Trading Notes for Week of November 17th

Notes to Note: 

The market continues to look for a catalyst in direction. Energy offered some negative momentum, but the broad markets continue to trade sideways. Retail sales data on Friday did little to help the broad markets despite the beat versus expectations. Banking is reeling again from new fined totaling billions of dollar on large banks halting the rally in the sector. The economic picture is stable at about 2% growth and dollar is raising concerns as it continues to strengthen. In all the headlines, analyst and investors talk about the negatives relative to the markets, but have remained engaged in owning stocks. We got some rotation in the sectors over the last two weeks, but money essentially has stayed invested. Thus, we have to go with the charts and money flow more than what is being said. The reality in time may be selling or a correction as a result of the concerns becoming reality, but until they do we have to go with the trend.

Oil tested the $73 level last week, but managed to close back close to the $76 mark, but that is still below the $80 support many were hoping would hold. Rumors about OPEC cutting production sparked the slight move higher to end the week. The downside has pushed the energy sector lower, but is it is still hovering around the $86 mark on XLE. The sector offers some opportunities as this cloud clears. Fundamentally the sector has held up well, but the worries over the potential negative impact on earnings of lower oil prices is where the speculation lies. Since there is no clear indication relative to direction we have to be patient and let it unfold this week.

Gold was another sector struggling to find direction on the week and was able to bounce back from a negative open on Friday to break higher from a base consolidation and put a positive face on what started negative. Gold opened down nearly 1%, but closed up more than 2% on the day. The cause for the reversal… a reversal in the dollar which started higher, but lower on the day. There is also the rumor of Russia buying gold aggressively. Worth our attention to start the new trading week.

Europe (IEV) struggled again on Friday as the economic data was weaker than expected. GDP grew at just 0.2% quarter-over-quarter as released by the EU statistics office. Germany grew at a whopping 0.1% for the third quarter. I guess it just depends on if you are a glass half full or half empty type of person… at least it was not recessionary numbers with negative growth. Country ETFs have been showing some pattern breakouts this week worth reviewing.

In all it was a second week of consolidating in place on the major indexes. We are seeing some sector rotation in leadership, but it is not impacting the broad markets. That results in trading opportunities as we need the major indexes to drive the overall trend and sentiment. This promises to be another interesting week as we approach the home stretch for the year and the infamous holiday season.

What we are looking for this week…

Doji central… the Japanese candlestick formation that many point to for directional signals are everywhere. As you are aware this candle tends to show up when the market direction becomes uncertain. I would have to say the data, charts and volume all confirm a lack of direction and/or conviction. This should be interesting to watch on the week and see how it unfolds. Two interest for me first, BABA and if it will pullback and test the move higher. Second, S&P 500 index showing a string of doji candles as it tops.

The dollar… the higher the buck travels the more headwind it could create for stocks, especially the multinational companies. We have already seen the impact in the third quarter earnings and the dollar has moved higher since. This has impacted the commodities as well, but it is starting to produce more concerns about the broader markets going forward.

Commodities… crude oil bounced off the intraday lows on Thursday and managed to close the week on a positive note. Watch to see if it follows through and offers any trading opportunities. Gold bounced as stated above and worth watch as well for GLD to clear the $114.50 level and possible trading opportunity. This is more likely going to be up to the dollar versus any other event. UNG found support at $20.75 as natural gas sold off on the week. This remains a supply and demand story for natural gas. Watching for the cold winter to impact the prices going forward.

Change in the Chinese stock market allowing the Hong Kong and Shanghai exchanges to trade mainland stocks. This opens the way for non-Chinese retail investors to trade on the mainland exchanges. What impact that will have on prices is still yet to be determined. We own FXI and YINN in the EGG Model and we will watch closely to see what, if any, impact this could have on those positions.

Banks? KBE is under pressure again from the fall-out of the fines from the foreign-exchange manipulation. Throw in the higher capital requirements and the ETF fell 1.3% following the news. Watching to see if it can hold $33.25 support on the week. KRE, the regional bank ETF, traded in sympathy, but offers better forward looking opportunities fundamentally and could offer an opportunity for adding to positions.

Treasury bonds still remain a concern as rates have settled with the thirty-year bond still at the 3.04% mark. The chart of TLT looks similar to the S&P 500 index the last couple of weeks. Topping and no clear indication on direction without offering excessive speculation. Either way this will offer some interesting trades as it unfolds going forward.

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

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

* Volatility has disappeared as VIX dipped below 13 intraweek and close at 13.7. Despite analyst and the media stating their is uncertainty looking forward the VIX is not showing any short term. Something to watch as this all unfolds moving forward.

* Topping patterns with the major indexes as they look for a catalyst on the upside. Now is a time to put on your patience hat and manage your exit points based on the time frame you are watching by holding. There no clear signs for selling or buying and this is becoming a time to set your stops and go play golf or travel… anything, but forcing trades and yelling at charts.

* The Fed is still in the background pulling the strings of the bond market and interest rates. 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.

* 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.

* Utilities are moving in response to higher interest rates worries and valuations fundamentally. This should off an opportunity to add positions if the selling gets too aggressive. Remember speculation is rarely anywhere near the truth.

Sectors to Watch Now: (SEE ABOVE)

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. Added slightly on Monday, but it is still positive. Big plus on Tuesday on breakout with stronger relative strength on the move and held on Wednesday after small test.

Interesting Move In… 

Utilities moved lower forfeiting 1.9% on Wednesday. Why the sudden change in sentiment? Dividend has dropped to 3.3% due to the rise in price of nearly 20% this year. Throw in some fundamentals like Price to forward earnings of 17.4, nearly ten year high, and you have an overbought situation fundamentally? Interest rates rising impact the sector has well, albeit we don’t see much on that front, but as we head to 2015 it does become an issue. Support is $45.50 currently and move below that could test the $43.75 mark. Made the move lower on Thursday and exits were hit for the sector. Continued to sell on Friday? Downside in play, but short doesn’t look to appetizing for now.

Model Position Notes: 

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

  • Volatility Index (VIX) The index moved slightly higher on the week, but is still well below the 15 level. Tested above the 14 mark on Thursday and could be time to add a VXX trade going forward. Oil is creating some uncertainty in the markets relative to speculation on the impact of cheap oil on the jobs and economic picture. $28.20 was entry posted for VXX trade. Hit again on Thursday to add. Need to be patient with this trade as we will add to the position as we move forward.
  • 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. Retail move higher on earnings and is now driving the follow through on the upside. (posted to the Sector Rotation Watch List)
  • 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 Fridayy. We will take our exit if the stops are hit this week, but be patient and watch how this plays out.  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. NEED TO BREAK ABOVE RESISTANCE at $53.55!
  • 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 and the sector may be showing signs of just that short term.. 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 continued this week… watching how it plays out with $74.75 as support currently.
  • 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? 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 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 this week selling 1% on Friday.
  • 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 on Wednesday. Those are worth tracking for the follow through… especially on a test. Sales data out on Friday for October better than expected.
  • 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 break-even at $24.40. Testing the move higher? Watch and manage your risk.
Watch List Opportunities:
  1. S&P 500 Model – Added to watch list – Adjusted Stops.
  2. Sector Rotation – Updated stops.
  3. ONLY ETF – Updated stops.

Pattern Trade Setups:

  1. New week, new hope, same issues to deal with.
  2. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector.
  3. BIS – entry $53.10. double bottom reversal. testing lower in the index for second time. Trade setup on worth watching.
  4. DBA – entry $26. breakout from bottom reversal. has build some short term momentum with grains moving slightly higher. (WEAT)
  5. Leaving these on the list from last week:
  6. TZA – entry $13.80. bottom reversal. Negative move for the small caps on Thursday could be start of test.
  7. MCHP – entry $43.65. sideways consolidation pattern. If SOX bounces look for the upside to move and finish filling the gap.
  8. MXWL – entry $11.37. bottom reversal consolidation. technology sector. it has been a leader and benefiting from improved earnings.
  9. CRAY – entry $34.70. Flag. Technology stock has run higher, but remains a leader in sector. resurgence in sector if NASDAQ moving higher.

Pattern Trade Tracking:

  1. XLV – entry $68. Flag and upside continuation. Still needs to lead if the upside is going to continue in the broad markets. Stop $66.80.
  2. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  3. 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.
  4. 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.
  5. 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 $116.
  6. 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 $141.20.
  7. TBT – entry $51.80. bottom reversal. Bonds overbought? look for yields to move up slightly as the positive in stocks influence yield short term. Stop $51.80 Added to position – entry $52.20 (2.5% add 10/24). Stop same on all of the position.
  8. QLD – entry $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 – entry $125. (10/27) Stop $132.75.
  9. 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 $74 on all shares.
  10. 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 $122.90 on all.
  11. SOXX – entry $77.80. bottom reversal. Setting up for bounce off the lows. Broke higher on Thursday and looking for follow through on the move. Stop $88.20. Break above resistance (82.30) good point to add to position. Added to position – entry $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: 
Twitter is showing signs of breaking lower and need to manage the position relative protection. Facebook is acting better, but still worries around the stocks short term. Building some downside protection into our positions.
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. (watching the Jan $75 puts to add if we break support.) – Nice bounce in the sector SOCL. 
  • 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). This is a long term holding and we trade around our position as the downside is back. (11/5 – Added Dec $40 puts at $2.50 – 10 contracts — HIT Stop $1.75 on contracts) – (11/10 – Jan $40 puts – 10 contracts @ $3.20. Stops still $1.75 on contracts.)
  • NEWS: Twitter announced they were adding a video service to launch in early 2015 and investors liked the idea. Stock jumped 8% on the day as a result. 11/13 – stock tumbles as investors decide they don’t like the news? Watching the tug-o-war and consolidation near the low. Nice bounce in sector SOCL.
  • 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.
  • NEWS: Forex fines of $250 million from OCC – hit the price on the day. They also stated they would not lower their standards for high risk mortgages. (makes sense) Wall Street didn’t like the news as they want more earnings…. bank wants to avoid defaults.