Trading Notes and Strategies, February 4th

Jim’s Market Notes:

“Well the next thing you know old Jed’s a millionaire…” The theme song to “The Beverly Hillbillies” kept ringing in my head on Tuesday as the price of crude rose 6.4% to close at $53.05. The new story of the market this week is crude and all attention has shifted to the catalyst on the upside and savior of the uptrend! At least that is what the headlines read like. Last week oil would never see the light of day and this week it heading higher and all is going to be will in the markets. Again news is driving and the question is sustainability of the move. For now it is news, not fact. News/speculation is driving price and that is pushing the broader markets higher. I see it, I like the trading opportunities, but it is still news driven and will have to be validated going forward for the trend in oil, energy and the broad market to reverse and resume an upward trajectory.

We started the week looking for a break lower in the indexes as the shift in sentiment was on the downside. Two days later we are looking for the upside to recapture the 2060 level on the S&P 500 and then back to the previous highs. I am getting dizzy with the swings back and forth. The consolidation wedge pattern is in play and within the range news is driving. Trading news only make feel like a ride at the fair… looks like fun, but afterwards it is something you would have preferred to miss. If you like 1-3 day holding periods this cycle of trading is for you. If you like longer term views take some Dramamine. Otherwise go play golf or take a vacation. The shift in direction this week has no guarantees with it, and the news can shift just as quickly to a negative blather versus the love for higher oil prices. Patience is required and a discipline approach to what works for you.

The energy sector was added to the watch list on Monday and it has hit entry points on the gap higher in response to oil prices moving higher. Manage your risk and don’t get caught up in the euphoria and hype. Take the gains for what they are and manage the risk associated with the move.

Oil supply data out today and that will give some insight to all the talk of supply being cut and normal production resuming towards the supply/demand equation. Not convinced, thus the data will validate where we stand now.

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.

Hit stops on short trades from last week and back to the drawing board. Timing the pivots is not easy when the news is in control and not forward looking clarity. The supply data for oil has not shown any reduction. The announcement of rig counts in the Gulf is not a conclusive result to the supply gluts. It is data that must be confirmed and in the meantime the reaction in price has everyone happy, but not understanding why. The comments of it doesn’t matter the charts are showing… is fine as long as you defined the strategy you are trading by and not just following the herd. Regardless we hit stops on the short trades and now move forward.

Added position to the Pattern Trading Strategy below and hit stops on others trades. Taking a break today to see if the upside follows through or the sellers take a shot?

Outlook for Today:

S&P 500 index (SPY) broke through the near term resistance at the 2020 mark. 2062 is next and then the previous highs. 3.8% off the lows Monday on the upside and you have to be cautious of the move, but take it for what it is and move forward.

NASDAQ 100 index (QQQ) rose back above the $102.25 resistance level. $103.32 is next level to clear and then $104.50. The large cap stocks remain the weaker link from my view, but the upside is tradable if the move follows through.

Small and Midcaps are where the action is from my view. The upside is back, but the strength and leadership technically are in these sectors on this move. IWM cleared $118.25 and $119.50 is the next level to move through and then the previous high. MDY cleared $263.60 and new high is next at $267.90. Both are added to the Sector Rotation Strategy.

The volatility index (VIX) stalled in the climbing with the late day rally on Monday. It continued lower on Tueday closing at 17.3. The move lower is in response to the buyers stepping back in to the market and creating short term confidence that things are looking better. It is setting up a trade in SVXY to short the VIX on the move lower. $54.70 is the level to watch on the upside move for trade if the positive sentiment continues.

Be patient as the week progresses and keep your stops in place, and let the speculation unfold.

Money Management Strategies Links:

  1. S&P 500 Strategy РManage Risk. Stops Hit
  2. Sector Rotation StrategyР Manage Risk
  3. ONLY ETF Strategy–¬†Gap open and Risk Managment
  4. ONE EGG Strategy –¬†Choppy mess
  5. Pattern Trading Strategy РBelow РAdded Position and stops hit
  6. Long Term Strategy – Below –¬†Updated

Pattern Trade Setups:

  1. Watching the bounce again? With the follow through we exited our short trades and look for the follow through in the opposite direction. Added Energy as trade on move in crude, but we have reign in our time horizon to 1-5 days if we are lucky at this point. Until the market validates more than that this remains a trading environment.
  2. Look for test of the move higher today as the news will be challenged… it is speculation and today we have the oil supply data to see how that is progressing. patience for now.

Pattern Trade Tracking:

  1. FSLR Рentry $45.50. Bottom range breakout. Alternative energy sector bouncing with oil. Look for trade to $52 if momentum follows through.
  2. 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.
  3. 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. HIT STOP
  4. 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. HIT STOP
  5. SKF Рentry $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. HIT STOP
  6. 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. HIT STOP
  7. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  8. VIPS – entry $23. Flag. Break above short term resistance and trade to $24.75. Stop $22.
  9. 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.
  10. 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.
  11. 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.¬†Bounced off support and looking to gain some upside faith… patience.
  • 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:¬†Back to the top end of the trade range in the bottoming pattern. Trading the breakout back to the $42.25 mark is on the table to add some profit and lower our cost basis on the existing shares.¬†
  • 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.¬†Still not good in the financials, but watching how this bounce unfolds short term.
  • 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:¬†¬†Holding up well and still letting this unfold short term. Continuation on the upside could offer a trading opportunity to lower our cost basis in the shares.