Trading Notes for Today, January 21st

Notes to Note: 

Start higher, moved lower, closed higher… intraday volatility is back in play as we start the trading week. Some worries about the global markets and deflation talk… but, the ECB is coming out with aggressive stimulus? Haven’t we heard this song before? At this point I am willing to wait and see what they really say before we believe that Draghi will actually deliver on any promised aide. I would fully expect a disappointment from any announcement made on Thursday by the ECB. China posted better than expected economic growth, but its still the slowest rate in nearly a quarter of century. FXI fell 1% and avoided the 7.7% selling from Monday’s cut in margin on stocks. Still watching how the chart responds to China short term.

Earnings are back in the headlines (if you ignore all the State of the Union talk) with Johnson & Johnson missing the mark on a strong dollar eroding global earnings net. Halliburton beat expectation surprisingly and Morgan Stanley missed (another bank missing expectations) on trading short fall. After-hours NetFlix beat earning and was moving higher and could help the NASDAQ today. Again it is not showing¬†great¬†promise in earnings land yet and¬†without some catalyst to push things higher or lower… we remain in the trading range for now.

It is back to the grind today and the attempt to define a direction for the broad indexes. Futures are pointing slightly lower and the modest bounce after early selling on Tuesday states the buyers are still somewhat engaged in the process. We will continue to be cautious and take it one day at a time.

MAJOR INDEXES:

The ten-year bond moved lower falling to 1.8%. I expect the volatility in the bond sector continue to be high moving forward. This is a good time to protect profits and manage the risk of any positions. Shorting the rallies or hedging on the rally manage the risk would be prudent. Money flow will shift if the stock market rallies and the global markets find some calm.

The NASDAQ closed at 4656 up 0.4% on Tuesday. The index has gained 20 points for¬†the week. A consolidation¬†pattern or trading¬†range for the index remains in place¬†and we bounced off the bottom of the range¬†support at 4555 last¬†week.¬†We have to watch how this unfolds as¬†swings have been more volatile over the last month. The bounce Friday is the third test of support with the second test and bounce creating a lower high. Respect the uncertainty and don’t force trades. QID entry hit as short trade against the index on 1/12¬†with stop at $40. Manage your risk.

The S&P 500 index closed at 2022 or up 0.15% on Tuesday. The index has gained 3 points this week. Remained below the 50 DMA and confirmed bounced off the 1992 support level again for the third time. The second test and bounce created a lower high. If this bounce creates another lower high, adding to the SDS trade is in order. If we push back above the January 8th high we retool our approach. Short trade in SDS hit entry point in trading 1/13 with stop at $22.50. Manage the risk short term.

The Russell 2000 index fell 6 points on Tuesday. This has been the better looking of the indexes, but the drop early brought some angst from traders to start the day. It is still within the trading range after testing the 200 DMA again. Watching how this unfolds near term.

The Volatility index moved higher early and closed lower on the day at 19.9. The index remains elevated, but some of the fear evaporated on Friday’s buying. The 25 level is the high from the October move and it is within distance depending on how we trade on the week. We are seeing just how much investors don’t like uncertainty about the future.¬†Started lower on Tuesday, but still plenty on the table to keep the worry elevated.

The Dollar (UUP) hit new highs closing at $24.69 (UUP). The dollar index (DXY) has moved above the long term resistance and continues to progress closing at 93.02. The stronger dollar remains in play and the move from the franc just added one more piece to consider. Talk of stimulus on Monday from the ECB is putting more pressure on the euro to move lower. 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 jumped Wednesday more than 5%… fell on Thursday 5%… Friday up 5.8%… Tuesday down 5.2%. Bottoming process in play? There is certainly some volatility in play as investors determine what they really believe. Some speculation about a short squeeze in play against the heavy short positions on crude. The commodity remains a sector with increased volatility and speculation generating big swings in both direction. Unless you like high risk trading, I would wait for a base to build and some clarity in direction before putting money to work.

There is plenty of speculation in the markets currently as investors struggle with uncertainty about both the US and Global economic picture. The downside has taken on the leadership role for now, but as we all know that can change quickly as the bounce on Friday showed. Watching for a follow through on the buying this week. This remains a high risk environment short term.

Moves that matter…¬†

Homebuilders reacted to the KB Homes data to start the week, but the delayed reaction came the next day nearly a 5% decline in ITB. Earnings over all have been mixed, but the banking sector is showing weakness in mortgage business as another negative indicator looking forward. Tested the 200 DMA on Friday and bounced, Tested again on Tuesday. Jury is still out on the sector, but the downside is set up technically for more selling. Watching to see how this unfolds.

Banks (KBE) produced earnings result that plainly stunk! The reasons for the missed numbers were as diverse as the number of companies announcing. The sector lost 3.3% last week and 0.75% Tuesday as Morgan Stanley missed earnings. Regulations, mortgages, bond trading, stock trading, slower IPO business, and plenty of other reasons were behind the missed earnings and decline in stock prices. The downside is in play, but the contrarian outlook is to let the news settle and look for the upside trades off the lows.

What to watch¬†this week…

Treasury bonds are technically overbought and look setup to short any rallies going forward. The challenge with that is the emotions and money flow into the bond any time something spooks the market. This is one to watch as we start the trading week.

Banks¬†and Financials are set up for short as it hit the 200 DMA. Bounce of Friday offered relief, but didn’t really change my mind for now. FAZ is the short ETF for financials and could offer entry opportunity on a rally in the sector.

Volatility index hit the highs at 23.25 and closed near 20 on Tuesday. More buying takes the index lower again as another attempt off the support levels is in play. VXX remains the trade of choice until the buyers validate a shift in sentiment and worries.

Sectors of Interest for Trading:

I still don’t like the chop of this environment and lack of conviction in either direction. The five days of selling followed by a bounce off support does not change my mind about the upside or the downside. The news is driving and the day-to-day volatility only escalates the risk of the trade. We will be patient¬†as Tuesday validated nothing except intraday volatility. Patience is the key.

Gold Miners (GDX) The sector has benefited from the bounce in gold. Tuesday up 1.4% for the day and pushed the miners up 3.5% to close above the 200 day moving average. Uptrend is in ply off the December low and the stops have been adjusted accordingly on the move. Let it run and manage the volatility as it unfolds.

REITs (IYR) flight to quality is the story. Money is moving were it treated the best with the least volatility. No test of the move last week as the uptrend continues to push higher. Steady as the defensive money continues to flow in to the sector. Slightly overbought, but that can continue as relative strength is high. Hold and watch for the opportunities as this moves forward. TUESDAY: tested 0.8% and near $81. Test of $80 would be of interest short term.

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. Still testing the highs with consistent tests as we go. We will see how this unfolds on Wednesday. need to move through the $42.12 level.

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. BABA – entry $100.25. Resistance and trend reversal. Bounce off support and break of resistance would be entry. Trendline break at 105.25 would be point to add to position.
  3. GILD – entry $104. bottom reversal and trendline break. Fundamental news driving the upside reversal. Trendline break entry point.

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. $33.60 (raised stop).
  2. TSEM – entry $13.45. descending triangle. Confirmation break on the upside from consolidation and uptrend resumption. Stop $13
  3. 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 $20.50 (target price).
  4. 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) Watching how the downside plays out. (Bought 20 of¬†the $75 puts for March on¬†the downside break $4.25).¬†TODAY:¬† Bounce produced some hope, but still needs to break the downtrend from the December high.
  • 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:¬†Small bounce, but watching how this unfold in respect to the broader indexes.¬†
  • 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) &¬†¬†(ADDED 250 June 16 put contracts @ 0.95 cents 1/14)¬†TODAY:¬†Positively ugly response to earnings and we just manage what we are dealt 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:¬†¬†Cleared the $50.80 resistance, and¬†holding up well for now as we remain patient. breakout confirmation still needed¬†on the upside.