Trading Notes for Week of December 1st

Notes to Note: 

Welcome to the new world of falling oil prices. The announcement on Thursday from OPEC that they would not cut production sent crude oil down to $66.15, stocks down more than 6.4 % on average in the energy sector and the ripple effect to natural gas, alternative energy and anything energy related felt the tidal wave reaction to the announcement. I would have to say at first blush this is an opportunity to find good stocks that have reacted to the emotions that are now in control of the sector. Time to brush up on who stands to win in this battle of price destruction. This story is not going away anytime soon and we will have to define what opportunities exist as a result

As we look to the final month of the year we will have to define how we want to positions our portfolios in light of this move. How much of a benefit with this be to the consumer globally versus the impact to the economy is jobs, etc. There are too many unanswered questions and too much speculation to make a quick decision on this front and the next few weeks will offer some clarity as we go forward.

The consumer confidence data was very disappointing last week, but the recovery in the retail stocks to end the week was promising. As we stated the market  wants the consumer to engage in the efforts of spending during the holiday season and from the preliminary data they are acting different to the survey. We will remain patient on how to address the sector going forward. We own retail stocks and for now that is a positive from my perspective.

Patience, focus, discipline and one day at a time… that is all we can do for now. The first of the holidays is over and we progress towards the year end events. Rally is still in place and results from the weekend sales will the next order of news to dissect.¬†This promises to be a big week as the energy issues unfold further.

What to watch¬†this week…

Energy is the sector at the forefront this week with the price of crude slipping to the $69 per barrel. The first response is consumer benefits… how much and where is the best opportunity? Economy gets hit as the stocks don’t expand production and jobs… how much and when? Russia is the biggest loser or not? What happens in the Middle East relative to production, profits, geopolitics, etc? This is bringing back memories of the financial crisis in 2008. What is the global impact good and bad? We have to watch for the sell at all cost mentality that builds in¬†these sectors. Emotions create ugly reactions.

Small caps hit resistance once again at the 1190 mark and reversed 1.4%… not exactly what I was looking for on Friday, but things got ugly the last 25 minutes of trading. Looking at the stocks in the index that dumped lower… of course energy stocks were the biggest and the most sold, small caps. Why, worries over the ability to stay in business as crude prices drop. This is a key concern for the market going into next week.

Commodities are another question mark considering what is taking place with crude oil. Grains (JJG) is trying to break higher. DBA is trading sideways. UNG fell 4% in sympathy with crude… demand is rising with the cold weather short term? Alternative energy hit by the move in oil with TAN and FAN down on Friday. Base metals (DBB) fell on the day as well. Precious metals fell lower with gold (GLD) and silver (SLV) heading lower on the day as well. The sector overall is not in good shape and could offer some selective opportunities in both directions short term as emotions take over.

Crude oil is the commodity that has the greatest challenge moving forward, but we are watching for the opportunity that lies in the reversal and capitulation selling. We will have to trade this around some positions we own in natural gas and other alternative  stocks to protect our downside risk as this all unfolds.

Global markets made a positive move last week, but now comes the challenges of the emerging markets reacting to the commodity crisis. How do they respond to all that is happening globally? Mixed picture and one to watch and trade, but not sure about holding these positions longer term.

Volatility index (VIX) fell the 12.4 as investors belief in the outlook remains confident. The disruption of oil is more of a positive to the broad markets than a negative… right? It depends on what you believe about the US energy sector and the downside risk of crude at $65. There is the challenge for the investor and VIX will reflect the shift in clarity relative to this issue if it starts to move higher as it did late on Friday. This is the week to see how investors really perceive what is taking place and what impact it could have going forward. Speculation may rule direction short term.

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

* Renewed worries for the markets in the form of economic data. Consumer Confidence fell much more than expected creating the question of is this an event or fundamental disruption as it relates the economic outlook and trouble on the horizon for the consumer? Thus, we have to let it unfold and determine how to manage the outcome going forward. Watch the impact to homebuilders (ITB), consumer services (XLY) and retail (XRT).

* Another mixed news event or fundamental disruption came in two parts, first, the meeting of the gruesome foursome about oil production levels. Venezuela, Saudi Arabia, Russia and Mexico met pre-OPEC¬†and¬†end result was they could not come to terms on cutting production and thus, the hopes of cutting production at the OPEC meeting. Second, the OPEC meeting in which no one was willing to cut production. That sent crude oil to $66.15.¬†Bigger issues for US oil production simply put.¬†Event and this is an opportunity… fundamental disruption and the energy sector could drop another 30%.

* The Fed is still in the background pulling the strings of the bond market and interest rates as seen in the FOMC minutes released last week. Not much is expected until the December 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.

* 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.

POINTS of INTEREST: Airfares rose 2.4% in October during the same time oil prices fell 11%? What about the consumer getting a break from the lower prices on crude oil? Unleaded gasoline at the wholesale level fell 22% but only declined 11% at the pump? Again where are the true savings to the consumer. It is as we speculated several months ago… it would end up in the corporations balance sheet and not the consumers. This is all something to watch looking forward relative to the consumer benefits.

Corporate profits annualized growth rate declined from 8.4% at the end of Q2 to 2.1% at the end of Q3. That is significant and impact the stock buybacks and dividend rates going forward. This is another point of interest to track moving forward.

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 Strategy¬†Retail move higher on earnings and is now driving the follow through on the upside. (posted to the Sector Rotation Watch List) Added XRT as well below for the move in sector. Manage the downside risk of the trade.
  • Retail (XRT) we are looking to the sector to take on some leadership into year and earnings were the catalyst thus far. 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 last week. Sales data for October better than expected.¬†TODAY: Adjust your stops and manage the risk.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and cleared the $116.50 resistance. Continued to move higher¬†tested the $117 mark and held following the FOMC meeting. ‘V’ bottom still in play on the upside. Manage your stops.¬†TODAY:¬†Watching how the late test on Friday impacts the start to the week.
  • 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.
  • 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. Still like the upside move and the target on¬†the sector and we own XLV in the S&P 500 Strategy¬†First sector to recapture the September highs, but has stalled in a tight range near the high. TODAY: Letting it run and managing the risk.
  • Semiconductors (SOXX) – Entry $88.10. Flag pattern setup to continue the upside. (SOXL is leverage trade on the index.) Hit the entry point on Tuesday, tested on Wednesday and back to the highs on Thursday…¬†and followed through on Friday! Upside now in play with a new high and… watching how it unfolds this week. TODAY: Nice follow through¬†on upside… manage the position and let it run.
  • Homebuilders¬†(ITB) followed through on the break through resistance as well on some positive data in the sector. The sector continued higher and looks¬†positive following the break higher with some¬†resistance at the $25.10 mark.¬†We hit the entry point and stops should be brought to¬†$25.50. TODAY:¬†Topping again and another round of data on the way for the sector.
  • Europe (IEV) entry $44.25. Yes the close was above this price as the gap higher on Tuesday broke from the established range. Look for a test of the move and follow through on the upside. If no test $44.50 entry and¬†confirmation of the move higher. Expect volatility in the position as the news from Europe is always an adventure.¬†Made the move to $45 resistance and watching for more upside. Made it above resistance and now look for entry point to add to positions.
  • REITs (IYR) the break higher pushed through the entry point for the trade we posted to the S&P 50o model as a trade on the Fed intervention into the keeping rates low again. Interest rates will play havoc with the sector, but for now content. Some topping signs continued¬†last¬†week… watching how it plays out with $74.75 as support currently. TODAY:¬†Volatility in uncertainty on Friday… watching how this unfolds could run with some flight to safety rotation in play.
  • Preferred Stock Index (PFF) broke above the $39.50 level and holding. 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: hold above the $39.85 mark and collect the dividend.
Watch List Opportunities:
  1. S&P 500 Model – Adjusted Stops and Watch List.
  2. Sector Rotation – Updated Watch List.
  3. ONLY ETF – Updated Watch List.
  4. Pattern Trade Model – Updated below.

Pattern Trade Setups:

  1. This could be an interesting week of trading as one sector struggles and others attempt to break higher. Key is to manage your exiting positions relative to the outcome. I have tightened stops and we took some exits on Friday. Remain disciplined!
  2. S – entry $5.15. double bottom. telecom is moving positive direction short term.
  3. ATHM – entry 43.70. base consolidation. FDN moving again… upside trade.
  4. DGLY – entry $13.91. triangle breakout. Tech sector still moving higher.
  5. Watching for trades…
  6. JJC, UNG, OIL, GLL, GDX – all oversold on Friday in reaction to OPEC. Somewhere in the emotions lies the truth and the opportunity.
  7. Digging into XRT if we hold following the Black Friday, Cyber Monday and Pink Tuesday sales data. Upside is still the direction of belief.

Pattern Trade Tracking:

  1. AMZN – entry $337.20. V-bottom reversal breakout. Broke down trendline off January high. Looking for follow through move higher and $362 target. Stop $325.
  2. C Рentry $54.15. Test cup and handle breakout. Banks still creeping higher and looking for leadership. Stop $53.
  3. MRVL – entry $14.05. triangle breakout on gap higher. testing as semiconductors break high and own a leadership role. Stop $13.68.
  4. CREE – entry $36.50. Bottom range breakout. Semiconductor sector. Stop $34.60.
  5. 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
  6. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through. Stop $27.90
  7. 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
  8. EXAS – entry $24.25. descending triangle. Biotech is leader and this was from the scan of the sector. Looking for follow through on upside. Stop $24.
  9. LULU – entry $46. Cup. bounced back and at resistance. If test back near the $43.50 level and bounces we will shift the entry. Retail sector and improving sales. Stop $45.75
  10. NLY – entry $11.50. Trading range breakout. The REIT is mortgage related. Dividend and growth trade. Looking for move back to $12 plus the dividend. 10% dividend currently. Stop $11.40
  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 $46.20
  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. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here. Stop $120.10.
  15. 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.
  16. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54. Stop $50. HIT STOP
  17. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce. Stop $76.80. HIT STOP
  18. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $68.
  19. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  20. 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.
  21. FAS – entry $107. Break through resistance in existing pattern. Financials show signs of wanting to add to the leadership role for the broad indexes. Stop $120. (manage your exit if reverses)
  22. IJH – entry $136.80. (10/27) Add position on breakout through resistance at $136.80. Did that on Friday and looking for a test of the move to add position. No test – no trade. Stop $142.00.
  23. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. $121 target for trade. Added to the position on Monday Рentry $125. (10/27) Stop $137.90.
  24. SSO – entry $107.60. bottom reversal.¬†Tested support at the $107 level and bounced, took entry on the trade. Added to the position on breakout and follow through upside –¬†entry $$117.10.(10/27) Stop $125.25 on all.
  25. 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 $90.50. 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) – $50 entry (10/20 – 1000 shares). 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.) Hanging onto support by a fingernail with small bounce and breathing room for now. Double bottom building and looking positive for now. ¬†
  • 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.