Trading Notes and Strategies, February 3rd

Jim’s Market Notes:

They are all on the verge of breaking key support levels of the six week consolidation and trading range; the S&P 500 index is down 3.1%, the Dow fell 3.7% and the NASDAQ is off 2.1%. The month of January came to an end with an exclamation point the last two hours of trading on Friday, falling 1.3%. Talk about a bad start to the year, but then we have to remember that 2014 started virtually the same way down more than 3% in January. In fact, last year was one that volatility ruled the year gyrating up and down throughout the year, but manage to post a profit for the year. Make sure your seat belt is fastened we may encounter rough air again in 2015. MONDAY: February starts off with a bounce to close the first day and pushing the S&P 500 index back to the 2020 mark and resistance. Still looking for a follow through in one direction or another… Today it the upside that needs a follow through to the bounce started on Monday.

What is wrong? Why the selling to start the year? Is it just a hangover from where we ended 2014? The economic data gets some blame and it continued with the consumer spending for December the weakest since 2009. Earnings have been mediocre at best and looking forward the data shows zero growth for Q1 earnings. The global markets get some blame, but Greece hope Monday was given credit for the late day buying? Really? I guess that is as good as any reason I have heard for the move. Based on the current tally the bad events are outweighing the good ones, and that is shifting the sentiment towards the sellers taking control of the market direction. The only way to change the trend is for more good events to take place moving forward to balance out the scale, until then momentum is on the sellers side.

Solar (TAN) breaking from the bottoming consolidation pattern. The challenge currently with breakout trades is they are failing due to the choppy consolidation in the broader indexes subject to big swings in either direction. That said, this sector is worth out attention if the price of crude oil continues to push higher. The pattern set up on the trade broke higher on Monday and is in position to follow through. I am adding it to the ONLY ETF strategy as a swing trade on the break higher.

Energy (XLE) moved back to resistance at the $77.80 level. The downtrend is still in play, but some positive news in earnings and higher oil prices are attracting money into the sector currently. This sets up a trading environment with long term hope. The focus is to trade the short term moves, but watch for the opportunity longer term if oil prices can creep higher and sustain the move. Watching for the break through resistance and the trading opportunity that will result. XOP and OIH are both in the same bounce off the lows and worthy of attention longer term if the price of crude gains momentum. Adding the leveraged trade on the sector with ERX to the ONLY ETF strategy.

Understanding the environment you are trading in is the first key to not losing your money without a fighting chance. The market is a battleground and you have to be well trained to fight

Action Taken: “Vision without action is a daydream… Action w/0 vision is a nightmare.” Japanese Proverb.

I added short positions (see the respective tables for trades) in response to the move on Friday in the S&P 500 index, Russell 2000 index, Financial sector and Technology sector. The weakness or lack of follow through to the buyers on Thursday was the catalyst for the entry. The chart below shows the trading range for the S&P 500 index. First the move back to 2020 on Thursday set up a possible bottom support test and reversal. For that to succeed it needed to follow through on Friday. If it failed to do so, and moved back below 2012 mark, was a short signal to me. Unfortunately that is what happened Friday in the first hour of trading. The risk of the trade is the key to the entry… If I was wrong the stop would have been a close back above the 2025 mark or 13 -15 points which is roughly 0.5%. If I am right and the trade proceeds below the support at 1992 and to the next level of support 1972 that would be a 40 point swing or approximately a 2% gain. A good risk reward set up for the trade. More importantly it would hedge any long positions that would remain open by not hitting their respective stops. Money management is about the portfolio not just one trade. Too often investors forget that key ingredient in the investment process.


MONDAY: The trade followed through early, but the last hour of trading saw the buyers step in and push the index back to the level it sold from on Friday… 2020. We have our stops posted and we will see how this unfold today. This is exactly what I have been talking about with the daily swings in either direction. The trade setup well, but the buyers had different plans… at least on Monday.

Outlook for Today:

S&P 500 index (SPY) is in position to break through the near term resistance at the 2020 mark. Watching to see how it sets up intraday. A move higher through this level put the 2060 mark back in play as well. It is important to remember the environment we are in with the news and events driving direction day-to-day without a trend established.

NASDAQ 100 index (QQQ) tested support on Monday and rose back near the $102.25 resistance level. As with the broader indexes patience is the name of the gave as this will need the buyers to step up with some conviction to take the index to the next level. Downtrend off the November high is still in play short term.

The volatility index (VIX) stalled in the climbing with the late day rally on Monday. Closing at 19.4 the index remains elevated showing the uncertainty from investors. VXX fell below the $35.30 on Monday after accelerating and triggering a buy signal on Friday. So much for the clear sailing to the $44.50 level reached in the October. The direction of traders remains like a cat chasing its tail. Trend is higher off the December low, and for those with a strong stomach, offers opportunity looking forward. SVXY is the inverse trade on the index should the buyer follow through on Monday’s swing higher.

Be patient as the week progresses and keep your stops in place, and look for possible downside trading opportunities.

Money Management Strategies Links:

  1. S&P 500 Strategy – Manage Risk.
  2. Sector Rotation Strategy–  Manage Risk
  3. ONLY ETF Strategy– Watch List – Manage Risk.
  4. ONE EGG Strategy – Choppy mess
  5. Pattern Trading Strategy – Below – Added Position and stops hit
  6. Long Term Strategy – Below – Updated

Pattern Trade Setups:

  1. Volatility is back as concerns over everything continue plague the outlook. Bounced on Monday despite all the worries. Manage risk with your stops and see where we go today? Follow through on the buying? More selling to test support again? Flip-a-coin.
  2. Watching the bounce again? if it follows through we exit or short trades and look for the leadership in the broad indexes. Adding Energy as trade on move in crude.
  3. ERX – entry $56. Bottom range breakout. We have been faked out before on oil, but still made money. Looking for the bounce to gain some momentum short term on crude prices. Give some room for volatility.
  4. SLB – entry $84.70. Bottom reversal and follow through. Oil services will bounce with the sector overall. Trade to $88.
  5. FSLR – entry $45.50. Bottom range breakout. Alternative energy sector bouncing with oil. Look for trade to $52 if momentum follows through.

Pattern Trade Tracking:

  1. SDS – entry $22.90. Made move toward the break higher and retreated. Looking for that to happen again today. Patience as this is a hedge against our positions on the downside. Stop $22.50. Watching the renewed bounce.
  2. QID – entry $40.70. Made move towards the resistance and retreated as well. Could happen again today despite earnings positives. This is hedge as well against positions and looking for the short term risk protection. Stop $39.65.
  3. SKF – entry $55.30. Break from  bottoming range. Break through would mean downside move in the financials which have been the weakest sector in the S&P 500. Volume is thin in the ETF use limit orders to keep the spread under control. Stop $54.
  4. SOXS – entry $14.50. Bottom reversal. Trading within the range and a trades setup back to the top of the range initially, but could break through the top and move to $17.50 if the negative sentiment rises. Stop $14.50.
  5. INFI – entry $15.65. micro-downtrend break. biotech remains a leader and setup is good. Stop $14.30.
  6. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  7. VIPS – entry $23. Flag. Break above short term resistance and trade to $24.75. Stop $22.
  8. ENPH – entry $11.10. bottom reversal within the trading range. Semiconductors have been a leader and looking for move at least midway in the range to $12.60. Stop $10.85.
  9. GDX – entry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target.
  10. 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 $51.50
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: 
Long term positions take time to manage and patience to let them unfold. The short term can be managed with hedging or trading off the longer term positions. The goal is to build the position and manage the risk. Sometimes the short term news and events cause anxiety… the goal is to mitigate the risk and protect the downside as we allow the stock time and room to grow. If you don’t like long term holdings don’t read the data below.
  • 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. Still trading sideways range as investors sort out the facts and fiction. (we added to our positions. 500 @ $77.50 – 1/8) Watching how the downside plays out. (Bought 20 of the $75 puts for March on the downside break $4.25 – looking to roll them forward if we test the bounce). TODAY:  Earnings beat, but like last quarter speculation on expenses weighing down the stock. Sold lower on Monday as result of the speculation.
  • Twitter (TWTR) –  Added 500 shares at $42.80 (10/28). This is a long term holding and we will manage the downside risk going forward. Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 on 1/9.) TODAY: Sold lower with large cap worries… watching how this unfolds near term. No momentum currently like broad indexes.
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.15 (avg price)/300 contracts. Banks were gaining some ground and I still like our position going forward. We add our long positions in stocks back (Added 2500 shares at the $16.35 mark  on 10/21). Stop is $15. TODAY:  Testing support again and investor resolve. Not pretty in the financial sector.
  • 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. Small range as market keeps stock in check. TODAY:  Cleared the $52 resistance and moved up to maintain the uptrend. Watch and see how broad indexes move and impact going forward.