Trading Notes for Week of January 12th

Notes to Note: 

I am going to start the notes by reiterating this is a traders market environment. News is driving analyst crazy as it drives the day-to-day action and the length of any directional move is 1-5 days. It isn’t necessarily a bad thing it just creates for choppy trading and bad signals. I am willing to be patient and let this settle down and define a direction.

The jobs report I hoped would provide a catalyst failed to materialize, and rightfully so. I want to only share one number from the report that put it all in perspective to me… 252,000 new jobs added, 451,000 people leave the¬†workforce! Unemployment rate declines to 5.6% not because of jobs added, but because the participation rates is at 62.7% same as 1978!

Throwing fuel on the fire was the comment from Nancy Pelosi: “now is a good time to raise gas taxes with prices lower.” Really? That is the intelligence level of our thinking in Washington? Wages fell 0.2% in December… note they didn’t rise. So, what discretionary income that was created with lower gasoline prices to households we want to take away with a tax increase. Brilliant! And we wander why we can’t balance a budget or stimulate the growth in the economy?

Okay back to¬†the market. NEEDED… a catalyst that is sustainable, good or bad. Earnings will set up to be that catalyst near term as we see just how good the growth was in the fourth quarter. Throw in some data from the economy and we should start to work through a direction at least by sector first and then the major indexes.

Looking at the charts we validated Friday we are¬†in the precarious position of resistance at various levels. IBB hit the previous highs as an example and tested lower. IWM hit the $118.50 mark and and tested closing lower. SPY is at $206 resistance and pulled back as well. As good as the move was on Thursday the next resistance level is in play for the leaders and want ¬†to be leaders.¬†We need to take these levels out if we are going to continue the upside moves. This is why I state it is at traders market… can’t maintain any micro trends at this point. Forcing my beliefs on the market only ends up with poor trading discipline and losses. Let it unfold.

In the global markets it is not looking good and no one seems to care. Industrial product… or should I say lack of production was negative except in Spain. Draghi (head of the ECB) can’t make up his mind. Last month I called him the ‘little boy who cried wolf!’ He promised stimulus, but never follows through. A report Friday stated he is still investigating what type of stimulus would be effective? The next meeting is in two weeks. He has been reviewing this for two years. Is there any reason the European index continues to be in a downtrend since June’s high? IEV is in position to break below $40.50 and confirm the short side plays again.

MAJOR INDEXES:

The ten-year bond move fell to¬†1.97% or or down 15¬†basis points. The bond has gained 1.3% this week hitting¬†a new closing 52 week¬†high.¬†The question remains: is this move telling us something about stocks? To this point I have said no… it is simply acting as a defensive buffer when any selling takes place in equities or a flight to quality. That is something to watch as the Fed wants to hike interest rates… Investors are voting they won’t do it in the short term if stocks correct and feel enough conviction to buy bonds. Throw in the global issues economically and money is moving to treasury bonds as well. The money flow into the bonds is the cause of the move in the yield. Watch and let it play out short term.

The NASDAQ closed at 4704¬†down 21 points¬†or -0.5% for the week. A nice double top pattern is not turning into a trading range for the index as investors are undecided on direction.¬†We tested¬†support at 4555 and reversed off the low.¬†The long term uptrend is still in play, but the risk of moving lower has not been negated necessarily by¬†the bounce.¬†We have to be patient and let this unfold. The gaps on the open kept us from¬†any short term trades as well. Respect the uncertainty and don’t force trades.

The S&P 500 index¬†closed at 2044¬†down 13¬†points or -0.6% for the week. Sold two days to support and rallied two days to resistance and close at the 50 DMA.¬†Leadership is one theme I discussed last week and we still don’t have any clarity on that front.¬†Healthcare was up 2.3% and consumer staples gained 1.5%, but both are defensive sectors and they are not going to take the index higher without help. The other eight sectors ended the week in the red. Energy was the worst performer down 4%.¬†Key resistance is at the 2060 mark and¬†it reversed off that level on Friday. As stated above there are plenty of things on the horizon that can offer the needed catalyst… patience as this all unfolds.

The Russell 2000 index had an eventful week with the index moving back below the 1190 level after a nice move to the 1220 mark to end the year. It completed a trip through the old trading range caught support at the low and closed at 1185? Held above the 50 DMA and still look positive in reference to recovering from the selling, but it is still a flip of the coin on direction. Need to confirm a move above 1190 and I would look for this to be a decisive week with earnings beginning.

The Volatility index spiked higher on¬†data pushing the near¬†the 23¬†mark early in the week, but has now moved back to the 17.5 level on Friday. That is still elevated relative to where we have been and does show uncertainty on the side of investors, but it is not in the fear range. Thus, if a catalyst shows up on the positive side this will move back near the 14 mark, if not a move above 25 will make it an interesting trading environment. As I have stated, it¬†is important to understand that investors don’t like uncertainty about the future. The default is to sell and watch as it unfolds. We are at that crossroad again.

The Dollar (UUP) continued higher on the week at $24.38 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 91.96. The stronger dollar remains a positive from my view looking longer term. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future. The impact to oil is showing as well near the $48.36 per barrel level.

Crude Oil remains one of the components that was a catalyst to the selling to start the new year. It has settled in the $46-50 range and if it can remain there without too much volatility the impact will dissipate in the short term. That said, it is still a key factor to the markets looking forward. The downtrend is well established. Three days of holding the current levels is positive, but I would like to see a base established in the commodity.

There is¬†plenty of¬†speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The bounce back from the five days of selling was positive, but we still have to clear critical resistance levels and deal with an onslaught of data heading our way. Jobs report¬†did no favors on Friday as wages declined on the month showing lower paying jobs added. Earning start Monday, more economic data out with sales reports for December, and bank earnings will set the tone for the sector and potentially the S&P 500 index. I stated we needed a catalyst to keep the party going on the upside… All the data may well provide that catalyst for the markets. If the news is bad (as seen with the jobs report) we return to the downside test with the sellers stepping back in. This remains a traders market with plenty of risk to confront in every trade.

What to watch¬†this week…

Further reaction to the jobs report to start the week. Looking to see if after some time to digest anything changes going into the week of trading Monday.

Banks (KBE and KRE) gave up 2.5% on Friday. Fear heading into the earnings reports that start on Wednesday. I believe they will be better than expected, but that does not seem to be the voting consensus from traders. Not willing to buy in front of the news, but it may well prove to be an opportunity on the other side.

Leading Sectors: XLV and XLP

Sectors worth Watching: XLK, XLU

Laggard Sectors: XLB, XLY and XLI

Loser Sectors: IYZ, XLF and XLE

Sectors of Interest for Trading:

The homebuilders (ITB) jumped to new high the last three trading days. Digging into the sector the leaders were the suppliers USG, LPX, OC, TREX, etc. The builders moved higher, but it is those supplying the building materials that made the move on the upside. The charts of these are worth some study as they do present some opportunities.

Semiconductors (SMH) are a sector that could offer some leadership along with technology overall if we can get off to a positive start on the week. Clear the $54.50 mark would be good entry point for the trade upside.

Gold Miners (GDX) The sector has benefited from the bounce in gold and has traded back to the resistance point of $20.40 The close on Friday at $20.70 puts the $21.75 target it sight. Recommended a high risk trade entry at the $20 mark last week after taking some early profits. Still like the upside and the risk remains high.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. Upside in play and a test of the $79 level would be potential entry point.

China (FXI) uptrend remains, albeit volatile, off the October low. Technically the upside is in favor and worth trading if we can move through resistance and stomach the volatility that is likely to remain. Close above $42.50 is level to watch.

Basic Materials (XLB) have formed a symetrical triangle of consolidation and I am looking for a break from the pattern and establishment of the trend. The upside is the previous direction and is the likely direction statistically. Watching for the opportunity to unfold. Scanning shows the miners and metals as the leaders… GDX above and XME are worth scanning as well.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†updated
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Volatility is back… we have to remain patient and selective with any positions. Manage the risk accordingly.
  2. ACAD – entry $33.40. triangle breakout. Looking to continue the upside trend following the break higher.
  3. PLNR – entry $8.40. test of breakout above $7.80. upside still in play after test and looking for upside to continue.
  4. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption.
  5. PXLW – entry $4.80. Break of downtrend line. Semiconductor sector and looking for some leadership to return.

Pattern Trade Tracking:

  1. TWTR – entry $39.30. Break from basing bottom. Trade off the long term position below.
  2. JD – entry $25. Break from base or bottom trading range. Internet sector. Need follow through on upside with some volume. Stop $24.
  3. GILD – entry $100.30. Bottom reversal follow through. Bounce back from the selling in December tested resistance and ready to move higher. Stop $99.40
  4. GDX Рentry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $19.50.
  5. 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
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 range as investors sort out the facts and fiction. Testing the bottom of the current range and bounced … bounce (we added to our positions. 500 @ $77.50) TODAY:¬†Being patient with the indecision in the broader indexes and letting this unfold short term.
  • 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. (hit stops on our put contracts on the reversal last week.)¬†Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 Friday.) TODAY:¬†Follow through on the upside move last week would be a positive for the position going forward.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). Banks were¬†gaining some ground and I still like our position going forward. We add our long positions in stocks back (Added 2500 shares at the $16.35 mark ¬†on 10/21). Stop is $15. (ADDED 2500 shares at $17.15 and target is $18 on the move short term as trade in¬†the position.) TODAY:¬†Watch the $16.70 level of support. Willing to add put contracts against the stock positions short term to protect our downside going into earnings. 50 Feb 17 puts @ 60 cents.
  • 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. TODAY:¬†Still need to clear the $50.80 resistance, but holding up well for now as we remain patient.