manage your risk accordingly. We have shortened our holding periods to market environment currently.
  2. COST – entry $127.50. flag breakout test. The break from the consolidation is a positive trade opportunity. If not test into the open max entry $128.
  3. ARWR – entry $15.75. triangle breakout off support. Healthcare sector remains a leader.
  4. EXAS – entry $20. trendline reversal off support. Healthcare sector remains a leader.

Pattern Trade Tracking:

  1. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. HIT STOP
  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 $15.40
  5. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $20.
  6. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.80
  7. 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.