Trading Notes of Today, January 15th

Notes to Note: 

Another interesting day relative to intraday swings and volatility. Traders are testing the next level of support, bouncing off the lows, and then finding reasons the next day to continue lower to the next support mark. There are buyers wanting to step in and own stocks, but the news each day has given the sellers the upper hand early. Wednesday the earnings from JP Morgan missed and disappointed many… me included. The sales report for December as disappointing moving much lower than expected overall and that was disappointing. Bottom line… positive outlook is turning negative based on the data. The VIX index hit 23.22 equaling the high from the end of December. Uncertainty remains the catalyst for the VIX and we will continue to watch how this all unfolds short term. The downside risk is rising and the potential to see a early year correction (ten percent decline) is rising with each move.

Overnight oil prices fell 1.3% and near the $45 mark again and that is putting pressure on the futures to the downside as well. Asia closed lower with Japan dropping 1.5% and China was off 0.4%. Europe opened lower with The FTSE off 1.5%. Not shaping up to be positive at this point.

It remains a traders market environment if you like volatility. News is driving analyst crazy as it drives the day-to-day action and the length of any directional move is 1-5 days. The S&P 500 index is on the fourth consecutive down day withing the current consolidation pattern. This is setting up a break up or down… currently the bias is to the downside. I am still willing to be patient and let this settle down and define a direction.

Earnings may set up to be a¬†catalyst near term was my comment to start the week, and it looks like that may be true except on the downside versus the upside we were looking for. KB Homes disappointed in grand fashion on Tuesday and JP Morgan was not as big of a disappointment, but a downer nonetheless. You will be happy to know that I am wearing a helmet and chest protector… today I am putting on shinguard’s as the market moves lower it is important to protect the lower limbs. More earnings from the banks and still looking for some good new in the financial sector. Like the report from KB Homes margin compression is a resounding theme. Watch and protect the downside risk and look for the short trades that fit into the current environment.

MAJOR INDEXES:

The ten-year bond moved lower falling to¬†1.83% or or down 5¬†basis points on Wednesday to continue the flight to quality or safety. The bond has hit¬†a new closing 52 week¬†high as well.¬†The question remains: is this move telling us something about stocks? To this point I have said no… it is simply acting as a defensive buffer when any selling takes place in equities or a flight to quality. Stocks are creating their own worries relative to future growth. That is something to watch as the Fed wants to hike interest rates… Investors are voting the¬†Fed¬†won’t do it in the short term and feel enough conviction to buy bonds. Throw in the global issues economically and additional money is moving to treasury bonds. The money flow into the bonds is the cause of the move in the yield lower. Watch and let it play out short term.

The NASDAQ closed at 4638 down 65¬†points for¬†the week. A nice consolidation¬†pattern or trading¬†range for the index remains as investors are undecided on direction short term.¬†We tested¬†support at 4555 and reversed off the low, but it is in position to retest that low short term hitting 4595 intraday on Wednesday.¬†The long term uptrend is still in play, but the risk of moving lower has not been negated as seen in Wednesday’s trading day.¬†We have to be patient and let this unfold. Respect the uncertainty and don’t force trades. QID entry hit as short trade against the index on Monday with stop at $40.

The S&P 500 index¬†closed at 2011 down 33¬†points this¬†week. Remained¬†below the 50 DMA and broke below the uptrend line off the October lows. Leadership is one theme I discussed last week and we still don’t have any clarity on that front. Utilities and energy¬†ended the day positive, but that is one¬†defensive sector leading and one oversold sector posting a gain. Financials was the worst performing following the earnings announcements and basic materials was awful again down 1.2%.¬†Key resistance remains¬†at the 2060 mark and support is 1992. Short trade in SDS hit entry point in trading Tuesday with stop at $22.50.

The Russell 2000 index fell 3 points on Wednesday to close at 1176. It is still within the trading range, but closed below the 50 DMA. The interesting note is it has held up well among the selling and the midcap as well showed some support near term. We will remain patient and watch for some clear indication in direction, but the trading range is holding steady for now.

The Volatility index spiked higher to start the week on oil prices. It cleared the 20.5 mark on the close¬†Tuesday on housing earnings. The index continued to rise on bank earnings Wednesday closing at 21.9¬†and it is¬†pushing the high from December. Some fear creeping in, but not enough yet to force the panic button to be pushed.¬†As I have stated, it¬†is important to understand that investors don’t like uncertainty about the future. The default is to sell and watch as it unfolds. We are at that crossroad again with a bias towards selling this¬†week.

The Dollar (UUP) is holding near the highs closing at $24.40 (UUP). The dollar index (DXY) has moved above the long term resistance of 89 closing at 92.08. The stronger dollar remains a positive from my view looking longer term. The weakness and uncertainty globally is one key reason for the rally and unless that shifts near term the dollar my remain strong for the foreseeable future.

Crude Oil remains one of the components that was a catalyst to the selling to start the new year. It settled in the $46-50 range and closed Wednesday at $48.49 up 5.6%. The late day jump came on a short squeeze from traders. We will see how that unfolds today. The Goldman Sachs downgrade on the outlook for demand had put more downside pressure on the commodity. The downtrend is well established. Too much risk for my taste as a trade. Patience.

There is plenty of speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The downside is back the last two days and we have to see how this unfolds going forward. This remains a traders market with plenty of risk to confront in every trade.

What to watch¬†this week…

We started with¬†the jobs dilemma, that progressed to the decline in the price of crude, and Tuesday it was the weakness in housing from KB Homes comments! Wednesday’s move lower was credited to JP Morgan rains on the earnings outlook and December sales report was worse than expected… Oh what a tangled web we weave! The move lower shook investor confidence and now we shift gears yet again relative to the longer term impact and how to play this scenario going forward. The trading range says be patient and let it all unfold near term as everyone regroups, take a deep breath and see how today unfolds.

Banks (KBE) was down 1.5% as JP Morgan missed earnings and Wells Fargo was disappointing on guidance. Any way you look at the news around the sector is was negative and the downside off the December high has started to accelerate. The test of the October low is in play and how much worse it gets depends on earnings the next two days from the big banks. My belief was wrong based on today’s data and thus why I was unwiling to¬†buy in front of the news, but it may still¬†prove to be an opportunity after the dust settles.

Leading Sectors: IYZ, XLU, XLP and XLV

Sectors worth Watching: XLU

Laggard Sectors: None

Loser Sectors: XLY, XLK, XLF, XLI, XLB and XLE

Sectors of Interest for Trading:

The homebuilders (ITB) jumped to new high, but that came to a halt on Tuesday as KB Homes comments on the analyst call looking forward sent the sector back to the breakout point ITB. Energy is getting the blame and Wednesday the selling started lower, but remained in a reasonable range to watch moving forward. Uptrend is still in play, but being challenged on the data.

Semiconductors (SMH) are a sector that could offer some leadership along with technology overall if we can get off to a positive start on the week. WEDNESDAY: failed to keep¬†the positive start again and holding above the key support at $52 for now. Watch for an opportunity on the reversal if the buyers show up again. Held again on the day… watching today for bounce.

Gold Miners (GDX) The sector has benefited from the bounce in gold and moved through the resistance at the $20.50 mark on Monday to $21.40. Short lived as it dropped 4% on Tuesday despite no real losses in the metal. WEDNESDAY: followed through dropping 1.2% as Europe struggles with mining stocks — of course that is equal in the US. That is fear of stocks moving lower and thus sell now ask questions later was the theme. Still like the upside and the risk remains high.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. Upside in play and a test of the $79 level would be potential entry point. No test on Wednesday to speak of, but still watching how this unfolds.

China (FXI) uptrend remains, albeit volatile, off the October low. Technically the upside is in favor and worth trading if we can move through resistance and stomach the volatility that is likely to remain. Close above $42.50 is level to watch. Tested lower on Wednesday.

Watch List Opportunities:

  1. S&P 500 Strategy¬†–¬†updated
  2. Sector Rotation Strategy- updated
  3. ONLY ETF Strategy- updated
  4. Pattern Trade Strategy Рupdated
  5. ONE EGG Strategy – updated

Pattern Trade Setups:

  1. Volatility is back… we have to remain patient and selective with any positions. Manage the risk accordingly.¬†Manage your stops along with the current volatility intraday. Not posting much as we will let this unfold.
  2. SDS – entry $22.75. Triangle breakout. Weakness is building in the index and downside protection is prudent at this point to hedge positions. Gap open elevated the risk of the trade and passed. Watching how this unfolds today.
  3. QID – entry $40.80. Triangle breakout. Weakness in the large cap NASDAQ stocks are building negative sentiment and breaking lower. Another hedge position. Gap open elevated the risk of the trade and passed. Watching how this unfolds today.

Pattern Trade Tracking:

  1. VXX – entry $33.60. Resistance breakout. Volatility is picking up short term and looking for the follow through on the upside move as uncertainty rises. $333.60 (raised stop).
  2. SUNE – entry $20.15. trading range. 200 DMA resistance overhead. Break above this level on volume would be trade to $23 or previous high. Stop $19.80 (raised stop)
  3. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  4. ACAD – entry $33.60. triangle breakout. Looking to continue the upside trend following the break higher. Stop $33.60
  5. TWTR – entry $39.30. Break from basing bottom. Trade off the long term position below.
  6. GDX Рentry $19. Break from consolidation bottom. Look for trade on the upside move in gold miners short term. $20.50 short term trade target. NUGT gives you the leverage. Stop $19.50.
  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 $46.90
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: 
Nice bounce back from the selling and now attempting to make a push on the upside. We have to be patient with these and use different approach as they are long term holdings.
  • 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. Testing the bottom of the current range and bounced … bounce (we added to our positions. 500 @ $77.50 – 1/8) TODAY:¬†Being patient with the indecision in the broader indexes and letting this unfold short term. Looking at the $75 put for March if the downside breaks.
  • 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. (hit stops on our put contracts on the reversal last week.)¬†Bounced back to resistance and sold the puts… Looking to buy shares on break above $39.20. (Added 500 shares at $39.20 Friday.) TODAY:¬†Follow through on the upside move last week would be a positive for the position going forward.¬†
  • Bank of America (BAC) We own the Jan 2016 $17 Calls at $1.85/200 contracts (added 100 contracts on pullback). 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. (ADDED 2500 shares at $17.15 and target is $18 on the move short term as trade in¬†the position.) (50 Feb 17 puts @ 60 cents. ADDED)¬†TODAY:¬†May need to add to our put contracts as this is not working out well as banks remain under pressure. (ADDED 250 June 16 put contracts @ 0.95 cents 1/14)
  • 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 $50.80 resistance, and¬†holding up well for now as we remain patient. breakout confirmation needed today.