Trading Notes for Week of December 22nd

Notes to Note: 

The outlook for the coming week of trading is one of interest… interest in what just happened on Thursday and Friday relative to the FOMC meeting. The Fed essentially punts ,traders field the punt and returned it for a touchdown and the Fed is standing there with a strange look on their face that says… “what just happened?” I am not the brightest person in the economic closet, but even I understand that you left stimulus in play in the form of zero percent rates and told everyone it is okay to keep abusing this and we will pick up the pieces “sometime” in the future. Well if you give a cocaine addict all the supply they want, ¬†do you think they act responsibly? Then why are we shocked that the Wolves on Wall Street would take full advantage of this type of response from the Fed? This will not end well… plain and simple.

Friday closed mixed, but held the gains from the gap higher on Thursday. How long do we run to the upside and what is the driver? If the FOMC meeting is the only driver I would be suspect about the duration. If crude oil prices move higher and stabilize, it would add validity to the upside as it would erase the key uncertainty from the recent selling. Plenty to watch near term and plenty to consider as we progress towards the new year. I am still of the opinion this is a traders market and watch the short term swings versus looking at the longer term perspective on new positions. We will continue to take this one day at a time.

As we discussed in the webinar last week, if the rotation to the downside were to reverse it would need an event, catalyst or news to stem the downside acceleration. The FOMC meeting on Wednesday provided news that shifted the selling to buying and created a pivot point for the indexes relative to a reversal. This is fine as a temporary impact on the markets, but for it to become sustainable we would want to see if crude oil is able to stabilize and move back near the $70 ish mark to maintain stability in the sector. It would equally remove some of the worries in the emerging market sector, especially Russia. We discussed last week the need to shift our strategy to short term swing trades or 0-13 week windows based on all the news and events in play.

The ten-year bond is acting contrary to the moves higher in stocks. Yields moved back to the 2.17% level and remain low relative to the move in stocks. The movement to bonds has been an indication that investors are looking for safety or a hedge to their portfolios, not a surge higher in the indexes. Time will tell how this plays out, but we will watch how the yields respond going forward.

The NASDAQ closed up 218 points from the low on Tuesday night. This puts the index at 4765 and just 26 points from the¬†November 28th high. The gap higher was one of interest and left plenty of issues to contend with in the gap. We attempted to buy the follow through on the pivot point low on Thursday, but I wasn’t willing to play the gap higher as it changed the risk/reward equation and unwilling to accept the risk of the trade.

The S&P 500 index closed at 2070 and gained an equally impressive 98 points from the close Tuesday. This also left a gap higher on Thursday making the entry a pass on the rise in risk of a trade if the pivot failed and the downside resumed. The Fed magic at work again. Is it sustainable? There in lies the reason we are still in a trading market and we will monitor this one day at a time.

The Russell 2000 index was¬†able to break through the 1190 resistance (upper end of the trading range) on the close Friday. This is the level we have discussed since the ‘V’ bottom reversal off the October lows. Looking for some leadership moving towards the year end and start of the new year. This is one of the indexes we have discussed and I like the upside move. Entry $119 IWM. Some discrepancy in price on Friday with options expiration.

The Volatility index jumped to a high of 25.2 Tuesday and reversed to 16.5 on Friday. The swings were big, but finally calmed to reasonable on Friday. Watching this for a test lower if the indexes are to continue the upside move during the new week of trading. The withdrawal of uncertainty was enough to procduce the two day move higher, but it is still elevated and despite the last hour plus move higher the index remained elevated. With options expiration behind us this should move lower leaving an opportunity to trade SVXY this week. (ONLY ETF Strategy Watch List)

Dollar (UUP) reversed the downside move from the crude oil influence and returned to the 12/5 highs. I still like the dollar in all the mess that is the markets globally currently. Still looking for more upside strength in the buck.

There is plenty of speculation in the markets currently on both the up and downside. This puts the market in a trading mindset and if you are not like minded in your approach it will only get worse short term. We start the week with an open mind, but guarded against all the potential issues facing the markets short term. One day at a time.

Economic News for the Week:

The most important news from last week was the FOMC meeting and the outcome was interesting, but the response was mind numbing. The Fed didn’t remove the language “considerable time”, but added “It can be patient”… before it starts to “normalize the stance of monetary policy”. Assumption that is related to raising interest rates from zero. This is like a addict saying they are gong to stop, please be patient and I will conquer this in time!

Yellen did elude to this meaning in would not happen at least for the first two meeting next year… which corresponds to the original six month comment by her at her first FOMC meeting as chairperson. No decision is a decision from the markets response meaning they are not going to do anything and we are going to invest that way until they do.

The consensus, from those understanding the outcome of this will eventually be bad, is doing nothing only makes the situation worse and risking a bigger problem. What is the Fed fearful of? Exacerbating the issues globally relative to oil? That is a temporary issue that will adjust over time. Yes, the markets may react to the initial comments on when rates will rise, but it will equally adjust and adapt over time. The best time to act is when you know what to do. Advise to the Fed, just hold your nose and jump in, you will adjust to the water temperature.

Philly Fed was lower and in line with expectations. CPI shows inflation is still not a problem as oil continues to move lower. Leading indicators were below previous months, but still showing positive growth expectations. Weekly jobless claims at 289k and below expectations. Still plodding along economically and enough to keep the buyers happy.

Adding to the worries on Tuesday with the housing starts coming in weaker than expect and lower than October. The Markit flash PMI was not in line with last month either and moved lower. Data isn’t helping thus far as the focus still remains the price crude oil… but, we do need the economy to improve… not remain flat.

Empire State index turned negative for December down 3.6. Industrial production rose 1.3% and better than expected. Homebuilders index dropped to 57 below expectations. Again the data remains mixed for the economy as we continue to filter through the data.

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.

All is going well with modest to slow growth… some action by the Fed would help versus keeping everyone in the dark on when they look to start moving rates higher. Keep you patience hopefully more clarity is on the way.

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

* FOMC meeting was catalyst for the upside on Wednesday…watching to see if the new unfolds into an event trading cycle for the market or short term upside/micro trend. Patience and focus are key short term.

* Tug-o-war over as oil prices continue lower. The speculation that OPEC would fold has not materialized and the lower oil travels the more nervous investors are getting. I think Russia has a better chance of winning the Nobel Peace Prize than OPEC giving in personally. Plenty of pontification on how this will be destructive to the global economics, but there are no real facts on the outcome or destruction levels that can be validated.

* Crude oil bounced 5% on Friday to close the week, but still plenty of news and speculation driving the process. Oil needs to move back above $65 short term (my view) to ease the anxiety in the emerging markets, especially Russia. This issue is not over despite what transpired last week.

* The Fed¬†is moving back center stage starting Wednesday¬†with the FOMC meeting… last one for 2015.¬†Not much is expected to change as everyone continues to drink the Kool-aide that all is well in the US economy.¬†¬†The discussion on interest rate hikes is on the table, but no definitive timeline currently. Any guidance will be greeted with interest and not likely positive interest.¬†

* Commodities across the board a causing havoc for global markets. This is not just speculation, but potentially can be destructive to the economics of countries like Canada, Australia, Brazil, Russia, etc. where a big share of their GDP is derived from export of commodities. The lower prices do impact the revenue base of the countries and all that ripples through that theme. This remains the primary issue facing the markets going forward and the uncertainty of the events unfolding is pushing stocks lower in response.

What to watch¬†this week…

This is Christmas week and the holiday will impact volume. Take what the markets offer, but be mindful of the period and manage your stops on positions as well as trading opportunities. I am traveling starting on December 23rd and as we announced the updates will be only to the trading notes and what is essential to address each day.

This week we continue to validate the pivot point reversal from last week. The move confirmed on Friday, but did leave some question marks as the indexes challenge the previous highs and the momentum to move higher. Watch how the futures set up for Monday’s open for some clues about the sentiment to start the trading week.

Volatility Index (VIX) moved off the highs and closed at the 16.5 mark. The move on Friday left some question marks about the uncertainty levels still in the market or did the options expiration cause some disruption? We will watch this on Monday with a bias towards the short trade with SVXY. Held the $64.50 level and looking for a extended move higher if the upside for stocks is going to continue. Adding it to the ONLY ETF Watch List.

Crude oil is still on the worry list to start the week. Closed at $56.52 ¬†and bounced off the lows to give some confidence to the buyer in the oil stocks (XLE). There is plenty of damage done and it will take time and energy to sift through the ashes and find what will work and what remains in trouble moving forward. One thing is for sure… the large cap stocks like XOM, CVX, COP, HES and others may be volatile, but they are not going anywhere short term. Still digging and looking for the opportunities both short and long term.

Semiconductors (SOXX) hit support on Wednesday and proceeded to bounce back tot he $94 level closing at $93.79. Can the sector resume the leadership role it maintained prior to the drop? The question mark is the global markets and what impact that will have on demand moving into the new year. Only time will tell fundamentally, but the reversal technically setup a short term trade we added on Friday in the Pattern Trading Strategy below.

Retail is still a mixed bag of optimism and reality. The upside move after the sales data last week helped push XRT back to the $95 level and tested back near $94 on Friday. Auto parts and related stocks are the leadership currently. KMX was up 11.2% on Friday. ARO, GME, AWAY and ODP all posted solid gains on Friday as well. Looking for the parts as well as the whole at this point.

Small Caps (IWM) hit the $119 entry posted for the EGG and the Pattern Trading Strategy on Friday. It did close slightly below that after a nice run to the $19.40 level. Watching the open on Monday and looking for the follow through on the upside to start the week. Need the leadership to help push the market higher short term.

Biotech (IBB) tested early on Friday, but followed up with a move through the $315 entry level we posted in the Pattern Trading Strategy and close at a new high to end the week. I still like the renewed leadership for the sector and we are going with the upside as a key for the move int the broad indexes to continue.

Technology (XLK) made nice reversal on the pivot move on Wednesday and tested back on Friday. This is a sector that needs all the parts to join in if it is going to renew the upside leadership role. IGN, IGV, FDN, SOXX, SOCL and SKYY all need to follow up with moves higher short term. TECL entry $141.25 hit on Friday.

Emerging markets (EEM) holding the bounce off the lows and I am watching how this unfolds in relationship to Russia, China and Latin America. They are all oversold short term in relationship to the oil worries, but need some upside movement to help the sector find buyers short term.

Model Position Notes: 

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

  • 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:¬†Broke through the resistance and closed at $94.92 and at high. Watch and manage the risk of the trade.
Watch List Opportunities:
  1. S&P 500 Model –¬†updated
  2. Sector Rotation –¬†updated
  3. ONLY ETF –¬†updated
  4. Pattern Trade Model – updated

Pattern Trade Setups:

  1. Markets get the pivot point follow through and makes positive move higher on Thursday. There are plenty of bottom reversal moves on the charts and I am looking at the best opportunities going towards year end.
  2. QQQ – entry $104.75. Pivot point reversal. A test back to the $103 mark would be ideal. However, a continued move through the next resistance is equally good. Discrepancy on price and index cause entry not to hit. Watching this today.
  3. IWM – entry $119. Trading range breakout. The sector has flirted with breaking through this resistance three times maybe it makes the upside move now. initial target $123. Hit entry, but late in day. Waited for the weekend to pass and will take on Monday assuming upside resumes.

Pattern Trade Tracking:

  1. IBB – entry $315. pivot point reversal and resumption of the uptrend. Previous leader in position to run higher after test lower. Stop $308.45.
  2. SOXL – entry $135 test. pivot point reversal in the previous leader is positive sign. I would like a test to the bottom of the bar on Thursday at $133 ¬†ish and take the lower entry, but if that doesn’t happen a small test to $135 will be good. Another gap open pass. Initial target $146. Stop $131.
  3. VIPS – entry $20.65. pivot point reversal. Retail sector leader that sold off and is now putting in a current low and reversal. Taking the entry above the resistance point. $23 initial target. Stop $20.10
  4. NPH – entry $11.75. trading range consolidation at support. breakout in the semiconductor stock worth trading the upside move. Stop $11.95
  5. SWIR – entry $39.25. Flag consolidation at high. Break to new high. Telecom struggling on Tuesday, but leader in the sector. Stop $37.50.
  6. 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
  7. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $90.
  8. 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.
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: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • 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. MONDAY: Looking for confirmation on the move higher and some upside acceleration as analyst are banging on the Facebook drum again.
  • 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. MONDAY: Still looking for low and reversal to take off our put options. The $35 level is holding for now, but still need some upside confirmation to gain our confidence.¬†
  • 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. MONDAY: Back near the highs again and breakout could be good reason to add to the upside trading positions.
  • 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.¬†Small range as market keeps stock in check. MONDAY: Still looking for a definitive break above the $49 mark and continuation of the upside.