Trading Notes for Week of November 24th

Notes to Note: 

Friday was a study in how emotions set the market up for a let down. The open was positive based on the news overseas and it added to the gains in the first hour of trading… but, then reality set in to the fact the stimulus could take months to actually benefit the US and the markets drifted back towards flat on the day. The Russell 2000 Small Cap index was the perfect example as it hit 1184 as the high early in the day and closed at 1170 erasing the gains and leaving plenty of people scratching their collective heads. Intraday reversals on the downside are never a good sign from my view and that leaves us with some question marks to start the trading week.

There is plenty of talk still circling about the downside risk in the current market based on valuations, technical overbought signals, earnings forecast, etc. Each has a valid point, but the buyers are still willing to step in and own stocks at each selling point. Wednesday was a modest selling day and the buyers still showed up to push stocks back to their previous highs and then added to the buying on Thursday. Friday, as we stated started in that direction, but forfeited the gains. This is an underlying concern as we start the trading week.

Are we now in a position to test lower or continue higher? That is the million dollar question to start the week and based on Friday’s activity I am leaning more on the test lower theme. We will look to see how it unfolds on Monday, but there is plenty to watch and understand as be proceed.

Patience, focus, discipline and one day at a time… that is all we can do for now. Remember this is Thanksgiving week and volume will be on the light side. Take some time and relax don’t worry about the markets the fun will resume next week.

What happened¬†this week…

This has been a week of why? At least that is what I am calling it. Why are we trading anything other than as a day trade? The lack of conviction from either side is noted in the charts, but Thursday and Friday did produce a move and gaps on the upside. The give back on the gains throughout the day on Friday caused some concerns, but we have to see how this unfolds on the week going forward. For now we will take it as continuation breakout and look for a confirmation on the upside.

Global markets get aide from Central Banks. China cutting interest rates, Europe authorizes asset buys (QE) and Japan voting to delay beginning of sales tax. All forms of stimulus globally to get the economies going again. The US rallied on the news, but as I stated above… Why? The time it will take for the benefits is much longer than now. This is a positive, but we will have to see how this all unfolds.

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

* Volatility has disappeared as VIX dipped below 13 and close at 13.6 on Friday. 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.

* Topping patterns with the major indexes as they look for a catalyst on the upside. Tuesday produce a breakout move higher, it tested on Wednesday and follow through higher on Thursday… only to end week with an intraday reversal. Watching for clarity.

* 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.

* Worries still lurking in the background… Russia and the crazy stunts towards Ukraine. Amnesty for Immigrants in the US without Congress? Economic data is stagnating and that is a long term concern. Wages and economic impact along with the estimated 100 million non-workers in US. FOMC notes stated Fed was focused on US economy… glad to hear it, now do something… anything.

Sectors to Watch Now: 

Global markets are back! Sounds like the theme to the movie Poltergeist. China is going to cut rates and FXI rallies 3.8% on Friday. Europe is going to use asset purchases similar to the Fed QE program, Europe rallies. Emerging markets are happy to be alive and rallied on Friday as well despite the stronger move in the dollar. All on our watch what happens list to start the week.

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 not test $44.50 as confirmation of the move higher. Expect volatility in the position as the news from Europe is always an adventure. Yes, volatility is here.

Emerging Markets (EEM) moved above both resistance and the 200 DMA. Will this hold and continue on the upside? $43.30 would be the target for the next resistance and that is 2% on the upside? Looking for a test and confirmation of the move on the upside before willing to risk the capital.

JJG – Grains Commodity ETF bounced off support at the $36.60 level on Thursday. We had been tracking this all week for a continuation of the move higher in the uptrend off the October low. Interesting move and back to watching for the upside to follow through in the sector. Entry $38 if we make the upside move. (ONLY ETF Strategy) Got the move and some give back with the broader market indexes. Still in position to climb higher.

MOO РMarket 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. Made a nice break from mini-consolidation Tuesday and has amassed a solid 12.5% upside off the low in October . Still work to do, but still looks positive short term. Maybe it is a precursor to the gains moving higher? OR doji left on Friday offers a test lower or reversal off the high.

Russell 2000 Small Caps (IWM) –¬†Can the index push higher or not? Friday was a negative relative to the move higher giving up the gains and leaving a bigger question relative to a reversal and move lower again. Watch and determine how this setup on the week.¬†

Internet (FDN) – entry $61.50. continuation of uptrend. The test back to $60 held and making move towards the September high, but still testing and no clear follow through yet on the upside move. I like this sector going forward for growth. Scanning the ETF for movers has produced some interesting pattern breakouts and setups. Tested lower again with exit point at $60.75.¬†Gap lower on the open… take stops off prior to the open. Moved back above the stop and watching how this does moving forward. Restore stops at the same level or $60.45 just below the low Wednesday.¬†

Model Position Notes: 

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

  • Volatility Index (VIX)¬†The index spiked up to 15.6 on the open and¬†move back below 14 on Thursday. Friday opened at 13 before closing at 13.6. Worries don’t last as long as there are buyers available to pick up each mini selling point. Small caps sells off 2% Wednesday and bounces back is a good example of the lack of conviction. Then they rise 1% and fall 1% on Friday. Intraday volatility is alive, but the uncertainty kind that spikes volatility in the index is not there. $28.20 was entry posted for VXX last week to¬†add. Need to be patient with this trade and¬†we will add to the position¬†going¬†forward. TODAY:¬†Testing and being patient for our point to add to positions.
  • 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.
  • 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: Trying to break higher, but cannot manage to hold the move with any conviction.
  • 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: looking for upside follow through or we tighten the stops.
  • 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. Tested lower and held, but¬†… manage your stops.¬†Give some room for volatility, but manage your 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: follow through to the Friday break higher.
  • 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: can it hold the move? watching.
  • 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: hold the move from Friday towards top of the current range?
  • 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.
  • Short Treasury Bonds (TBT) – We will take our exit if the stops are hit, 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! TODAY: looking to protect our money at the stop… Fed too engage and investors too worried for bonds to sell.
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. Market is showing psychitzophrenic¬†tendencies still. Up, down, sideways all in the next hour… we have to manage with patience, allow for volatility and maintain our focus or we will get a little crazy to match the market.
  2. Some setups from sector scans this weekend that are leading…
  3. EXAS – entry $24.25. descending triangle. Biotech is leader and this was from the scan of the sector. Looking for follow through on upside.
  4. NLNK – entry $35.30. Flag. Biotech pattern broke on Friday… test and move higher.
  5. ACAD – entry $28.90. reverse head and shoulder. Break higher tested Friday. Look for follow through.
  6. MRVL – entry $14.05. triangle breakout on gap higher. testing as semiconductors break high and own a leadership role.
  7. MU – entry $34.40. Trading range breakout. ready to establish a new high. Breakout is positive for the sector and the stock.
  8. JNPR – entry $22. Triangle. downtrend will be broken as well on a breakout and follow through. Leading the network sector higher currently.
  9. Left from last week on the gap higher at the open. Look for solid entries to the move on Monday:
  10. BABA – entry $110. Trend test of support. Held support Thursday at the $107.30 level and reversed. If we get the follow through today willing to add a position for a trade back near the $120 level. Gapped through entry at open. $111 max entry.
  11. XOP – entry $61. Bottom consolidation range. Energy oversold. crude leveling off. Trade on upside momentum as investor warm up to the idea. strong volume on the bounce Thursday. Gapped through entry at open. $61,70 max entry
  12. GDX -entry $20.30. Bottom reversal. If gold makes a run on the upside speculation the miners will go with it. tested on Wednesday and held above $18.64. Be patient.
  13. FCG – entry $$15.30. Bottoming wedge. Good move on Thursday to put in a position to follow through on the upside. $17 target. Gapped through entry. $15.30 or break above Friday’s high ($15.82).

Pattern Trade Tracking:

  1. 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 $45.20
  2. 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
  3. 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
  4. MA – entry $84.70. Flag. Gap higher on earnings and consolidating the move. Higher with sector. Stop $83.10.
  5. TZA – entry $13.80. bottom reversal. Negative move for the small caps watch for follow through and test. Stop $13.40
  6. TSO – entry $73.60. Trading range breakout. Refiners continue to hold a positive outlook relative future growth. Stop $72.60
  7. SOXL – entry $115. trading range/flag. gaining some upside momentum? break above resistance is entry. patience here. Stop $114.
  8. 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 $42.50.
  9. AMJ – entry $51.50. trading range. dividend plus growth trade. target of $54. Stop $49.50
  10. PSX – entry $73.50. bottom reversal. Looking for move back to the $79 level on bounce. Stop $72.80.
  11. 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.
  12. XRT – entry $90. Break higher from ‘V’ bottom reversal… holiday momentum? Stop $88.60
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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 $51.80 Added to position Рentry $52.20 (2.5% add 10/24). Stop same on all of the position.
  18. 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 $132.75.
  19. 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 $124.50 on all.
  20. 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 $88.20. 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: 
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.
  • 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.