Trading Notes for Week of September 29th

Notes to Note: 

Thursday the economic data prompts selling that took the major indexes below key support level and Friday pushed them back to those levels. Is there any wonder that some investors are pulling their hair out? Trading in volatile markets will drive you insane… just speaking from experience. I get plenty of email during periods like this asking me why I am holding so much cash. My response has been the same now for nearly 15 years… “CASH is a Sector!” in micro to short term time frames getting out of the way of emotions is often the best course. That begs the question from me, “why do we feel like we always have to trade something?” Remember compulsion is an addiction. If you need to join a group to help you with that addiction please do.

There are three primary trading strategies most investors follow… Long-term (passive investing), short to intermediate-term (active investing), and trading (micro to short-term). Most investors will participate in all three or a combination of the three. Very rarely do they only select one style of investing. There in itself many times is the problem. We confuse strategies and time frames which feeds emotions, leading us to react to market events versus being proactive to managing our portfolio based on a defined strategy. Throw in help from a “professional”, and it gets more confusing. Bottom line define what you want and then create a strategy to obtain it. Stay on course and when take a detour, clean yourself off and get back on the road you laid out. This is a journey not a destination.

Okay I will get off my soap box and back to the market. It remains a market without direction, clarity or conviction and that is a dangerous environment short term. The longer term outlook has not changed except for the impact from the global markets. Therefor, we stay with our current outlook and let this all unfold. The downside bias short term remains in effect, the volatility has picked up to reflect the bias and the traders are enjoying the day to day swings and the rest of us are playing golf as it unfolds.

The headlines remain full of pontification on what is going to take place going forward. I am going with what brought us to this point… a lack of clarity about the outlook/future. That brings speculation into play which in turn gets twisted by news events. The longer the uncertainty goes the more nervous investors get and the more emotional the decision making day-to-day.

A positive Q2 GDP update and an upbeat consumer sentiment report started Friday with buying and it carried throughout the day. The markets still closed down just over one percent on the week, but it could have been worse. As we push into the final days of the third quarter and start the fourth this week, watch how investors deal with the belief of what is on the horizon. The emotions will come and logic will prevail creating the next cycle or trend of this market… we just have to be patient as it unfolds.

* Positive news on home sales helps the upside bounce off support. Negative durable goods data brought the downside back into play… Positive consumer sentiment combined with some oversold conditions brought the buyers back to end the week. We continue to look for some solution on direction from the micro trend perspective. Resolve that and the longer term will develop.

Some thoughts on news/events impacting investor psyche:

* Syria bombing was added to the list of worries as Obama call for the elimination of the Islamic State. The attacks are having an impact on oil prices and we have to watch going forward.

* Apple and “bendgate” as it is being called did and may continue to have an impact on the technology sector short term.

* Tax inversion fight in Washington. While the immediate impact is of more interest to the tax implications, the longer term impact to mergers and acquisitions may have bad unintended consequences. I will not get into the issues stomping on the Constitution to enact this law. Three branches of government were created for balance, these decisions teeter on being a Monarchy or worse a Dictatorship. It will all be interesting to see how it unfolds, but at some point we have to return to a government of the people, by the people and for the people.

* Trading environment is compressing holding periods on trading positions again. Thus, the choppy markets are in play and we have to respect that relative to trading. Now we are down to one day moves in direction with increased volatility. Throw in the bubble warnings from analyst and it makes for fun times.

* Interest rates moving higher, maybe, possibly, potentially, someday… This is still a worry for investors.

* 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. You either hold through the chop with a longer term focus or you sit on the sidelines and await clarity to develop. The latter allows me to maintain my sanity and is my preference relative to short term holdings.

Sectors to Watch:

S&P 500 index broke key support at the 1978 level Thursday and Friday moved to 1982 in an attempt to keep the upside belief in play. The downside potential remains the 1910 level, but it could also make a renewed attempt to move back toward the 2010 mark. Short trade is SDS which we added in the Pattern Model below. I will look to add to that position today if we confirm the downside opportunity.

Bonds (TLT & IEF) as stocks retreat so do rates on bonds and bond prices rise. Stocks rebound and bonds fall with rising yields. The choppy issues in stocks are now showing up in bonds. The uncertainty towards the Fed has bonds chopping around like stocks. The response to the Fed not moving on interest rates was a push lower in yields. TLT pushes to $115.50 resistance on the long bond. Watch to see how this bounce plays out. TODAY: Yields moved back below 3.24% on fear towards stocks and yields to decline again. That would bring TLT back as a trade opportunity. This is as bad as stocks on direction currently.

Financials (XLF) We got the initial follow through on the upside and the banks led the way as expected. Now we are testing along with the broad markets. Thursday pushed below $23.10 intraday and hit stops on the trading positions. The opportunity going forward is if rates rise. The outlook currently is rates will fall again on the fear in stocks. That puts financials on the defensive again and moving lower. Small bounce of Friday gave some hope, but still cautious currently. TODAY: Moving back toward the $23.45 mark, looking for direction and remaining patient.

Semiconductors (SOXX) solid move short term back near the previous high, but reversed and the questions are starting about the downside. Big reversal last last week and held the 50 DMA as support again. Needed to move above $88.50 to hold and that failed to materialize. TODAY: Got the downside move and $86 break is the entry point for short trade.

Model Position Notes: 

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

  • S&P 500 Index (SDS) Made the break lower on Thursday and looking to add to the position if the Friday bounce fades again. TODAY: entry of $24.85 if we maintain a negative sentiment in the AM. If we move back below $24.45 we will wait.
  • Consumer Services (XLY) after a set up to break higher the sector broke support on the downside and the short term trade. The $67.60 mark was the downside break and added the short trade short term. Patience and let this unfold as the volatility plays out. (Pattern Trade Model)  TODAY: Follow through on the downside? pushing our stop to $67.75.
  • Energy (XLE) the weakness in the sector is expected as crude oil prices have declined. There is some volatility in prices, but the downtrend is well confirmed in oil and now in the energy sector. Added the short side trade (Pattern Trade) and managing the risk. The short trades with DUG on the stocks is an opportunity. (ONLY ETF Model) Remember bull cycles die hard and this will be the case in the energy sector unless oil finds an upside bid that reverses the trend. Watch the issues in the Middle East as they will have an impact on oil prices if worry gains traction. TODAY: Still looking for more downside short term.
Watch List Opportunities:
  1. Holding steady as we start the week and look for some definition on the direction versus getting whipped in and out of positions.

Pattern Trade Setups:

  1. FLIP — FLOP – Markets are acting like a politician! Bias still on the downside and we have to manage the risk, but give some room for volatility.
  2. QID – entry $45.50. Add to position if the downside accelerates through support of 50 DMA. Add to existing position

Pattern Trade Tracking:

  1. QID – entry $44.65. Break above resistance off five week base. Stop $44.40
  2. SDS – Entry $24.30. bottom reversal. RSI confirmed upside momentum in the short trade. Stop $24.30. (ADDED BACK Thursday) Stop $23.60
  3. XLY – Short entry $67.25. Breakout reversal. The downside is in play again as short term trade. Manage your risk as this is a short position. Stop $67.75.
  4. XLE – short entry $93. The downside opportunity remains in place and we will add a short position on the break below this level. Stop $95.50. Reversal candle sitting on the 200 DMA – watch to see if it confirms in the AM and manage the stop.
  5. TZA – entry $15.40. bottom reversal on weakness. The lack of conviction is hurting the sector short term. Stop $15.40
  6. TKMR – entry $21.50. triangle consolidation. Upside continuation move on the breakout is good trading opportunity in leading sector. Stop $21.
  7. BAC – entry $16.30. breakout. Held the move higher and now looking for the follow through to $17.30 short term. Stop $16.30
  8. AGN – entry $163.50. Test lower and move through resistance. drug manufacturer. Stop $163.50.
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. (see note page for history. ADDED shares on 8/7 – $73.15 — Stop $71.50. Nice slow upside drift in play for the stock. Still positive opportunity long term for the position.
  • Twitter (TWTR) – entry $45.50 1000 shares (last trade). This was recommended on our webinar as the next long term position we have been trading since bottoming in June. Adjust your Stop to $45 for now on position and we will make adjustments as we extend the upside.