Trading Notes for Week of December 15th

Notes to Note: 

It was a week of sentiment taking a hit from the uncertainty surrounding oil prices and the global economic picture which ultimately took the markets lower. We can all blame something for the declines this week, but the reality of the decline is what matters the most. As stated below we broke support on the S&P 500 index and put the downside in play. The most important question to answer now is relative to the sustainability of the new direction? Taking into account the variables that are in play how low can we go? Equally what news, events or data is there that would potentially pivot the sentiment back to the upside. Investing is as much about understanding the variables in play now and moving forward, as it is reading a chart. Thus, my conclusion for now is to be patient, gather more data, and let the market define the duration of this move on the downside.

The yield on the 10-year bond remains under pressure as investors look for alternatives closing at 2.1% and IEF was up 1.8% in response this week. The movement to bonds is an indication that investors are looking for safety or a hedge to their portfolios going forward. The thirty-year bond TLT hit $126.30 (up 4.3% for the week and the yield is at 2.75% with money rotation still in play).

The NASDAQ closed down 127 points or 2.6% for the week. Now I am going to say that is volatility at work. We have discussed the potential test to the 4611 level near term we are making a run at it currently. 4652 is the current level of support and we closed at that mark on Friday. Looking to next week the semiconductors, biotech and small cap stocks will set the tone for the index. We discussed the two inside trading days on Wednesday and Thursday, the break lower established the downside as the direction of choice for now.

The S&P 500 index closed at 2002 and broke the support at the 2018 mark we were watching. The drop of 3.5% for the week was not pretty with almost 1% of that decline coming in the last thirty minutes of trading on Friday. Energy, basic materials, telecom and industrials are leading the downside. Financials, healthcare and technology gave up big gains on Friday to join the selling parade. We closed on the 50 DMA and I would expect some type of test to the selling, but the bigger issue is the continuation of the move lower. That is what we are watching now to start the week.

The Russell 2000 index is stuck in the 1153 to 1190 trading range and closed at 1152 on Friday. The intraday volatility has been noteworthy with big swings up and down. The trading range is still intact and a move below the 200 DMA would solidify a break lower. We will watch patiently for this to give us a direction signal before making any moves.

The Volatility index made it’s way below 12 and tested the 11.55 support level¬†last¬†Friday. This week it closed at 21.08 with a high of 23.06… that is a big swing in uncertainty for the markets as investors deal with all the unknowns. From oil prices to geopolitical risks it is taking a toll on investor psyche and this could cause further disruption if the move continues on the upside in the index. 31 was the high on the low in October.

Dollar closed at new high last Friday, but has¬†tested lower¬†this week, but holding¬†the $23.35 support. Stronger dollar is a positive, but more than enough analyst, politicians and economist want it to drop again. Not so fast… you cannot devalue your way to a strong economy! It has never worked in history and it isn’t likely to begin now.

As we start a new trading week there are plenty of issues, worries and speculation for all. But, we have to let it unfold. The break of support on the S&P 500 index puts the downside in play. Looking for confirmations and opportunities, but also aware of the time of year it is and potential for a bounce and run into year end. Thus, we will take an aggressive approach (where we get in and out of trades, not risk) to how we enter and exit any trades going forward.

Economic News for the Week:

The week ended with the producer price index dropping 0.2% as a result of cheaper oil prices, and the consumer sentiment jumped to 93.8 much better than expected. The consumer continues to hang tough and optimism springs eternal. The early benefits of cheaper oil on both accounts… but, analyst are equally as worried about the longer term impact to the economy. We will see how it all plays out going forward.

Retail sales numbers were posted and they were better than expected… up 0.7% and auto sales were up 1.7%. All around positive numbers and better than expected even with the weaker Black Friday numbers. Still optimism swirling about the holiday sales and we will see how that unfolds, but not until January. The good news did help push stocks higher in the morning.

Jobless claims continued to fall again this week with only 294k filings.

One key leak from Europe on Wednesday was a memo being leaked that Draghi doesn’t have approval now for bond buying stimulus to start in January. That impacted the sentiment as well and it too Europe lower as IEV fell 1.1%. If the rumor is true this will have negative effect on prices in European stocks going forward. As with any news this would have to be validated to be true and what other stimulus may take place in Europe.

Looking forward we will have the CPI data out on inflation Wednesday, housing starts on Tuesday, industrial production on Monday, Empire state index on Monday, Philly Fed and leading indicators on Thursday. Plenty of data points on the week, but they may get lost in the emotional swirl in play.

Some thoughts on news/events and statistics impacting investor psyche:

* Spending bill for the US Government? Really? How hard is this… fund the budget based on what the need is and let the next Congress deal with the fat and spending that those leaving want to add and those who owe favors want. We expect Americans to balance a budget, but the government doesn’t have to… regardless the threat of no spending bill and a government shut down are making investors more nervous. VIX spiked to 21 again on this issue. Watch for the solution to come soon.

* Tug-o-war over oil prices and the impact to the global markets and economy. Too much speculation on the outcome when no one really knows. Oil prices, stimulus fake outs (Europe) and Greece are all in the headlines.

* The positive economic data did not produce much in terms of a positive upside for stocks. The reality is the market is looking forward and the data was looking backwards. Investors are uncertain of the outcome that crude oil will bring and speculation leads to volatility intraday and longer term. Watch for more positives to develop as we push towards year end.

*¬†OPEC and Russia stance on cutting oil production remain an issue. It has shifted to the back burner for now, but it will be watched through the supply data and the price of crude going forward. Due to the weekly release by the EIA on supply, the temperature isn’t likely to get too warm any time soon. Consensus believes that OPEC will cut output over the next 1-6 weeks to help the issues with supply. Too much talk and speculation and not enough action or fact.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes. Not much is expected until the December 16th FOMC meeting, but they are speaking and pontification about the economic picture as well as their intent towards rates and stimulus. The discussion on interest rate hikes is on the table, but no definitive timeline currently. Next week is the FOMC meeting.

* Dollar is causing disruption by the move higher. Watch the impact to commodities, multi-national earnings and the consumer. All will give some opportunities as we move forward. Big spike higher to end the week. Take a moment and look at the month chart of the Dollar Index (DXY) not the eleven plus year consolidation wedge breakout and the topping near resistance currently. The dollar could be on a multi-year rally as the global markets deal with stimulus efforts and devaluation of currency. China, Russia and Europe have all forfeited considerable ground to the buck and we are going to see more before it is over.

What to watch¬†this week…

Being that the indexes closed with a solid move lower on Friday we have to watch for a bounce or attempt to bottom short term. Look for doji candlesticks and the key retracement levels on Fibinocci charts. We could get additional swings lower, but I would be inclined to believe we start to see a base build even if it only a week or so and bounce into the new year. Watch how the leaders respond this week… healthcare, semiconductors, biotech, drugs, and retail. These sectors break lower then ignore the earlier comment on rally.

Crude followed through with another 4.1% drop on Friday to make it a 12.9%¬†drop for the¬†week and that leaves crude at the $57.49 mark. The sector (XLE) declined 7.1% for the week in response and continues to confirm the downtrend. Remember the simple rule of trend analysis… Short the rallies in an established downtrend, Tuesday and Thursday produced rallies that were sold into confirming the trend. Looking at the chart this downtrend started in July for the stocks and it has not held a rally attempt since. ERY is the leveraged short trade. SCO is the short oil trade. Plenty of speculation to continue the downside near term.

Natural gas has been declining as well, but did find some fooling on the week an a small bounce off the lows worth watching near term. Supply data continues to show draw downs keeping the hope alive that prices will rise in response and with the low in place… could produce a trade on the upside. UGAZ is the leveraged upside trade and $9.55 upside trade entry. Watching to see who wins the tug-o-war.

China gave up the gains and moved back to the bottom of the up trending channel. This could give another upside trade opportunity and one to watch going forward. We will keep this under review this week for a trade.

Semiconductors (SOXX) stops are $91.50 on trades and the next support level is $88.50.

Retail found some good news and XRT is holding above the $90 level for now. I still like the parts better than the whole for making money in the sector.

Small caps (RUT-X) tested the 1153 support level again and closed at 1152 Friday. Posted TZA trade below on Friday and still like the short side follow through, but be aware of the surroundings if this bounces with broad markets.

Biotech still leading the upside, but IBB and XBI are showing some topping. Need to see a follow through on the upside if the leadership is to continue. One to watch this week IBB support is $297.25.

Technology (XLK) took out the $40.95 support. Downside in play currently on the move.

Volatility Index (VXX) The spike higher is on watch. If this fades we would look to exit any positions and then add SVXY if a rally breaks out in the major indexes.

Emerging markets (EEM) short trade set up last week and followed through. Closed at  the next level of support on Friday and a break lower would be entry point to add to short trade. EUM.

Model Position Notes: 

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

  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and followed through. Added to the S&P 500 TODAY:¬†Adjusted our stops and letting this play our short term as the market takes its lumps.
  • Retail (XRT)¬†¬†the sector was to take on some leadership into year end with¬†earnings as¬†the catalyst. Break above the $90 level was the entry point for the sector ETF, but take time to scan the holding and you will see some great pattern breakouts in the parts.¬†TODAY:¬†Tested back near the $90 mark and held this week. Volatility picking up and we have to manage the outcome short term.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, it was¬†lagging as the earnings and outlook were not attractive to investors. (S&P 500 Strategy) Stops at the $23.70 ¬†ish level to¬†manage the risk. TODAY:¬†Tested¬†and broke¬†broke lower. Raised our stops and we will see how it unfolds this week.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and got the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation on the chart. (We own XLV in the S&P 500 Strategy) First sector to recapture the September highs¬†and set the pace for the upside to continue. TODAY: Testing lower and we need to manage our risk relative to market overall. Holding our stops to give some room for volatility.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o Strategy¬†as a trade on the Fed intervention into the keeping rates low again. Some topping signs returned and watching how it plays out near term. ¬†TODAY:¬†Testing with the broad indexes and adjusted our stops to protect the gains if things shift downward.
  • Preferred Stock Index (PFF) broke above the $39.50 level and rose nicely. We added a longer term position with the dividend as the driver at 5.7%. Patience is required for this type of holding. ADDED position to Sector Rotation Strategy. TODAY: Broke¬†the 200 DMA on price, but still above the stop… Manage your risk and honor your stops.
Watch List Opportunities:
  1. S&P 500 Model –¬†udated
  2. Sector Rotation –¬†updated
  3. ONLY ETF –¬†updated
  4. Pattern Trade Model – updated

Pattern Trade Setups:

  1. Starting the week with a negative bias from last weeks selling. Manage the risk of the trades and focus on what is in front of you as we move forward.
  2. Look to add to short positions if the downside remains see below.

Pattern Trade Tracking:

  1. TZA – entry $13.80. Top of trading range. Cheating entry on this slightly as a couple of the indicators point to this level technically. $14 is the breakout and other option for entry. Stop 13.50. (ADD on break above $14)
  2. QID – entry $40. Bottom reversal. Selling is picking up in the technology stocks and if they break support short term will accelerate downside. Stop $39.50 (Add on break above $41)
  3. SDS – entry $22.95. Double bottom confirmed with break higher. This is a trade on the current volatility in the market. Stop $22.50 (add on break above $23.50)
  4. BSFT – entry $28.10. flag breakout. The follow through on the move higher is the entry point. Could run back to the $32 high from February. Software sector is in position to break from consolidation pattern as well. (IGV) Stop $28.10.
  5. ENPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.95
  6. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $37.50.
  7. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $54. HIT STOP
  8. MU – entry $34.70 (bought higher than posted). Trading range breakout. ready to establish a new high. Breakout is positive for the sector and the stock. Stop $34.70 HIT STOP
  9. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $31.50
  10. JNPR – entry $22. Triangle. downtrend will be broken as well on a breakout and follow through. Leading the network sector higher currently. Stop $21.30 HIT STOP
  11. WFM – entry $48. Flag. Longer term outlook very positive off earnings. Look to hold this position going forward. May add to our long term strategy below. Stop $46.90
  12. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $84.70.
  13. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $73.60
  14. MCHP Рentry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap. Added position and Stop is $43.65.
  15. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  16. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  17. MAS – entry $23.25. ascending triangle. big move on Thursday? watch for follow through or test of the move. On test $22.75 entry would be positive. Stop $23.70.
  18. SOXX Рentry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $91. Break above resistance (82.30) good point to add to position. Added to position Рentry $82.50 (added 2.5% 10/24) same stop on all.
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: 
Some positive moves in all the positions with Bank of America lagging currently. We continue to be patient and hit some stops on the hedges we added. That concludes the upside has returned at least for the near term. Remember we are looking long term and we have to ride out the volatility periods as the develop.
  • Facebook (FB) – $73.15 entry (10/16) added 1000 shares back on the long term outlook following the choppy drop in markets. 10/28 – Earning¬†were good, but the outlook showed higher costs and the first reaction is sell the shares from traders. Still trading sideways as investors sort out the facts and fiction. Added Dec $75 puts @ $3.50 – 10 contracts.¬†Hit stops on the puts at $2. move on the upside reversal has been a welcome site as it bounced off the trendline.
  • Twitter (TWTR) – ¬†Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)¬†Broke down and trading lower, we exercise the put if no bounce. $36 is potential support. Watching how to trade this near term.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks are finally gaining some ground and I like our position currently.¬†We add our long positions in stocks back as held support¬†and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15.
  • Whole Foods Market (WFM)¬†11/20/14 Start coverage. The outlook has improved after making changes to the stores and adding new stores. The earning validated what I have been following for the last year and the company should be at the front side of a long term upside based on fundamental growth. Adding 1000 Shares at $48 to start the position. Finally got the continuation breakout on the upside short term.