Trading Notes for Today, September 26th

Notes to Note: 

So much for the rally on Wednesday! I didn’t realize a iPhone that bends would have that much impact on the markets. At the end of the day durable goods numbers were not pleasing and they get the blame for the reversal and the move below 1978 on the S&P 500 index. Break of support… new near term low… break of the 50 DMA… and plenty of questions about the outlook from here. The headlines are full of pontification on what is going to take place. I am going with what brought us to this point… a lack of clarity about the outlook/future. That brings speculation into play which in turn gets twisted by news events. The longer the uncertainty goes¬†the more nervous investors get and the more emotional the decision making day-to-day.

Was a -18.2% reading on durable goods orders market moving? Not unto themselves, but when you add in all the parts and worries it was. This is something that we will have to see how it flows today. I am of the opinion that 1910 could be in play before this is all said and done. Tomorrow is the GDP revisions for Q2 and any disappointments from that report will only add to the downside pressure. I am not expecting it, but crazier things have happened in Washington.

Yesterday I stated that 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. Wednesday it gave upside and Thursday it took it back and then some. The sellers are exerting control for now and that will have to play out short term before we get to a defined direction. The break of the 50 DMA and support puts the short plays in motion with a confirmation today on the downside.

* Positive news on home sales helps the upside bounce off support on Wednesday. The negative durable goods data brought the downside back into play on Thursday… Today we look for some solution on direction from the micro trend perspective.¬†Resolve that and the longer term will develop.

* 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. Now we are down to one day move in direction with increased volatility.

* No ability to mount or sustain a move to the upside short term, the sellers hold short term control of direction, but that shifted somewhat on Wednesday and back down on Thursday. Challenging environment and patience is required.

* 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:

S&P 500 index broke key support at the 1978 level Thursday and now we have to look at the short trades as this put the 1910 level in play from my outlook. Short trade is SDS which we added in the Pattern Model below. I will look to add to that position today if we confirm the downside opportunity.

Bonds (TLT & IEF) as stocks retreat so do 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 chopping around¬†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.¬†TODAY: Yields moved back below 3.24% on Thursday… looking for confirm of further fear towards stocks and yields to decline again. That would bring TLT back as a trade opportunity.

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. Thursday pushed below $23.10 intraday and hit stops on the trading positions.¬†The¬†opportunity going forward is if rates rise. The outlook currently is rates will fall again on the fear in stocks. That puts financials on the defensive again and moving lower.¬†TODAY: Moving back toward¬†the $23 mark¬†and break of support… watch.

Semiconductors (SOXX) solid move short term back near the previous high, but has now reversed and the questions are starting. Big reversal last 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: Got the downside move and $86 break is the entry point for short trade.

Model Position Notes: 

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

  • S&P 500 Index (SDS) Made the break lower on Thursday and looking to add to the position. TODAY:¬†entry of $24.85 if we maintain a negative sentiment in the AM. If we move back below $24.45 we will wait.
  • 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¬†was¬†the downside break and added¬†the short trade short term. Patience and let this unfold as the volatility plays out. (Pattern Trade Model) Bounced back to the entry point on Wednesday, but we waited¬†to see how it¬†unfolded. Got the downside follow through and we will now address our stop on the trade.¬†¬†TODAY: Follow through on the downside?
  • 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 is¬†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:¬†reversed the bounce from Wednesday and still looking for more downside short term.
  • Short trades are building and looking for the opportunities that offer the best risk/reward! Others are listed above as they developed over the week.
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. FLIP — FLOP – Markets are acting like a politician! XLK, XLF, IYZ, XLI all broke key support and joined XLU, XLE and XLY on the downside. 7 of 10 negative short term trends moving lower.
  2. QID – entry $45.50. Add to position if the downside accelerates through support of 50 DMA.

Pattern Trade Tracking:

  1. QID – entry $44.65. (from Wednesday list). Break above resistance off five week base. Stop $44.40
  2. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK Thursday)
  3. 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.
  4. 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.
  5. TZA Рentry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $15.40
  6. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $21.
  7. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
  8. 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.