Trading Notes for Week of November 10th

Notes to Note: 

Another week of economic data and the economy remains the same… at least that is how I see it. Manufacturing improved and services fell with a net effect being the opposite of last month. The reality being we are chugging along at roughly a 2% growth rate and all is good according to the analyst. It isn’t bad and based on stock prices it looks to be good enough, but I would not say things are good in the economy, but it is better than a recession. I don’t see any evidence of this changing anytime soon.

The mid-term elections are over and the republicans won control of the Senate, and according to the headlines, everything will get better now. I am not in that camp either, by the way. This will likely bring about some short term changes in the energy sector, but I don’t expect any sweeping changes in how the economy is performing.

Biotech put investors on notice that the leader on the move off the October 15th low may be topping. Blame the election, blame overbought signals, blame whatever you want, just pay attention to the sector moving forward if the downside move follows through.

Energy made a moved off the low thanks to oil prices showing some signs of life moving back towards the $80 level to end the week. XLE moved back above the $87 resistance level as a positive sign for the sector. Again you can blame the election results or a modest move higher in oil prices, but worth watching the outcome short term.

Commodities made a move off the lows the later part of the week and are on our list of potential trade opportunities with the life shown in gold, oil, natural gas, and base metals. Worth watching for any trades that develop like that in UNG and FCG to end the week. This is only a trade short term unless the dollar decides to decline going forward. Watch, trade and mange the risk of those trades.

Homebuilders followed through on the break through resistance as well on some positive data in the sector. We will get more data this week to confirm or deny any strength in the sector last month.

The broad markets as consolidating at the highs and looking for a catalyst to lead them higher as we march toward the year end. The sectors above are not going to be the ones to make a difference, but technology, financials, healthcare and the consumer stocks are, and that is where we will look for movement this week to confirm the continuation of the move off the October 15th low.

Remain patient and let the markets unfold where they intent to go.

Some thoughts on news/events impacting investor psyche:

* Oil prices remain at the center of attention for relative to the US outlook. They are double edged sword relative to helping the economy with lower costs and hurting the economy as it has been the sector with the most job growth. If that stalls it would hurt the economic picture. We have to watch how this unfolds and act accordingly.

* The¬†momentum in the markets¬†called¬†global stimulus continues as the central banks around the world continue ease and add to their stimulus packages. The dollar has jumped higher, commodities have fallen and US stocks have run on the prospects. How long does it go? Use the US Federal Reserve as a benchmark… they were engage in the latest stimulus for two full years. That leaves plenty of time globally for this to all unfold.

* The Fed put some new things on the table¬†relative to their collective outlook for economic growth in the US. Is it valid and will investors buy into the outlook?¬†My initial reaction was no, however, the GDP revisions higher than expected at 3.5% growth in Q3 did lend some credibility to what the Fed stated. That in turn has pushed stocks higher. The bigger question is does the news have sustainability?¬†I know the truth doesn’t apply to an emotional market, but it is another reason to keep your stops in balance with the risk at hand.

* 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.

Sectors to Watch this week:

Note the sectors outlined above as well for this week.

Energy (XLE) bounced back from selling lower and made a key move back above $87 (XLE) to end the week. A follow through move above the 50 DMA would be a confirmation of the uptrend resuming. Oil needs to move back to the $80 mark, my opinion, for this gain traction. Trade first, then let it develop into a longer term holding.

Natural Gas (UNG) made the move higher last week and broke through the $22.30 resistance level. Touched the 200 DMA on Friday and retreated to close at the $22.90 level on UNG. The stocks finally moved on Friday as well with FCG gaining 5.8% to push back to the top end of the trading range and bottoming pattern. Watching to see how sustainable this move is or if it was just a trade opportunity.

Volatility Index (VIX) The index moved lower on the week and closed below 14 at 13.1 on the closing rally Friday. This puts the 12 level back in play and is showing not signs of worry as we make the turn towards the year end move. SVXY is the short VIX ETF and may be the trade to hold going forward as volatility has been taken out of the market for now.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play, at least mentally. The drop in yields on Friday back to the 3.04% mark was a negative in my view for growth sectors. The buying of bonds corresponded with money rotating from the leaders like semiconductors, biotech and small caps. If this continues you could see another mini rally in long bond as a trading opportunity.

Crude oil remains a big question mark relative to the price short term. Crude Oil (USO) is attempting to build a bottom reversal pattern the last week, but it has not produced a change worth the upside trade risk at this point. It could get peer pressured higher short term, but the demand is certainly not there for now. I like the short the rally trade more than trading the bottom.

Gold bounced 2.8% on Friday as dollar tested lower and the global outlook sparked some buyer to step into the oversold metal. Does it last? Not likely, but could be a trade opportunity as gold, silver, platinum, uranium, copper, steel and aluminum all had a nice day. Natural gas had a strong week, agriculture was modestly higher on Friday and hope was in the commodity headlines. This is a trade and nothing more currently. MOO, Market Vectors Agribusiness ETF has been running nicely off the lows, but that is the industrial stocks like John Deere, Toro, Tractor Supply and Agrium moving higher.

We still need the large sectors to carry the load while the small discussion above provide some trading opportunities. The Financials are taking on some leadership along with basic materials, industrials, consumer staples and utilities. That is fine, but healthcare, technology, consumer services, biotech and small caps need to step back into the role of leadership if the broad markets indexes are going to break higher. Take what the market gives and measure risk relative to the current market events both short and long term.

Model Position Notes: 

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

  • Energy (XLE) the sector pushed to resistance short term at the $86.50 level and attempted to break higher this week, but stalled on the concerns over crude oil prices¬†and worked lower.¬†The price of crude is still testing lower and causing grief to the sector.¬†This sector will require patience for the answers to unfold. Added¬†small allocation on break above the $87 mark Friday, but not convinced overall of the strength moving forward. Added (Sector Rotation Model). Manage our risk short term. Small bounce and breathing room to start the trading week.
  • Consumer Discretionary (XLY) moved through resistance at the $66.65 mark. The upside gained some ground through the $66.65 level and follow through. We will look to add this position if trend gains more traction. Added to the S&P 500 Model. Consolidating near the high and looking for follow through on the upside. (posted to the Sector Rotation Watch List)
  • Gold (GLL)¬†Hit stop on the selling Friday. Watching how it unfolds and could take short again if the bounce trade fails.
  • 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 Model.
  • Short Treasury Bonds (TBT) – TLT¬†bounced on buying from rotation. Not good sign for the short side and we will take our exit if the stops are hit this week. ¬†Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Raise stop to break even trade at $51.80 on renewed worries.
  • Russell 2000 index (IWM)¬†Led the move off the lows and cleared¬†the 115¬†ish resistance and stalled with consolidation near the highs. We have been looking for investors to take on risk in portfolios, but that is stalling currently.¬†Adjust your stop accordingly.
  • Utilities (XLU) broke above the upper resistance at the $43.75 mark and confirmed the move higher. A reverse head and shoulder pattern was the breakout move and on test¬†and confirmation of the move to add a position to the S&P 500 model. Holding and letting it run for now. S&P 500 Model.¬†Watch the volatility as it has picked up, but the upside remains the trend.
  • 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. How much gas is in the tank for the move higher?¬†For now… enough.¬†Manage your stops.
  • 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 to end the week… watching how it plays out.
  • 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. That changed following the FOMC meeting and now testing the highs.¬†Adjust your stops and 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 model. First sector to recapture the September highs and¬†is setting the pace on the upside move. One question mark is the election… will the republicans attempt to overturn Obamacare or parts of it? The attempt could rattle and impact these stocks in turn.¬†Note the topping pattern and volume on selling Friday.
Watch List Opportunities:
  1. S&P 500 Model РAdded to watch list РAdjusted Stops.
  2. Pattern Trading Model below updated. Adjusted Stops.
  3. Long Term Opportunities –¬†Added puts.
  4. Sector Rotation – Updated stops.
  5. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. Still consolidating on the move through the previous highs. Watching, looking and planning on a catalyst to drive the indexes higher or else the test lower could evolve near term.
  2. BIS – entry $53.05. rolling top in biotech (IBB) looking for pullback trade.
  3. TSO – entry $73.50. Flag. Continuation trade on the upside in refiners.
  4. CMI – entry $$147.50. Consolidation breakout. the sector has been leading as money rotates.
  5. IFN – entry $$27.80. consolidation breakout. India is picking up again as stimulus flows in global markets. looking for test of the move on Friday for entry.
  6. OIH – entry $45.50. Energy is breaking from consolidation pattern and looking for bump higher as trade.
  7. SLV – entry $15.25. Gold jumped on jobs report Friday. Could rally silver along with it short term.

Pattern Trade Tracking:

  1. 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 $22.75.
  2. TBT – entry $52.85. Break through resistance and continuation of the bottom reversal. Watching for reaction to the FOMC meeting and add to our existing position. Stop $51.80.
  3. 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 $114.75.
  4. 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 $140.50.
  5. TBT Рentry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.50 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  6. 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 $128.65.
  7. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Target $66.50. Added¬†to the position on move through resistance at $66.42. Entry $66.45. (10/27) Stop $72 on all shares.
  8. 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 $120.35 on all.
  9. 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 $86. 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: 
Consolidating near the lows of the current range on Facebook and Twitter. Need to manager our risk. We added the put options to protect our downside risk, but if the stocks break lower we will exit the stocks and hold the puts for the trade. Still a buyer long term, but shifting to protection and risk management mode on these positions for now.
Bank of America is doing well on the move higher and we continue to manage the position accordingly. If the upside stalls we will lock in some profit on the options added and let the balance play out going forward.
  • 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. Watching today for it to bottom out and add to position as it since. Patience today as other news will impact later in the day with FOMC. Flat lined after open… still like the upside and will be patient. Add Dec $75 puts @ $3.50 – 10 contracts.
  • Twitter (TWTR) – $50 entry (10/20 1000 shares).¬†Removed stop with the gap lower pre-market of better than 12%. Added 500 shares at $42.80 (10/28) late morning as the dust settled. This is a long term holding and we trade around our position now and look at some option trades on this move. Add Dec $40 puts at $2.50 – 10 contracts
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85. Banks are selling in the current push lower, watch and manage the position.¬†Want to add our long positions in stocks back near term if we hold support and make some progress relative to sentiment. Added 2500 shares at the $16.35 mark (10/21). Stop is $15. Added to our Jan 16 calls same price.