Trading Notes for Today, February 5th

Jim’s Market Notes:

So much for the run higher in oil price as they fall more than 8%, but stocks don’t react to the decline in price? The analyst focus is looking forward 3-6 months for prices to rise and that means we ignore what is happening today. I covered the psychology of that thinking in the video last night and I will not go through it again here, but we do need to understand the psychology of the market as much as we do the charts recording what happens. Oil is believed to have bottomed currently and the rest is working itself out going forward. That puts confidence back in the US markets, but it also ignores the fundamental side of the economic data and earnings. Oil prices rising aren’t going to fix what is wrong in either of those areas short term. The whole thing is more complex than it sounds, we watching a train wreck in slow motion… you can see it happening, but their is nothing you can do about it. Bottom line of this rambling rant… take what the market gives, but understand the risk of being in this market environment near term.

We started the week looking for a break lower in the indexes as the shift in sentiment was on the downside. Now¬†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 remains¬†in play and within the range news is driving activity and investors crazy. Trading news only make it 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, but we did validate the confidence/belief in oil having bottomed in Wednesday’s trading activity.

Supply data put a dent in the rally for crude, but I would not count it out. The commodity fell further overnight, but has bounced back in early trading and is up fifty cents at this writing. The sector is one to watch if you like to trade short term. The longer term view is positive based on the data, but you will have to stomach the volatility created by all the news and speculation.

ECB and Greece are back in the headlines and stocks reacted late on Wednesday to the announcement by the ECB. This morning futures are looking high and dismissing any negatives from the move and seeing more of a chess match between all parties.

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 spent Wednesday reading, watching and analyzing what was taking place in the markets. The sentiment shift is of interest and the bounce is taking root. I am not sold on the upside move, but the confidence level is rising as a result of the belief towards oil. Greece is a wildcard as the ECB takes action towards the lending process. Still patient here, but looking for the upside to take root short term.

No positions added on Wednesday.

Outlook for Today:

S&P 500 index (SPY) broke¬†through the near term resistance at the 2020 mark on Tuesday. Tested 2041 support on Wednesday and is looking at 2062 next and then the previous highs.¬†Well within the current range and looking for the catalyst. Oil? That is the rumor, but the charts aren’t there yet.

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 as seen in trading Wednesday, 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 Tuesday and slightly higher Wednesday at 18.3. 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. I am of the opinion/belief this will test the previous lows near the 15.5 level. That would set 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¬†–¬†Scanning for opportunities
  2. Sector Rotation StrategyР Manage Risk
  3. ONLY ETF Strategy–¬†Trades setting up
  4. ONE EGG Strategy – Too Choppy
  5. Pattern Trading Strategy – Below –¬†Updated
  6. Long Term Strategy – Below –¬†Updated

Pattern Trade Setups:

  1. Watching the bounce again?¬†Focus is 3-5 day trades and risk management. Don’t take unnecessary risk in this environment and understand what is true today… may not be tomorrow.
  2. SPY – entry $204.50. Range trade. Looking for move back to the previous highs on the positive sentiment. Stop $198.50 to give room for volatility.
  3. IWM – entry $119.50. break in range. The move through this level puts the upside back in play and expect leadership from the sector going forward. Stop $114.50 to give room for volatility.
  4. IJH – entry $147.25. Breakout from range. The move would put the sector at a new high and the leadership role. Stop $141 to give room for volatility.

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. Stop $44.
  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. Stop $54.
  3. SKUL – entry $10.40. Ascending triangle. $10.25 breakout on Friday and follow through for entry. Stop $10.
  4. VIPS – entry $23. Flag. Break above short term resistance and trade to $24.75. Stop $22.
  5. 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 $12.25.
  6. 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.
  7. 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.) Added 500 shares at $40.25 for trade to $42.25 short term.¬†TODAY:¬†Made¬†break from¬†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. Looking for follow through on move Wednesday.
  • 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. $53.80 is level to watch.