Trading Notes for Week of October 27th

Notes to Note: 

The buyers are still willing to step in and put money to work. This has changed the overall view of the bottom reversal for many analyst, me included. The ability to turn what looked to be a nothing more than a bounce in a established trend¬†lower, is impressive to say the least. I am still in the camp of it ain’t over ’til it’s over. The fundamentals are still not supporting a upward trek in the broad indexes and at some point waiting for it to get better will wear thin and investors will sell… Just ask Amazon! Take what the market offers and keep moving forward in this trade opportunity.

Markets showed that fear over Ebola (Thursday) is alive and well. There is concern about the European Banks passing the stress test which is in process, and earnings have not been helpful in the least as a whole. Some bright spots, but the impact of slower global markets is starting to surface in the numbers. How that gets discounted or extrapolated out into the future is still being determined. From my view it ain’t pretty.

New home sales out Friday and¬†it was interesting as the number for August was revised lower by 41k to 466k and then September reported 467k and showed an improvement? Good math! The expectation number was 455k, thus it beat anyway. ITB was lower at the open, but added¬†profits to Thursday’s gains and but remains in position to break above resistance at the $24.15¬†level.

Remember this is a new week of trading and the buyers have held the edge for nine trading days. Some indicators are showing overbought short term and we will let the market determine where we go from here, not us. Still taking it one day at a time!

Some thoughts on news/events impacting investor psyche:

* ¬†Trading environment remains challenge short term. Some testing on Wednesday kept the indexes honest relative to the bounce,¬†but the move higher on Thursday kept¬†the upside in play.¬†The¬†sellers took their best shot¬†and over the last month produced what amounted to a ten percent push lower prior to current¬†bounce in play. The micro trend is still down, but has lost most of the control relative to the sentiment of investors. The indexes are making moves through the downtrend line micro-term and in position to reverse the micro-trend to higher. Monitor the bounce and take what trades work for your strategies, but remember the objective is to manage risk as well as money.¬†Don’t let your emotions get the best of you and remain true to your investment strategy.

* FOMC¬†meeting is finally here and with all the bantering and ranting the biggest questions are¬†what the Fed will do relative QE and equally as important what do they do with interest rates? We have waited patiently to hear the direction they offer… if they are more aggressive than thought it will spark some selling. Investors are looking for the just right approach… whatever that is. All eyes will be fixed on the outcome.

* ¬†Clarity is the primary issue with stocks. Without the ability to forecast with some confidence investors react to news and worries which creates a choppy environment. We are in the process of building a second ‘V’ bottom potentially off the October 15th low. This would be a much deeper ‘V’ than the one in August if it completes the process.¬†So far it has passed the test and this week will tell how it comes out.

Sectors to Watch:

Consumer Discretionary (XLY) moved through resistance at the $66.65 mark on Thursday and stalled on Friday. We will look to add this position today if we can follow through on the positive move. entry $66.80 on S&P 500 model.

Preferred Stock Index (PFF) broke above the $39.50 level and holding. I was looking for a test to take an entry point, but that has not materialized. We will see if it holds tomorrow and add a longer term position with the dividend as the driver at 6.8%. Patience is required for this type of holding. ADDED position on Friday to Sector Rotation Model.

Telecom (IYZ) hitting resistance at the $$29.50 level and looking for the catalyst to break through and move to the $30.40 mark initially. Earnings cut off the advance, but we will watch to see if it changes going forward.

Transports (IYT) hit resistance near the $152 mark and tested back on Wednesday only to break higher on Thursday. The boost from airlines and trucking sectors has helped lead the broad index higher. Watch to see if it can gain enough momentum to move back to the previous high or do we test and then rise. Target $156.

Energy (XLE) the sector pushed to resistance short term at the $86.50 level. If we can clear this on positive volume willing to add to our positions in the sector short term. The price of crude remain near the $80 support. This sector will require patience.

Downside:

Gold (GLD) hit resistance at the 50 DMA and $120.25 mark. Bottom reversal in play and watch how this trades from here. Short opportunity in gold setting up. The reversal off is in play with the move lower to $118 is test of near term support. Short trade is back? GLL entry $95 if the downside continues in the metal.

Natural Gas (UNG) continued the trek lower. We attempted to take the entry on DGAZ at $5 on Friday, but gapped up and we are being patient on the trade opportunity. This is one we will watch on Monday to see if it recovers at all. Patience on the entry. If you own it let it run and manage your stops accordingly.

Volatility Index (VIX) VXX tested the $32.30 support level with the¬†VIX falling to the 15.8¬†mark. consolidating some at the 17ish level and we will look for the directiconal trade on the break… up or down. SVXY is the short VIX trade.

Bonds (TLT & IEF) The uncertainty towards the Fed remains in play as stated below. The current view is that rates will remain low as the Fed attempts to help everything from US income inequality to more jobs for global growth in Europe. The mandate has become too spread out and the effectiveness is equally as spread out. Watching for the downside in bonds to materialize, but patient for now. TLT hit $119.40 support and held. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold.

The speculation is for rates to rise in response to the Fed hiking rates next year… not happening as fear wins. If we remember the FOMC minutes from the last meeting, the Fed is worried about the stronger dollar… the impact of higher US rates to the global economies and low unemployment rates in the US. In other words the Fed wants rates to remain low longer to help the world economies. I believe the threat of higher interest rates¬†is the greatest risk facing the financial markets currently… if rates rise too abruptly it could trigger a sell off in bonds raising yields and impacting the outlook for growth as cost rise proportionately to the cost of debt. If Humpty-Dumpty (treasury bonds) falls as yields rise, all the worlds Treasuries and banks will not be able to put Humpty back together again. Don’t let the short term fear factors driving rates lower be a distraction from the longer term outcome for the sector, but in the same vein we have to let the speculation and fear play out.

Crude oil remains a big question mark relative to the price short term. The stronger dollar has pushed prices lower along with weaker demand globally. Closed at $81.30 to end the week and holding above the $80 level for now. How low does oil fall? The figure of $70 is being tossed around as if it is a fact of late. This is created a downtrend in the stocks, but has managed to bounce with the broad markets of late.

Impact of Crude oil on other sectors is important to watch. While lower prices in crude are a positive for the price of gasoline you have to extrapolate that to the potential economic impact in the US. Trucking costs decline, jet fuel declines, etc. All of the pass through benefits to the consumer are a positive for the economic picture. Some believe the benefits will not pass through to the consumer, but the Airlines, Trucking companies and others will keep the profits to add to their bottom line. If that is true, then we should look at who stands to benefit the most going forward. Since Airlines spend approximately one-third of their revenue on jet fuel and if prices fall 20% doesn’t that translate to a stronger bottom line without much effort? Sounds like a good reason to scan the Airline sector for stocks like DAL, AAL, SKYW, JBLU & LUV which are the current leaders.¬†You get the point… it is good to look where opportunities will improve going forward despite what is happening in the world. The only wild card to this situation is the Ebola situation as it will put more stress on airlines and travelers. Remember the objective is to outline what we believe could happen and then let the charts validate the truth or reality going forward. Transports (IYT) and Trucking stocks are worth attention as well (USAK, YRCW, ARCB, PTSI, & MRTN).¬†This is already heading higher with all of these sectors. Manage your positions and enjoy the ride. It help you pay for¬†you next airline ticket.

Model Position Notes: 

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

  • Short Treasury Bonds (TBT) – TLT hit $119.40 support and held for now. Added the entry at $51.80 on TBT. This is a trade back to $54 initially and we will watch for this to unfold. Tested and allowed to add to position if you wanted on Friday.
  • Russell 2000 index (IWM)¬†Led the move off the lows and has worked its way back to the $111 ish resistance. Down trendline is now in play as resistance. There is still work to do on the move off the low. Still looking for investors to take on risk in portfolios, but has not materialized yet. Take what the sector gives. We own TNA in pattern trading model.
  • 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 steady and we maintain a positive outlook for the sector.
  • S&P 500 index (SSO)¬†followed through on upside¬†bounce move and closed at 1940 (50% fibanocci retracement) Tuesday. Continued to move higher the balance of the week and is now in position to clear the next resistance at the $117.50 mark. ‘V’ bottom still in play on the upside. How much gas is in the tank for the move higher?¬†For now… enough.
  • REITs (IYR) the break higher on Monday 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. Solid bounce continues¬†as we push back near the previous highs with consolidation to end the week.
  • Financials (XLF) added position on the move through $22.70 mark. I still like the sector, but it is still lagging as the earnings and outlook are still not attracting investors to any large degree. Clearing the $23 level is good point to add to position if you have not already done so. This is a key resistance level to clear if upside is to continue.
  • Healthcare (XLV)¬†¬†moved through resistance at the $63.40 level and looking for the upside follow through. A test of the $63 mark and move higher was¬†a good confirmation read on the chart. Attempted to buy CURE, but missed the entry on the gap higher. 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.
Watch List Opportunities:
  1. S&P 500 Model – updated model table – Adjusted positions.
  2. Pattern Trading Model below updated. Adjusted positions.
  3. Long Term Opportunities – added positions on Monday.
  4. Sector Rotation – Watch List Updated.
  5. ONLY ETF – Watch List Updated.

Pattern Trade Setups:

  1. Nice upside moves higher on the week establishing the move off the low to be more than a bounce for now. Manage the positions and keep looking¬†forward. Looking for a test of the current move, but don’t see much in terms of the sellers willing to retest the lows currently. Let it run and take what it offers.
  2. See note below for adding to positions and stop adjustments. Adding to existing positions as they approach breakout levels to complete the ‘V’ bottom move. Less risk currently on these trades.
  3. QLD – entry $125. Add to position on next breakout level for the index.
  4. TNA – entry $66.45. Add to position on the breakout at resistance on the bottom reversal follow through.
  5. SSO – entry $$117. Add to position on breakout at resistance and follow through on upside move.
  6. IJH – entry $136.80. 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.

Pattern Trade Tracking:

  1. SCO – entry $37.85. Flag pattern on the uptrend of the ETF… if we break higher look for the trade entry on the move. Stop $37. (reversed after the entry on Friday.)
  2. BIB – entry $111. Breakout. Be patient broke to new high on Thursday. If this confirms looking to add s short term trade on the leveraged ETF. need a test back of hold this level and move higher. Test is the preference for the trade entry. Stop $110. Nice move higher after entry on Friday.
  3. 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. Friday: If we test the move looking to add to our positions. Added to position at $52.20 on Friday (2.5% add). Stop same on all of the position.
  4. QLD Рentry $114.50. Bottom reversal continuation. Quick upside, but needs volume to keep the move alive. Stop $118.80. $121 target for trade. TODAY: Looking to add to the position on breakout.
  5. TNA –¬†entry $62.50. bottom reversal breakout. Tested and needs to move through the next level if we are going higher. Stop $62.50. Target $66.50. TODAY: could add to the position on move through resistance at $66.42. TODAY: Looking to add to position on break higher.
  6. SSO Рentry $107.60. bottom reversal. Tested support at the $107 level and bounced, took entry on the trade. Stop $112.20. TODAY: Add to the position on breakout and follow through upside.
  7. 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 $81.50. TODAY: Break above resistance (82.30) good point to add to position. ADDED to the position at $82.50 (added 2.5%) same stop on all.
  8. ERX – entry $71.15. bottom reversal. Oversold bounce on Thursday. Followed through for entry and target of $84. Oil bounced as well off the lows. Stop $75.80. TODAY: Break above resistance at $81.06 is of interest to add to positions.
  9. SOXL – entry $75.60. bottom reversal. This is a trade setup only and not willing to chase is the Intel news spikes too high. SOLD 1/2 on pop $84 Friday. Sold 1/4 at $93.70 Wednesday. Stop on balance $87.40. Managing out the tail of the holding for now with stop as exit.
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: 
Both positions held on in the storm Monday and Tuesday. Exercising some patience as the issue of the Fed unfolds. These are long term holdings and we don’t want to over react tot he short term news. If the short term volatility made any rationale sense we would trade the events, but they are too news and emotion drive for now. There will be opportunities on the other side of this and we will take advantage of that as it arises.
  • Facebook (FB) – Testing the break higher and has held up well in the recent choppy markets. $73.15 entry point to add 1000 shares back on the long term outlook. Earning are 10/28 and we will watch to see how we traded into that timeline.
  • Twitter (TWTR) –¬†Tested lower and wanted to add on a break from the trading pattern at $50. Took entry 10/20 for 1000 shares at $50 and stop at $46.
  • 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 today at the $16.35 mark. Stop is $15.